VAT Nuances on Salary Recharges

VAT Nuances on Salary Recharges

Salary recharges is a common practice across industries in UAE. Often due to certain regulatory restrictions, labor contract and VISA is issued to employee by one entity, however, employee actually works for other group entity either partly or fully. Salary may be paid to the employee directly by the entity for whom he is working for or may be even by the VISA issuing entity. As both the entities are group entities (not within the same tax group), sometimes they tend to ignore or maybe are not aware of possible VAT implications on the given transaction.

In this Article, I have tried to ponder my thoughts on certain key areas that needs to be taken care of before finalizing the tax position on such a scenario. The given transaction can be explained by way of an illustration as follows –

There are two group entities (not within a tax group), Entity A and Entity B. Entity A issued VISA and entered into a labor contract with the employee. However, employee is actually working for Entity B. In other words, employee is working under the whole management and control of Entity B whilst VISA and labor contract is issued by Entity A. There can be three scenarios possible under which salaries may be paid to the employee –

Scenario 1 – Entity B is directly paying salary to the employee

Scenario 2 – Entity A is paying salary to the employee and cross charging such salary amount to Entity B

Scenario 3 – Entity A is paying salary to the employee and not charging any amount to Entity B as it is a group entity

It is also important to note that where a company cross charges, it could be with a mark-up or just at cost.

Possible VAT outcome on the above scenarios can be as follows –

Scenario 1 – Entity B is directly paying salary to the employee

In case where Entity B is directly paying salary to the employee, can a tax position be taken that Entity A is providing manpower supply services to Entity B. Accordingly, such manpower services may be treated as taxable supply in the hands of Entity A and salary paid to the employee could be treated as consideration for the purpose of charging and paying VAT. The salary paid by Entity B to employee of Entity A could be treated as a payment made on behalf of Entity A. Further, if Entity A charges anything to Entity B towards providing such employee, it would be chargeable to VAT at the standard rate of 5%.

Scenario 2 – Entity A is paying salary to the employee and cross charging such salary amount to Entity B with or without mark-up

It needs to be evaluated in detail:

• whether such cross-charging of salary amount by Entity A to Entity B would be treated as consideration and ultimately taxable supply of manpower service under VAT or
• can it be said that it is just a salary recharge made to other Entity and hence would be treated as outside the scope of VAT and only the mark-up, if charged would be liable to VAT.

Scenario 3 – Entity A is paying salary to the employee and not charging any amount to Entity B as it is a group entity

As stated above, firstly it needs to be analyzed whether Entity A is providing manpower supply services to Entity B. If yes, then can a tax treatment be adopted that as Entity A is not charging any amount to Entity B for provision of such manpower supply service, accordingly, the given transaction may be considered as deemed supply in the hands of Entity A and Entity A would be required to charge and pay VAT.

Global Reference -

Reference is also drawn to Para 4.4 of KSA - VAT on Employee Benefits Guideline on Special Cases – Outsourced Human Capital and Secondment issued by GAZT which states that:

“Businesses may often choose to outsource specific roles or functions to third party providers or agencies. Usually, these third party providers undertake to carry out the activity under a contract for services which is considered a supply of services. In this case the third party provider’s charges are subject to VAT under the standard VAT rules.

Alternatively, it may provide specific persons to carry out the roles under the direct instruction of the recipient business (in line with a contract of service between the service provider and the recipient business). In these cases, the third party/agency may charge for the Employee’s salary or wage, plus a commission.

In cases where the contract between the recipient business and the third party provider creates a relationship between the business and the seconded/mandated worker equivalent to that of an Employer and Employee (as described in section 2), then the payment of wages to the third party provider or agency is not subject to VAT. In all cases, the commission or margin earned by the third party provider or agency must be subject to VAT.”

Based on the above KSA guidelines, can a view be taken in UAE that if employer – employee relationship is created (between Entity B and employees as per the illustration above) then salary amount cross charged by the other entity (Entity A in the illustration discussed above) may not be subject to VAT, and mark-up, if any, would be liable to VAT.

Thus, to conclude, I would recommend businesses to undertake a thorough study before finalizing tax treatment in the above transaction. Alternatively, businesses may also explore an option of seeking clarification from the FTA to confirm the tax position. Overlooking the given transaction may have serious consequences.

Gaurav Shivhare | Chartered Accountant – England & Wales and India | +971564030888

Disclaimer: Content posted is for informational & knowledge sharing purposes only and is not intended to be a substitute for professional advice related to tax, finance or accounting. The view/ interpretation of the publisher is based on the available Law, guidelines, and information. Each reader should take due professional care before you act after reading the contents of that article/ post. No warranty whatsoever is made that any of the articles are accurate and is not intended to provide and should not be relied on for tax or accounting advice.