FTA publishes a VAT Public Clarification on manpower and visa facilitation services

3 June 2024 – On 31 May 2024, the Federal Tax Authority (FTA) in the United Arab Emirates (UAE) published VAT Public Clarification (Clarification) VATP038 regarding the Value Added Tax (VAT) treatment of manpower and visa facilitation services.

The Clarification addresses the challenges faced by companies in classifying transactions involving employment visas and determining the consideration for VAT purposes.

In this Clarification, the FTA provides helpful guidelines and examples for determining the nature of these supplies and applying the relevant valuation rules.

Summary of Clarification
 

Background 

In some instances, employment visas are held by one entity while the employees work under the supervision and control of another entity. In some cases, salary payments are made directly to the visa holder, who subsequently pays their employees. However, in other cases, the supervising company takes full responsibility for these individuals as employees and pays the salaries directly to them.

As this is a common arrangement within the UAE, companies have faced challenges in determining the nature of the supply (i.e., whether it is a supply of manpower or visa facilitation services) and how to determine the value of these supplies for VAT purposes. 

This has presented significant challenges, particularly given that many of these arrangements arise between entities within the same corporate group.

Clarification by the FTA on manpower and visa facilitation services for VAT

Manpower services 

Manpower services generally refer to the processes involved in identifying, recruiting, and providing employees to another entity. This includes activities such as hiring candidates and making them available to work for a different entity. The employer (supplier) is responsible for fulfilling all employment obligations, including payment of salaries and benefits, as well as supervising and controlling the employees' work. This is generally considered a taxable supply for VAT.

The consideration for the supply of manpower services, on which VAT should be accounted, includes the full amount received by the employer (supplier) from the other entity (customer). This encompasses all amounts recharged by the supplier to the customer and amounts directly paid by the customer to the employees (such as salaries and benefits). As a result, the guidance clarifies that the payment of salary directly to an employee does not, in itself, automatically exclude the services from being classified as a supply of manpower services.

Visa facilitation services

Visa facilitation services refer to administrative assistance provided to facilitate the employment visa process for individuals hired by another entity. These services are considered an exception to manpower services if all of the following conditions are met:

1. The employment visa holder and the customer should be part of the same corporate group from a commercial/accounting perspective (and not of the same tax group for VAT purposes);
2. The facilitator's business activities do not include the supply of manpower;
3. The facilitator is not responsible for any employee obligations; and
4. The facilitator sponsors employees to work exclusively for and under the supervision and control of the customer.

If these conditions are met, the supply will still be regarded as a taxable supply of services for VAT purposes, but the consideration for that supply will differ.

In the case of visa facilitation services, the consideration for VAT purposes is the amount charged for the facilitation services. This could include the recharge of expenses such as typing fees, medical tests, and the issuance of employee Emirates IDs. The value of the supply of visa facilitation services excludes the employees’ salary, annual flight allowance, and any other monetary benefits, as these are the obligations of the other entity (customer).

Visa Facilitation Services Where No Fee is Charged

Special valuation rules apply for supplies between related parties and supplies made for no consideration.

If the facilitator charges a fee that is less than market value and the other entity (customer) is not entitled to full input recovery, VAT is due on the market value of the supply.

If the facilitator provides the visa facilitation services to another entity for no charge, the supply would constitute a deemed supply unless one of the relevant exceptions applies. The supply would not be regarded as a deemed supply if the facilitator did not recover any input tax incurred to make the supply (both for direct and indirect costs).

Implications and Industry Impact 

This Clarification has implications for businesses engaged in both receiving and providing manpower and visa facilitation services. However, it also has a broader impact on many corporate groups in the UAE, where staff are employed by a central visa-issuing entity while working for another group entity on a day-to-day basis. This guidance helps to distinguish manpower services from visa facilitation services by means of conditions to be applied when establishing the nature of supplies and valuation thereof.

Ambiguities have arisen in cases where an employee has been granted a visa and employment contract by one entity but works for another entity on a day-to-day basis. This has been further complicated in scenarios where the salary payments for that employee are made directly by the controlling entity, not by the visa holder.

This has led to VAT risks relating to the undervaluation or overvaluation of supplies, which consequently impact the amount of VAT accounted for. It is important for businesses to consider the guidelines to determine the appropriate value of the supplies on which VAT will be levied, and to take action to rectify the VAT treatment applied in scenarios which have previously been unclear.

We recommend that businesses impacted by these changes familiarize themselves with the new Public Clarification, assess the nature of the supply of the services, and determine the consideration to be accounted for VAT purposes.

How Deloitte can help

Your tax advisor is available to discuss to assess the consequences of this Clarification for your business or corporate group, including assessing which type of services you supply (i.e. manpower or visa facilitation services) and what should be considered the consideration for VAT purposes, ensuring compliance with the VAT regulations.