Let's understand some of the concepts relating to the article:
What is Wages Protection System (WPS)?
WPS is an electronic salary transfer system that allows companies / institutions to pay workers wages via banks, bureaux de change, and financial institutions approved and authorized to provide the service. The system, developed by the Central Bank of the UAE, allows the Ministry of Labour to create a database that records wage payments in the private sector to guarantee the timely and full payment of agreed-upon wages.
What is defined as Salary?
A salary is a form of payment from an employer to an employee, which may be specified in an employment contract. From the point of view of running a business, salary can also be viewed as the cost of acquiring and retaining human resources for running operations and is then termed personnel expense or salary expense. In accounting, salaries are recorded in payroll accounts.
Its important to note that there should be employer and employee relationship.
What is 'Taxable supply', as per VAT Law?
A 'taxable supply' is defined in the VAT legislation as 'any supply of goods or services for consideration by a person conducting business in the UAE, excluding exempt supplies.'
Therefore, a supply would be a taxable supply if the following conditions are met:
The VAT legislation defines 'business' as 'any activity conducted regularly, on an ongoing basis and independently by any Person, in any location, such as industrial, commercial, agricultural, professional, service or excavation activities or anything related to the use of tangible or intangible properties.'
What provision makes 'Salary' as 'Out of Scope' as per VAT Law?
Salary is considered as 'Out of Scope' since the condition in the definition of 'Taxable Supply' is not complied with i.e. 'Independent by any person'. As an employee, every action or act is done for and on behalf of company (organisation) i.e. employer & hence it done not fulfill the criteria of independence.
With above interpretation, 'Salary' is considered as Out-of-Scope supply as per UAE VAT Law, since Salary payment is by an employerto THEIR employee.
Let's understand implication of VAT, using some practical examples.
Basic assumption used:
Employees hired in 'UAE Company A' (Work Visa from 'UAE Company A').
Employees are performing activity for 'UAE Company B'.
WPS for the salary of Employees are paid / transferred directly form the bank account of 'UAE Company B'.
Books of 'UAE Company A'
Salary Account Dr. XXXX
To Salary Payable XXXX
(Recognition of Salary)
Salary Payable Dr. XXXX
To 'UAE Company B' XXXX
(WPS initiated by 'UAE Company B' on behalf of 'UAE Company A')
UAE Company B Dr. XXXX+VAT
To Service Invoice XXXX
To Output TAX (VAT) VAT
(Tax invoice issued for value of services provided)
Books of 'UAE Company B'
'UAE Company A' Dr. XXXX
To Bank Account XXXX
(WPS initiated for transfer of salary by 'UAE Company B' on behalf of 'UAE Company A').
Expenses Dr. XXXX
Input TAX (VAT) Dr. VAT
To 'UAE Company A' XXXX+VAT
Note: WPS transfer will not substantiate the employer / employee relationship, this transfer can be on behalf of other company (example in above case transfer done by 'UAE Company B' is considered as transfer on behalf of 'Company A').
However, there is a different view provided in KSA VAT guidance note i.e. 'Financial Services Sector Industry Guide' stating 'In cases where a supplier provides an employee to a customer, and the outsourced employee is under the direction of the customer and acts in a manner equivalent to an employee, the provider of outsourced labour may view the on-charge of the salary cost for the outsourced labour as a direct disbursement. VAT must still be charged on the agency fee.
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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