Article 51 - Proportional Deduction of Input Tax

Tax incurred by a Taxable Person on Goods and services received which are exclusively and directly attributed to Taxable Supplies made by them, or other Supplies described in Paragraph 1 of Article 49 of these Regulations, may be deducted in full subject to the other provisions of these Regulations.

Tax incurred by a Taxable Person on Goods and services which are exclusively and directly attributed to an Exempt Supply is not deductible.

In cases where a Taxable Person incurs Input Tax on Goods or services which are used both for making Taxable Supplies and for making Exempt Supplies, or which cannot be attributed exclusively to use in making a specific Supply, the default method of proportional deduction of Input Tax shall be determined in accordance with this Article.

The proportional deduction, for the purposes of the default method of proportional deduction referred to in the third Paragraph of this Article, is calculated on the basis of a fraction where:

1. the numerator is the value of Taxable Supplies made by the Taxable Person in the last calendar year,

2. the denominator is the total value of Taxable Supplies and Exempt Supplies made by the Taxable Person during the last calendar year,

3. the value of Taxable Supplies or Exempt Supplies made by that Person in the fraction include those Supplies that do not take place in the Kingdom, but that would have been either Taxable Supplies or Exempt Supplies if they had taken place in the Kingdom.

The fraction calculated in Subparagraph (b) of the fourth Paragraph of this Article shall not include:

1. Supplies of Capital Assets by the Taxable Person,

2. Supplies taking place outside the Kingdom which are supplied from an establishment of the Taxable Person outside the Kingdom.

Taxpayers who were not registered for VAT in the previous calendar year must calculate the fraction using the default method set out in the fourth Paragraph of this Article based on estimated values for the current calendar year.

At the end of the calendar year, the Taxable Person using the default method set out in Paragraph 4 of this Article must compare the values used in the fraction during that year with the actual values of Supplies made in that calendar year, and make an adjustment to Input Tax in the final Tax Return for that calendar year to reflect the correct proportional deduction based on the actual Supplies for the entire year.

A Taxable Person may submit an application to use an alternative proportional deduction method to the default method, in cases where that alternative method more accurately reflects the use of Goods and services supplied to that Taxable Person.

The Authority may approve or reject an application to use a method other than the default method by notification to the Taxable Person. In cases where the application is approved, the Authority shall prescribe a time period during which the alternative method may or must be used. Such period may be for a maximum of five years, following which a new application must be submitted.

Notwithstanding any prior approval, in cases where the Authority believes the default method or the approved alternative method does not accurately reflect the Taxable Person's use of Goods and services supplied to it, the Authority may issue a notification directing the use of another method, and the period during which this method must be used.

In cases where the Taxable Person incurs Input Tax on Goods and services which are not used to make a Taxable Supply, but are used:

1. in respect of raising capital for an ongoing Economic Activity to the extent this constitutes the making of Taxable Supplies by way of the issue of share capital or debt;

2. for a business activity which is treated as outside the scope of VAT, such as a transfer of an Economic Activity or part of an Economic Activity as a going concern within Article 17 of these Regulations;

3. to carry out an exempt Supply of real estate - as per the provisions of Subparagraph (a) of Article 30 of these regulations - that is incidental and not regularly carried out in the ordinary course of the Taxable Person carrying out their taxable Economic Activity; ^[77] or

4. for another one-off event which is incidental to the Economic Activity to the extent this constitutes the making of Taxable Supplies;

Such Input Tax shall be deductible in accordance with the proportion of the overall Economic Activity of the Taxable Person which constitutes the making of Taxable Supplies, determined using the applicable proportional deduction method determined in accordance with this Article.