- December 13, 2022
- Posted by: Shuraa Tax Consultant
- Categories: Dubai Tax System, VAT - Value Added Tax in UAE
The VAT reverse charge mechanism in UAE is frequently disregarded when discussing VAT compliance in the UAE. Although it is a requirement for VAT in the UAE, most businesses fail to recognise it, which is a serious error. VAT is typically considered when businesses issue sales invoice. Customers are required to pay a business the full amount due, including the correct VAT charge. You must maintain invoices as a seller or provider.
With the UAE VAT reverse charge mechanism, the buyer is held liable for the VAT, as opposed to the business making the supply that is registered for VAT. Typically, the seller will settle VAT with the FTA. The buyer is responsible for paying VAT to the tax authorities when using the reverse charge mechanism.
In actuality, it means that a buyer settles VAT-related costs for a service or goods delivery directly with the Tax office rather than a supplier based outside.
Let’s first understand the idea of the reverse charge mechanism before learning about the supplies that are subject to the reverse charge VAT.
Reverse Charge: What is it?
A typical business involves the supply of goods and the collection of VAT on behalf of the clients, who then pay the government. The buyer or final customer pays the tax to the government directly under the reverse charge mechanism.
Since the non-UAE supplier is exempt from paying VAT on imports of UAE entity, it is the recipient’s responsibility to report a VAT transaction instead of the sellers. Each quarter, the recipient must include the VAT on sales in addition to the VAT on purchases in their VAT return.
What is the Purpose of Reverse charge?
Reverse charge mechanisms are frequently used in cross-border and designated zone clearance transactions. It is challenging for the tax authorities to keep track of these foreign suppliers to pursue them for payment of their tax liabilities when the goods or services are imported into the UAE. The liability is transferred to the recipient on a reverse charge basis in order to ensure VAT compliance because the tax authorities are concerned about the payment of the VAT liability on those goods/services.
The foreign supplier or seller of imported goods or services is exempt from the UAE’s VAT registration requirement where the vat on imports in UAE is reported by UAE buyer and the supply is below registration threshold.
The recipient in such transactions is regarded as a supplier selling taxable supplies to himself, and as a result, he is required to pay VAT to the FTA.
To prevent foreign suppliers from evading taxes, the UAE government therefore implemented the reverse charge mechanism. In addition, foreign suppliers are not required to register for VAT in the UAE.
What Circumstances Call for Reverse Charge?
The following situations involve reverse charge:
- Import of products and services from GCC and non-GCC nations. The supplier of these products or services must be situated outside of the UAE.
- Buying products from a designated area.
- Gold and diamond purchases for future production or manufacturing and sale.
- Supply of Pure hydrocarbons to a registered recipient in the UAE for resale by a registered supplier.
- Provision of crude or refined oil to a registered recipient in the UAE by a registered supplier.
- Supply of processed or unprocessed natural gas to a registered recipient in the UAE by a registered supplier.
- Production and distribution of any type of energy in the UAE provided to a registered recipient by a registered supplier
Note: Reverse charge mechanisms are not applicable to the export of gold and diamonds, the supply of investment precious metals (gold or platinum with a purity of greater than 99% that can be traded on international markets), or the export of goods in which gold or diamonds are the primary component.
What Guidelines does the VAT Law’s Reverse Charge Mechanism Provide?
If the recipient of imported goods or service satisfies the conditions listed below, they are responsible for paying UAE VAT.
- The VAT law requires that he be registered.
- Establish the value of the goods or services that would be subject to tax.
- Include the VAT that was paid on the products and/or services.
- Convey the FTA, regarding the VAT.
- Claim input tax if you’re eligible.
- Keep all documentation, including invoices, records of VAT payments, and other documents, as evidence of tax payments and for use in claiming input tax.
- The reverse charge mechanism used for the transaction must be made explicitly clear in all records.
Example for Reverse Charge Mechanism in UAE
Let’s look at an illustration to better understand the mechanism:
Italian company, XYZ sent goods worth AED 8,500.0 to ABC (a VAT-registered in the UAE). Because it is a supply of goods subject to VAT, someone must pay the applicable taxes.
Since the goods were imported from Italy, XYZ will not charge VAT to ABC, as it is not registered in the UAE. Only the costs of the goods will be paid by ABC to XYZ, and the VAT liability will be paid to the government.
When filing VAT returns, ABC claims the 5% VAT-liable amount as input tax and deducts it from the output tax liability. RCM merely transfers the recipient’s (XYZ) obligation to pay VAT from the supplier (ABC).
What is the Mechanism of the Reverse Charge?
The aforementioned illustration demonstrates that while XYZ is not VAT-registered in the UAE, ABC is. As a result, XYZ is exempt from filing any UAE returns or paying UAE taxes.
ABC will note the reverse charge on his pertinent VAT returns because he bought goods from XYZ (a non-UAE-based supplier). Even though the goods came from Italy in this instance, the UAE will be the place of supply for VAT returns.
Why do Reverse Charge Mechanism Transactions Need to be Handled by a Reputable Tax firm?
It is preferable to hire a reputable tax firm to assist you in dealing with the reverse charge mechanism accurately and successfully in transactions attracting RCM provisions.
In addition to making sure that import records are organised and collected, the company must be able to maintain accurate VAT filing for transactions involving the reverse charge mechanism and claim VAT using the proper form.
Our in-house FTA registered tax agents are well-equipped and proficient to assist you in all necessary ways. All you need to do is get in touch with us on email@example.com or call us on +971 508912062.