The VAT reverse charge mechanism in the UAE is often overlooked in discussions about VAT compliance. Despite being a mandatory requirement for VAT in the UAE, many businesses neglect its importance, leading to a significant error. Normally, VAT comes into consideration when businesses issue sales invoices, and customers are obligated to pay the full amount, inclusive of the appropriate VAT charge. It is crucial for sellers or providers to maintain proper invoices. In the context of the VAT reverse charge mechanism, the responsibility for VAT shifts to the buyer rather than the VAT-registered business making the supply. Typically, the seller settles the VAT with the Federal Tax Authority (FTA), while the buyer is tasked with remitting the VAT to the tax authorities when utilizing the reverse charge mechanism.
In essence, this implies that the buyer directly handles VAT-related costs for a service or goods delivery with the Tax office, rather than with a supplier based outside the country. Before delving into the supplies subject to reverse charge VAT, it is essential to grasp the concept of the reverse charge mechanism.
What is VAT Reverse Charge Mechanism (RCM)?
VAT Reverse Charge Mechanism (RCM) exempts businesses outside the UAE from registering for VAT in the country. It is primarily applied to cross-border transactions. Unlike the traditional process where the supplier collects VAT from customers. Under RCM, the buyer pays the tax directly to the government. The supplier, in this case, doesn’t charge VAT and is relieved from VAT on imported items. Reporting obligations shift from the seller to the recipient, who records input and output VAT in their quarterly VAT return. For suppliers outside the UAE without a local business presence, residents in the UAE receiving goods must pay VAT on a reverse charge basis.
Application of Reverse Charge Mechanism in UAE VAT Law
The reverse charge mechanism UAE VAT is applicable in the following scenarios:
- Import of goods/services from other GCC and non-GCC countries, where the supplier may or may not have a business presence in the UAE.
- Purchase of goods from a designated zone.
- Supply of gold and diamonds.
- Purchase of gold and diamonds for resale or further production/manufacture.
- Supply of hydrocarbons for resale by a registered supplier to a registered recipient in the UAE.
- Supply of crude/refined oil by a registered supplier to a registered recipient in the UAE.
- Supply of processed/unprocessed natural gas by a registered supplier to a registered recipient in the UAE.
- Production and distribution of any form of energy supplied by a registered supplier to a registered recipient in the UAE.
Purpose of VAT Reverse Charge Mechanism
The VAT Reverse Charge Mechanism is implemented to guarantee the collection of VAT on the supply of goods or services when the supplier is not a taxable person, and the supply occurs within the UAE. This concept designates the recipient or buyer as a party making taxable supplies to themselves, making them responsible for remitting VAT to the government.
Example of VAT reverse charge mechanism UAE
An Italian company, XYZ, dispatched goods valued at AED 8,500.0 to ABC, a VAT-registered entity in the UAE. As this constitutes a taxable supply of goods, VAT must be addressed. Since the goods were imported from Italy, XYZ does not impose VAT on ABC, given its non-registration in the UAE. ABC pays only the goods’ cost, with the VAT liability settled directly with the government.
During VAT return filing, ABC asserts the 5% VAT-liable amount as input tax, offsetting it against the output tax liability. The reverse charge mechanism UAE VAT simply shifts the responsibility to pay VAT from the supplier (ABC) to the recipient (XYZ).
How should recipients handle reverse charge transactions?
Recipients need to determine the tax amount owed to the Federal Tax Authority (FTA), self-account for the VAT during the purchase, and subsequently report it in their VAT return. If eligible, businesses may seek input credit. It is essential to retain necessary documents, such as invoices, for future reference.
What conditions must be met for the reverse charge mechanism?
Below are the conditions must be met for the reverse charge mechanism UAE VAT:
- The recipient of the goods or services must be VAT-registered.
- Every registered business owner is obligated to maintain accurate records of supplies subject to reverse charge.
- Invoices, receipt vouchers, and refund vouchers must explicitly indicate whether the tax payable for a specific transaction is through reverse charge.
Why Engage a Trusted Tax Firm for Handling Reverse Charge Mechanism Transactions?
Engaging a reputable tax firm is advisable to ensure accurate and successful handling of transactions subject to the reverse charge mechanism UAE VAT. This involves organizing and collecting import records, maintaining precise VAT filing for such transactions, and correctly claiming VAT using the appropriate forms. Our in-house FTA registered tax agents are highly skilled and ready to assist you in every aspect. Feel free to contact us at info@shuraatax.com or call us at +971 508912062.
