Clarification: VAT on Salary Recharges or Secondment of Employees
There has been a great deal of confusion regarding the tax treatment for cross-charging salaries to customers by companies. The aim of this article is to share a clarification obtained from the Authorities on this point.
At the outset, we would like to state that this clarification is subject to the facts and circumstances of the case elucidated below and may or may not apply to your case or your client’s case.
The aim of this article is to share the view-point of the authorities being adopted or that may be adopted in the case of future litigations.
There are three parties involved in the scenario:
- The Tax-Registrant which is a registered Tad-Beer center
- The customer who approached the center to employ a domestic worker
- The employee of the tax-registrant placed with the customer for providing services as per contract between the tax-registrant and the customer.
In this scenario,
- The tax registrant employs domestic workers, registers their employment contracts and sponsors their resident visa in the UAE.
- The customer as per their requirement finalizes a candidate and enters into a contract with the tax registrant.
- The customer in exchange of the supply of this service has to pay a fixed fee (Depending on the nationality of the worker) which is clearly subject to VAT.
- Further post-dated cheques for the salary of the domestic worker are collected from the customer in the name of the tax-registrant. The tax registrant deposits the cheque into their own account which is later disbursed to the worker through the WPS by the tax registrant.
- It is important to note that:
- The amount of the post-dated cheques is exactly the same amount of salary mentioned in the employment contract of the domestic worker with the tax registrant; it has no element of any service charge or commission attached to it.
- For instance, let the monthly salary of the domestic worker be AED1800; this is collected from the customer as post-dated monthly cheques for the tenure of the contract.
Query raised before Authorities:
Questions for clarification:
- Whether the amount of AED 1800 collected from the customer to pay the salary of the employee via Wage Protection System (i.e. cross charge of Salary) shall constitute a taxable supply of services under the definition of “Taxable Supply” as contemplated under Article 2 of the Federal Decree Law No. (8) of 2017?
- Whether the amount of AED 1800 collected from the customer to pay the salary of the employee should be treated as consideration under the definition of “Taxable Supply” as contemplated under Article 2 of the Federal Decree Law No. (8) of 2017?
- Article 1 of the Decree-Law provides the definition of 'taxable supply' and 'services'.
- Taxable supply has been defined as a supply of goods or services for a consideration by a person conducting business in the UAE and does not include an exempt supply.
- Services have been accorded a wide definition to mean anything that can be supplied other than goods.
- Article 1 of the Decree-Law further defines 'consideration' as all that is received or expected to be received for the supply of goods or services, whether in money or other acceptable forms of payment.
- Article 2 of the Decree-Law prescribes the scope of Tax and includes within its purview taxable supply, deemed supply and imports.
Basis of Tax Authorities decision:
The contractual relationship between the company and the customer as-well-as the underlying nature of the supply primarily determine the VAT treatment. In the present case, the tax registrant provides domestic workers to the customer; hence the supply falls within the definition of a taxable supply of services.
As-far-as the value of the supply is concerned, the term ‘Consideration' broadly comprises of all that is received for the supply of goods & services. In the present case, the fixed fee and the amount received via post-dated cheques are included within the definition of consideration for the taxable supply according to Article 1 of the Decree-Law.
In the present case, the domestic workers are employed by the tax registrant and are just made available to the customer for consideration. Whereas, if the customers were to employ the domestic worker themselves and the tax registrant was solely responsible for introducing the workers with the customers, then only the agency fee received by the tax registrant would be subject to VAT.
Taking the above into consideration, the Authority has decided that the monthly amount of AED1800 collected via post-dated cheques comprises of consideration for a taxable supply, it thus falls within the scope of VAT according to Article 2 of the Decree-Law.
Implications of the Decision:
This decision could impact the following:
- Existing Tadbeer Centers who provide domestic workers on contract to their customers
- Man-power Supply Agencies who are cross-charging Salary to their Clients without VAT and only levying VAT on their own markup/ fees.
- Any Company out-sourcing employees who are cross-charging Salary to their Clients without VAT and only levying VAT on their own markup/ fees.
These Companies should urgently review their terms and contracts with their customers in light of the Clarification received from the Authorities.
Further, in case VAT has not been paid on such earlier transactions the Companies must look into filing a Voluntary Disclosure to mitigate possible penalties.
The article has been authored by Shrey Joshi- Founder and CEO of Ascent Auditing of Accounts; email: firstname.lastname@example.org.
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.
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