Scenario 5: Partial Exemption Bank

Scenario: Dubai Bank — Partial Exemption

Business Profile

• Entity: Dubai Commercial Bank
• Activity: Banking and financial services
• Registered: Yes

Revenue Mix

• Taxable supplies (fees, commissions, zero-rated cross-border): AED 40M
• Exempt supplies (interest, domestic financial services): AED 60M
• Total supplies: AED 100M
• Recovery rate: 40% (40M ÷ 100M)

Input Tax

• Direct input tax (taxable): AED 5M — fully recoverable
• Direct input tax (exempt): AED 3M — not recoverable
• Residual input tax (office rent, IT, shared services): AED 10M

Apportionment

• Recoverable residual: AED 10M × 40% = AED 4M
• Non-recoverable residual: AED 10M × 60% = AED 6M

Total Input Tax Recovery

• Direct (taxable): AED 5M
• Residual (40%): AED 4M
• Total recoverable: AED 9M
• Total not recoverable: AED 9M (AED 3M direct exempt + AED 6M residual)

Annual Adjustment

At year-end, the bank performs an annual adjustment:

• If the actual recovery rate differs from the provisional rate used during the year, the bank adjusts the input tax recovery.
• Example: If the actual rate at year-end is 42% (not 40%), the bank recovers an additional AED 200,000 (2% of AED 10M residual).

Key Lessons

1. Banks are typically partial exemption businesses — they make both taxable and exempt supplies.
2. Input tax apportionment is required for shared/residual costs.
3. The recovery rate is based on the ratio of taxable supplies to total supplies.
4. Annual adjustments true up the provisional rate to the actual rate at year-end.
5. Banks have significant unrecoverable input tax — a major cost consideration.