What is the VAT treatment for Disbursement and Reimbursement expenses in Oman?
Enterprises contract a lot of costs and expenses on a day-to-day basis. It is a legitimate method to make payments on account of the customers and clients as a part of a company transaction. Under the VAT regime of Oman, the approach is different for disbursement and reimbursement of expenses. Businesses need to have a precise knowledge of the concept and the employment of the VAT treatment. These concepts are discussed in more detail to understand the implications of VAT.
What is Disbursement for VAT in Oman?
Businesses making payments on behalf of a client in a capacity of an agent. The goods and services received from the supplier. The benefit goes directly to the customer or client then this will be treated as a disbursement when the organization recharges those expenses to the customer or client. It is outside the scope of VAT.
Let us try to understand the same with the help of an illustration:
PQR LLC is a VAT registered entity in Oman and importing raw material from the USA through a custom clearing agent DEF LLC. DEF LLC meets all the expenses associated with the raw material of port fees, customs duties, and transportation charges on behalf of PQR LLC. The invoices for these services are in the name of PQR LLC but paid by the clearing agent DEF LLC.
Once the customs clearance, DEF LLC will invoice PQR LLC for all the expenses paid by them. The recovery of all these expenses is considered disbursement because DEF LLC has not made any taxable supply to the PQR LLC. They acted as an agent to clear the raw material. The transaction happened between the PQR LLC and the supplier from the USA. Hence, the disbursement received by DEF LLC is not a taxable supply. It is excluded from the VAT calculations, and the same must be detailed separately in the VAT invoices.
It is vital to note that if there is any VAT paid on these service charges paid by DEF LLC, the same cannot be claimed, and this the case of disbursement. Further, ABC LLC will also be unable to claim back the input VAT paid if they don’t have a valid VAT invoice in the name of PQR LLC for the services.
What is Reimbursement for VAT in Oman?
When a business contracts incidental costs while supplying goods and services to its customer or client and later charges such costs are not disbursements. Expenses are utilized or consumed by the supplier in providing the goods and services, these expenses will be treated as reimbursement, and VAT will apply to them.
For example, a consultancy firm ABC LLC has been engaged by XYZ LLC for due diligence services. As per the terms of the engagement, they have acknowledged that all out-of-pocket expenses paid by ABC LLC will be paid back (reimbursed) by XYZ LLC. As XYZ LLC is located in another city, the staff from ABC LLC had to book a flight and hotel until they complete the assignment. Later, ABC LLC includes the amounts they have paid for the air tickets and hotel in the final invoice issued to the XYZ LLC, which should be taxable at 5%.
The amount recovered by ABC LLC from XYZ LLC is on account of a taxable supply. It will be considered as the reimbursement and subject to VAT rules. In the case of reimbursements, the VAT is charged by ABC LLC. The input VAT on the supplies can be claimed in the VAT return. Further, the client XYZ LLC can claim back the VAT charged to them by ABC LLC if VAT-registered.
Entities in Oman need to know the concepts of disbursement and reimbursement. Enterprises should start examining their company transaction quickly from a disbursement and reimbursement perspective.