What UAE's VAT clarification will mean for employee visa facilitation fees

The latest Federal Tax Authority clarification on VAT will be a relief to many corporate entities, as it makes a subtle distinction between manpower supply and visa facilitation services to determine VAT obligations.

For visa facilitation services, VAT is applicable only on the facilitation fee charged by the supplier, that is the employer/visa sponsor (referred to as ‘facilitator’). A tax relief is provided as the taxable value of a visa facilitation service excludes the employee’s salary, annual flight allowance and other monetary benefits.

Manpower supply also entails a scenario where employment visas are held by one company while employees work under the supervision and control of another company.

Since January 1, 2018, the VAT is chargeable on the full value of manpower supply. A manpower supplier is obliged to pay VAT not only on amounts charged by the supplier but also on that directly paid by the recipient to employees such as salaries and benefits.

Scope of visa facilitation services

To be eligible, the facilitator/supplier and customer should be a part of the same corporate group. The facilitator should ensure that its business activities should not include the supply of manpower. If employees are provided to any person other than a member of the same corporate group, all supplies including that to the corporate group member would be taxed at full value.

The eligibility conditions require that the recurring employee obligations - employee’s salary, monetary benefits such as annual flight allowances, housing allowances, and medical insurance and accommodation - must be borne by the customer. The facilitator/supplier should not pay for these.

The most important condition is that the employees should work exclusively for, and under the supervision and control, of the client.

Ripple effect

A public clarification is not an amendment of the tax provisions, and becomes effective as of the date of implementation of the relevant legislation. The business community needs to evaluate the potential impacts on their visa facilitation services and corporate tax positions.

A recipient can recover input credit on a supply if the VAT has been correctly charged by the supplier. If a facilitator charges VAT only on the visa facilitation service fee instead of the full value, would it contradict the previous VAT positions? Should the customer reverse the input credit recovered on the recurring employee obligations?

With the taxable value of supplies by a facilitator being equal only to the visa facilitation service fee, should the eligibility criteria for the mandatory/voluntary VAT registration be revisited for past periods or trigger VAT deregistration henceforth?

As the recurring employee obligations borne by the customer are generally not considered as a disbursement, the potential implications on corporate tax is noteworthy. The small business relief (SBR) from 9% corporate tax is available with an annual revenue threshold of Dh3 million.

Do accounting principles mandate that the facilitator’s revenue should include the recurring employee obligations borne by the customer? The answer could impact the eligibility for small business relief.

The dilemma is more for free zone companies eligible for 0% preferential corporate tax rate.

The revenue from any visa facilitation services provided to mainland or overseas group companies could be critical for the de-minimis threshold. Would the principles of the public clarification be applicable to evaluate the de-minimis eligibility?

In the rapidly evolving tax space, the business community should look out for an immediate and comprehensive impact analysis of each tax development.