VAT Public Clarification (VATP038) on Manpower & Visa Facilitation Services in UAE
On 31 May 2024, the Federal Tax Authority (FTA) issued VAT Public Clarification VATP038 regarding the VAT treatment of manpower and visa facilitation services concerning employment visas and related services.
The clarification addresses the constraints in classifying transactions related to employment visas and evaluating the consideration for VAT purposes.
This clarification provides guidelines and examples for employers and visa facilitation services to determine the nature of supplies and clarify the difference between manpower services and visa facilitation services for VAT purposes.
The Background:
In UAE, there may be some cases where employment visas are held by one company (supplier) and the employees work under the supervision and control of another company (customer). In some instances, salaries are paid to the employees by the visa holder. On the other hand, the supervising company takes complete responsibility for the employees and pays salaries to them.
In such situations, the companies in UAE face difficulties in classifying the nature of supply (i.e. Manpower services or visa facilitation services) and determining the value of these supplies for VAT purposes. This has raised constraints if both parties (i.e. supplier and customer) are operating under the same corporate group.
Manpower Services Vs Visa Facilitation Services Explained (for VAT purposes):
Manpower Services
Manpower services is the process of identifying, hiring, and providing employees to another company.
In such cases, the supplier will be responsible for all employment obligations, salary payments, and other benefits, including supervision and control of employees. This type of activity is considered a taxable supply for VAT.
For Example: Company A, holding the employment visas for individuals as employees in Company Band takes full responsibility for benefits related to the employee, including salaries, and other benefits. In this case, Company A is perceived as manpower services, and the consideration for this supply involves all expenses incurred by Company B, enclosing salaries and benefits.
For the supply of manpower services, the VAT amount will be calculated including the full amount provided by the customer to the supplier (employer). This comprises all costs remunerated by the customer to the supplier and salaries & benefits which are paid directly by the customer to the employees. Therefore, this guidance clarifies that the salary that is directly paid by the companies (customer) will not exclude the services from being categorized under manpower services.
Visa Facilitation Services
Visa facilitation services involve administrative support provided to another entity for facilitating the employment visa process for their employees.
The facilitating entity must satisfy all the following conditions to be classified as Visa facilitation Services (otherwise it would be considered as Manpower nature):
- The facilitator and the customer should belong to the same corporate group (but not under the same VAT group).
- The facilitator’s nature of business shouldn’t be manpower services.
- The facilitator is not liable for any obligations concerning the employee except for costs incurred for obtaining the employment visa.
- The facilitator sponsors the employees to work solely for and under the custody and control of the customer.
If the above conditions are met, the supply will still be considered a taxable supply for VAT purposes, but there will be a difference in VAT treatment.
Example:
Consider company A (supplier), holding employment visa of employees working in company B (customer), where both Company A and Company B belong to the same corporate group. The nature of business for Company A is not categorized under Manpower Services and all the obligations of the employees will be handled by Company B except for incurred costs for the Employment Visa. In such cases, Company A will be classified as a Visa Facilitation Service.
For Visa Facilitation services, the VAT amount calculated will include the cost incurred for the facilitation i.e. recharge of expenses including medical tests, typing fees, and issuance of Emirates ID for employees. The value of the supply of visa facilitation services does not include the salary of employees, annual flight allowance, and other benefits, as these are responsibilities of the other entity (customer)
Key Considerations:
The special value of supply rules applies between related parties and supplies made for no consideration.
- The VAT is payable on the market value of the supply if the visa facilitation charges are less than the market value and the other entity (customer) is not sanctioned to full input recovery.
- If the facilitator offers the visa facilitation services to another entity free of charge, the supply constitutes what is called a” deemed supply”.
- However, the Public Clarification has declared a crucial exception that emerges when the facilitator does not require to retrieve input tax, including both direct costs and indirect costs. In such cases, the supply cannot be considered as “deemed supply” for VAT purposes. However, if the input tax is recovered, the facilitator should calculate output tax, which covers both visa-related expenses and operational overhead, on total costs for VAT purposes.
The Implications:
This VAT public clarification created a few implications for businesses that are involved in offering and receiving manpower and visa facilitation services.
In the UAE corporate groups, ambiguities arise when employees work for one entity and are granted a visa by a different entity of another group. It is crucial for businesses to understand the guidelines to determine the relevant value of the supplies on which VAT will be levied, and to pursue measures to resolve the VAT treatment applied in ambiguous scenarios in the past.
