Under UAE VAT Law, the responsibility to levy, collect, and pay tax to the Government is on the supplier. But there is also a reverse charge mechanism applied on certain notified supplies when the recipient or the buyer of goods or services is responsible for paying the tax to the Government.
The reverse charge mechanism under VAT is used for transactions from across the border. This provision frees the business from physically paying VAT at the point of import. Understanding this mechanism is crucial for businesses that import goods into the UAE because the provision differs from other clauses in the UAE VAT Law.
What Is Reverse Charge Mechanism?
Normally, the supplier of goods or services charges VAT on sales and then pays the tax so collected to the Government. This process of a registered supplier collecting tax from his customers is called a forward charge mechanism.
So what is the reverse charge mechanism in the UAE?
In the reverse charge mechanism (RCM) under UAE VAT Law, the supplier does not charge VAT to the customer. Instead, the buyer or end customer is responsible to pay the tax directly to the government authority.
In effect, the obligation of reporting a VAT transaction is shifted from the seller to the buyer. The buyer will need to record the VAT transaction on purchases (Input VAT) and sales (Output VAT) in their VAT return in the respective VAT return period.
Why Was VAT Reverse Charge Mechanism Introduced?
If the supplier does not have a business in the UAE, tracking their business transactions and ensuring VAT compliance becomes difficult for the Federal Tax Authority (FTA). That is why buyers who are residents of the UAE have to pay VAT on a reverse charge basis. That levels the playing field for domestic and foreign supplies and helps to avoid tax evasion on any taxable supplies. Another reason is that the VAT reverse charge mechanism eliminates the responsibility for the businesses outside the UAE to register for VAT in UAE.
Reverse Charge Mechanism VAT UAE: When Does It Apply?
The recipients that have a business in the UAE and buy goods from the suppliers from outside the UAE must pay VAT on a reverse charge basis. According to the UAE VAT Law, if the taxable person imports concerned goods or concerned services for business purposes, they are treated as making a taxable supply to themselves. So they are responsible for all applicable taxes.
The Executive Regulations specify conditions when UAE VAT reverse charge mechanism applies and additional obligations related to record keeping for tax calculated according to the RCM.
The UAE VAT Law lists the following supplies that are liable for reverse charge mechanism of VAT in UAE if the applicable conditions are met as it is prescribed in UAE Executive Regulations:
- Import of a concerned product or service for business purposes;
- Supply of a product or service by a supplier that does not have a residence in UAE to a taxable entity with the place of residence within the UAE’s jurisdiction;
- Taxable supply of refined or crude oil, processed or unprocessed natural gas, and hydrocarbons for resale or production and distribution of any form of energy by a registered supplier to a registered buyer in the State of UAE.
You should keep in mind that reverse charge is generally applicable when purchases are made from outside the UAE. If all purchases are made locally, the reverse charge mechanism is not applicable.
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Reverse Charge Mechanism UAE: What Are the Requirements?
So if your business is a recipient involved in a reverse charge transaction, what should you do? First, you should calculate the amount of tax to be paid to the Federal Tax Authority (FTA) and self-account the VAT amount as input tax during the purchase. Then you need to declare it in your VAT return. Besides, you may claim input credit if possible. It is also essential to maintain the necessary documents like invoices and payment records for future reference as proof of tax payment.
Here are the requirements for the reverse charge mechanism in the UAE:
- Businesses that receive goods or services must be registered for VAT.
- Every registered business owner must keep proper records of their supplies that incur a reverse charge.
- Invoices, receipt vouchers, and refund vouchers should specify whether the tax payable for that particular transaction is through reverse charge.
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Reverse Charge VAT in the UAE: How Beaufort Associates Can Help You
If your company is registered for VAT and you have recently imported goods from outside the UAE, you need to analyze whether the reverse charge mechanism should be applied to that transaction. That requires a clear understanding of the latest tax regulations in the UAE.
But as you see, reverse charge VAT regulations can be very confusing for business owners because of their complicated nature. So you may need a professional and experienced opinion to understand how and when to use the reverse charge mechanism under VAT.
Beaufort Associates offers a wide range of VAT consultancy services in the UAE. Our experienced VAT consultants can provide you with professional support and advice tailored to your business needs.
We can assist you in managing every VAT aspect of your business, including handling reverse charge mechanism transactions. You can always count on us when you need guidance on VAT registration, VAT return filing, and Vat implementation in the UAE. Contact us today for a free consultation!