Determining VAT liability - Disbursement and Reimbursement

Businesses incur lot of costs and expenses on day today basis. It is a very common practice to make payments on behalf of the customers and clients as a part of business transaction. Under the VAT regime, the treatment is different for disbursement and reimbursement of expenses. Organizations need to have proper understanding of the concept and the application of the VAT treatment. Let’s discuss these concepts in more details to understand the implications of VAT.

Disbursement:

If an organization makes payment on behalf of the customer or client in a capacity of an agent, for goods and services received from the supplier and the benefit goes directly to the customer or client, then this will be treated as disbursement, when the organization recharges those expenses to the customer or client. Such disbursements of expenses are outside the scope of VAT.

Let us try to understand the same with the help of an illustration:

ABC LLC is a VAT registered entity in Oman and is importing raw material from India through a custom clearing agent XYZ LLC. XYZ LLC pays all the expenses related to import of raw material such as port fee, custom duty and transportation charges on behalf of ABC LLC. The invoices for these services are in the name of ABC LLC but paid by the clearing agent XYZ LLC.

Once the custom clearance is done, XYZ LLC will invoice to ABC LLC for all the expenses paid by them. Here the recovery of all these expenses is considered as the disbursement because XYZ LLC has not made any taxable supply to the ABC LLC rather they acted as an agent to clear the raw material. The transaction happened between the ABC LLC and supplier from India. Hence, the disbursement received by the XYZ LLC is not a taxable supply. Though disbursements are excluded from the VAT calculations, yet the same must be itemized separately in the VAT invoices.

It is very important to note that, if there is any VAT paid on these service charges paid by XYZ LLC, the same cannot be claimed by XYZ LLC 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 ABC LLC for the services.

Reimbursement:

When an organization incurs incidental cost while supplying goods and services to its customer or client and later charges to them; such costs are not disbursements. As these expenses are utilized or consumed by the supplier in the process of supplying the goods and services, these expenses will be treated as reimbursement and VAT will apply on them.

For example, a consultancy firm PQR LLC has been engaged by LMN LLC for due diligence services. As per the terms of the engagement, they have agreed that all out of pocket expenses paid by PQR LLC will be paid back (reimbursed) by LMN LLC. As LMN LLC is located in another city, the staff from PQR LLC had to book a flight and hotel in the other city until they complete the assignment. Later, PQR LLC includes the amounts they have paid for the air-tickets and hotel in the final invoice issued to the LMN LLC, which should be taxable at 5%.

The amount recovered by PQR LLC from LMN LLC is on account of a taxable supply, hence this will be considered as the reimbursement and subject to normal VAT rules. In the case of reimbursements, when VAT is being charged by PQR LLC, the input VAT paid on the supplies can be claimed in the VAT return. Further, the client LMN LLC will also be able to claim back the VAT charged to them by PQR LLC, if they are VAT-registered.

It is very important for entities in Oman to understand the concepts of disbursement and reimbursement. It is advisable for businesses to start reviewing their business transaction immediately from disbursement and reimbursement viewpoint.