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trIs the service fee paid for recruiting employees from other companies subject to VAT?
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Is the service fee paid for recruiting employees from other companies subject to VAT?
In many cases, business entities obtain services from other entities when carrying out projects. In some cases, they even engage employees from other companies to work on their own projects. So, are the fees paid for such services subject to VAT? How should these services be documented? Economist Mahmud Abasguliyev provides clarification on these questions.
According to Article 13.2.11 of the Tax Code, a service (work) is an activity that is not considered a supply of goods and whose results have a material expression.
For VAT purposes, the transfer of ownership of money and land, the transfer of the right to use land, the leasing of land, as well as the provision of services to an employer as an employee are excluded.
If the goods used in providing services (performing work) are not supplied separately, or if reimbursable expenses that are not included in the value of the service (work) are not separately indicated in the contract or payment documents, such goods or expenses are considered an integral part of the service (work).
The key point to consider here is that, for VAT purposes, the transfer of ownership of money and land, the transfer of the right to use land, the leasing of land, and the provision of services to an employer as an employee are excluded. This can be explained more clearly with an example.
Example: Suppose “AA” LLC wins a tender for a project under a contracting agreement. To complete the project on time, it needs additional staff. Therefore, “AA” LLC approaches “ZZ” LLC and asks 10 employees who have employment contracts with “ZZ” LLC to work for “AA” LLC for a certain period.
In this case, the companies should enter into two contracts. One contract concerns the engagement of employees and the payment of their salaries. It is important for this contract to specify the name, scope and duration of the work to be performed, the list of employees to be engaged (including their FIN numbers), the gross salary amount stated in the employment contracts, and the number of hours each employee will work.
Suppose the monthly value of this contract between the companies is AZN 30,000. At the same time, “ZZ” LLC enters into a separate contract with “AA” LLC for an additional service fee. In this way, the company receives payment for the service it provides by making its employees available to another company. The monthly value of this contract is AZN 5,000. Both companies are assumed to be VAT payers.
After that, the employees of “ZZ” LLC start working at “AA” LLC. At the end of each month, “ZZ” LLC issues an electronic invoice. Two items should be indicated in the document. The first item should show the service fee payable to “ZZ” LLC, which is subject to VAT. The second item should show the amount to be paid to the employees as salary. This amount is not subject to VAT.
“AA” LLC pays “ZZ” LLC AZN 5,000 plus VAT. In addition, it pays “ZZ” LLC AZN 30,000 intended for the employees’ salaries. “ZZ” LLC reports the AZN 5,000 in Appendix 3 of its VAT return and pays the corresponding VAT amount to the state budget. The AZN 30,000 is reported as an amount not subject to VAT. This amount should be allocated to the employees’ salary cards and social insurance payments.
As can be seen, no VAT liability arises in respect of the AZN 30,000. “ZZ” LLC reports this amount both as income and expense in its profit tax return and records it as an expense deductible from income.
The AZN 5,000 received as a service fee is recorded as income and is subject to profit tax at a rate of 20%.
“AA” LLC, in turn, records both AZN 30,000 and AZN 5,000 as expenses in its reports.
The key point to pay attention to is that the details of the work to be performed must be clearly specified in the contract. This will help prevent potential disputes with the tax authorities in the future.
In many cases, business entities obtain services from other entities when carrying out projects. In some cases, they even engage employees from other companies to work on their own projects. So, are the fees paid for such services subject to VAT? How should these services be documented? Economist Mahmud Abasguliyev provides clarification on these questions.
According to Article 13.2.11 of the Tax Code, a service (work) is an activity that is not considered a supply of goods and whose results have a material expression.
For VAT purposes, the transfer of ownership of money and land, the transfer of the right to use land, the leasing of land, as well as the provision of services to an employer as an employee are excluded.
If the goods used in providing services (performing work) are not supplied separately, or if reimbursable expenses that are not included in the value of the service (work) are not separately indicated in the contract or payment documents, such goods or expenses are considered an integral part of the service (work).
The key point to consider here is that, for VAT purposes, the transfer of ownership of money and land, the transfer of the right to use land, the leasing of land, and the provision of services to an employer as an employee are excluded. This can be explained more clearly with an example.
Example: Suppose “AA” LLC wins a tender for a project under a contracting agreement. To complete the project on time, it needs additional staff. Therefore, “AA” LLC approaches “ZZ” LLC and asks 10 employees who have employment contracts with “ZZ” LLC to work for “AA” LLC for a certain period.
In this case, the companies should enter into two contracts. One contract concerns the engagement of employees and the payment of their salaries. It is important for this contract to specify the name, scope and duration of the work to be performed, the list of employees to be engaged (including their FIN numbers), the gross salary amount stated in the employment contracts, and the number of hours each employee will work.
Suppose the monthly value of this contract between the companies is AZN 30,000. At the same time, “ZZ” LLC enters into a separate contract with “AA” LLC for an additional service fee. In this way, the company receives payment for the service it provides by making its employees available to another company. The monthly value of this contract is AZN 5,000. Both companies are assumed to be VAT payers.
After that, the employees of “ZZ” LLC start working at “AA” LLC. At the end of each month, “ZZ” LLC issues an electronic invoice. Two items should be indicated in the document. The first item should show the service fee payable to “ZZ” LLC, which is subject to VAT. The second item should show the amount to be paid to the employees as salary. This amount is not subject to VAT.
“AA” LLC pays “ZZ” LLC AZN 5,000 plus VAT. In addition, it pays “ZZ” LLC AZN 30,000 intended for the employees’ salaries. “ZZ” LLC reports the AZN 5,000 in Appendix 3 of its VAT return and pays the corresponding VAT amount to the state budget. The AZN 30,000 is reported as an amount not subject to VAT. This amount should be allocated to the employees’ salary cards and social insurance payments.
As can be seen, no VAT liability arises in respect of the AZN 30,000. “ZZ” LLC reports this amount both as income and expense in its profit tax return and records it as an expense deductible from income.
The AZN 5,000 received as a service fee is recorded as income and is subject to profit tax at a rate of 20%.
“AA” LLC, in turn, records both AZN 30,000 and AZN 5,000 as expenses in its reports.
The key point to pay attention to is that the details of the work to be performed must be clearly specified in the contract. This will help prevent potential disputes with the tax authorities in the future.