Simplifying VAT Compliance for Financial Institutions Using SWIFT Messages in UAE

Priyanka Babu | Updated on: November 14, 2024

International financial transactions are snowballing regularly, and now it takes just a few seconds to do a transaction worldwide. This has all been made possible with the help of SWIFT.

The Society for Worldwide Interbank Financial Telecommunication, or SWIFT, is responsible for smoothening these connections. It not only ensures that these transactions are secure but also systematic and efficient.

Although transactions are becoming easier across international borders, the complexity of VAT (i.e., Value-Added Tax) is increasing. Every nation has different regulations for their taxation, and thus, complying with the norms has become a challenge for many banks and financial institutions. Banks cannot afford to circumvent the importance of careful tax compliance, and the Federal Tax Authority (FTA) in the UAE has taken a significant step to provide clarity on this matter.

Understanding VAT Implications of SWIFT Transactions

Value-Added Tax is collected on the value added to all the goods and services at distinct stages of distribution or production. In terms of services, VAT is applied to various services provided by banks or financial institutions like processing of payments, advisory services, facilitation of transactions, etc. SWIFT transactions are the essence of international finance and an authentication of all transactions done in global banking.

However, the primary problem arises when the banks recover this VAT as the transactions are verified by SWIFT messages. However, these messages are not recognised in the UAE as tax invoices to satisfy the UAE VAT obligations.

Why are VAT compliances complex in the UAE?

The FIs (Financial Institutions) of the UAE face challenges when it comes to complying with VAT compliance. When the banks of the UAE receive inter-bank services from international banks, they treat them as making self-supplies. In simpler terms, it means that they are required to account for all the VAT obligations on these services as if they have supplied these services to themselves, completing all related tax obligations.

As per the UAE VAT, financial institutions and banks are obligated to self-account for VAT compliance. They are required to use the Reverse Charge mechanism and pay the VAT to the FTA.

How is the VAT compliance simplified?

The FTA has recognised the impracticality of requiring financial institutions to issue a tax invoice to themselves for each SWIFT transaction. Therefore, the FTA has clarified that qualifying SWIFT messages will be sufficient for VAT documentation requirements and input VAT recovery. This simplification significantly impacts financial institutions engaged in SWIFT transactions, reducing the administrative burden and providing more certainty and clarity on the VAT treatment of SWIFT transactions.

Acceptance of SWIFT messages as evidence

Due to the rising administrative burden on the banks and financial institutions for invoicing every SWIFT message, FTA accepts SWIFT messages as valid documentary evidence when documenting inter-bank services. However, some mandatory requirements have been set up as criteria for all SWIFT messages to be considered a “Qualifying SWIFT message”.

As per FTA, a “Qualifying SWIFT message” must include the following information —

• Name of the UAE financial institution that is receiving the service (SWIFT receiver/customer)
• Date of the transaction
• Name as well as address of the non-resident bank (Supplier/SWIFT sender)
• SWIFT message reference number
• Transaction reference number
• A description of the transaction
• Consideration charged
• Currency used

How will a qualified swift message simplify VAT compliance?

• Qualifying SWIFT messages: The FTA has clarified that qualifying SWIFT messages can be used as valid documentation for VAT purposes.
• Reduced organisational burden: Financial institutions and banks in the UAE no longer need to issue a tax invoice to themselves for each SWIFT transaction. This will not only save manpower and resources but also reduce the administrative burden and associated costs. Financial institutions can redirect their resources to more planned activities, such as improving customer service or developing new products.
• Improved certainty: The FTA's clarification has provided more certainty and clarity on the VAT treatment of SWIFT transactions, permitting financial institutions to manage their VAT obligations better. This will further decrease the risk of non-compliance and associated penalties.
• Enhanced efficiency: With these clarifications by the FTA, the VAT compliance process will be streamlined, allowing the banks to focus on their core business activities. This improved efficiency empowers financial institutions to respond more speedily to fluctuating market conditions and customer needs.
• Qualifying SWIFT messages: The FTA has clarified that qualifying SWIFT messages can be used as valid documentation for VAT purposes.
• Record-Keeping: Financial institutions should maintain accurate and detailed records of their SWIFT transactions, including VAT-related information.

The UAE FTA's public clarification on the use of SWIFT messages for input tax recovery is a noteworthy development in simplifying VAT compliance for all banks and financial institutions. The clarification provides more certainty, precision, and clarity on the VAT treatment of SWIFT transactions. By understanding the FTA's simplification and key considerations, financial institutions can ensure they are compliant with UAE VAT regulations and take advantage of the simplification offered.