FTA issues new directive on VAT deemed supply valuation

1. A Taxable Person making a Deemed Supply of Services shall determine the value of that Deemed Supply based on the total costs on which Input Tax was incurred (direct and indirect costs) to make that Deemed Supply, in accordance with Article 37 of the VAT Law. 2. For the purposes of Clause 1 above, the Taxable Person shall calculate the total costs on which Input Tax was incurred, in accordance with the following mechanism: a. Determine the open market value of the Services constituting the Deemed Supply. Where the open market value of such Services cannot be determined, the open market value of comparable Services shall be used. b. Calculate the estimated total cost of the Services by excluding the profit element from the open market value determined in paragraph (a) above. This shall be done by dividing the open market value by (1 + the net profit margin). The net profit margin shall be calculated based on the Taxable Person's financial statements for the preceding financial year. Where the Taxable Person's net profit margin cannot be determined, the average net profit margin prevailing in the sector in which the Taxable Person carries on its Business may be used. c. Calculate the percentage of the costs in respect of which the Taxable Person incurred Input Tax to the total costs incurred by the Taxable Person during the previous financial year. d. Calculate the total costs in respect of which the Taxable Person incurred Input Tax, by applying the percentage calculated under paragraph (c) above to the estimated total cost of the Services calculated under paragraph (b) above. 3. The cost calculated in accordance with Clause 2 above shall constitute the value of the Deemed Supply of Services for the purposes of Article 37 of the VAT Law.