VAT Guide on employee benefits is now available in English
The General Authority for Zakat and Tax (“GAZT”) has released the English version of the guideline that explains in detail its view on the VAT treatment of the employee benefits.
We have summarized the most important messages of the said publication as follows.
GAZT seeks to treat the various types of outsourcing of human capital that are similar in effect to a labour relationship as effectively an employment relationship even if there is no labour contract in place.
This may result in the “base salary” portion payable to the third party provider to be considered outside the scope for KSA VAT purposes. Any additional amounts payable as commission or service charges are deemed to be a consideration for provider’s services and thus subject to VAT. Such an interpretation may impact both providers and consumers of these services which are widely used in KSA. We expect this approach to be applied by the GAZT only in cases when the salary portion is clearly distinctive from the additional fees.
Service Providers – Individuals & Non-Executive Directors
GAZT is of opinion that individuals (other than employees) providing services on a regular and continuous basis under a services agreement or similar contract are obliged to register and account for VAT if their income exceeds the VAT registration threshold.
This includes non-executive directors who are not employees but are remunerated for their services. Such interpretation is likely to have an impact on many currently serving non-executives. Considering limited comments from the GAZT, analysis of practice in other developed jurisdictions may be required for businesses to decide on their approach in KSA in this respect.
In certain cases, the provision of goods or services without any consideration to the employees or business guests may result in a nominal supply on which VAT must be accounted for.
GAZT recognizes that in some cases a taxable supply may include an element of a “free” offering which may not be considered as a separate nominal supply, but only if it is clearly an indistinguishable part of the overall
Further, GAZT also recognizes that the said nominal supplies should ideally be valued on the basis of purchase value/ cost. However, in cases where such nominal supplies are made to the related persons (including employees) or a clear purchase value/ cost cannot be ascertained (e.g. for goods produced internally), the VAT should be charged on the market price. So, employee specific discounts may be ignored by the GAZT for VAT purposes.
Employee Allowances & Benefits
In cases where an employer provides any benefits in kind (e.g. medical insurance) to the employees in excess of the statutory requirement under KSA laws, the excess must be recognized as a private expenditure (without input VAT deduction), or a nominal supply subject to VAT.
There is no GAZT’s public opinion so far on what types (or levels) of medical insurance coverage they will consider to be in excess of “minimum” labour law requirements.
GAZT has confirmed that VAT incurred on the purchase/lease, repair and maintenance, and fuel for company vehicles is only deductible if such vehicle is used exclusively for business purposes. There is no ability for partial deduction if a vehicle is partly available for private use.
GAZT has stated in the Guide that input VAT should not be blocked by the mere fact that employees may still use the vehicle to commute from their residence to the office. This view is contrary to international practice. Also, it is worth mentioning that an opposing GAZT opinion is still publically available, creating uncertainty.
GAZT considers that VAT incurred by the employer on any catering costs, including the provision of free meals in the staff cafeteria, would be inadmissible for deduction.