Reverse Charge Mechanism as per UAE VAT Laws

Reverse Charge Mechanism

On January 1, 2018, the UAE government introduced Value Added Tax (VAT), a tax levied on the transaction of goods and services. There are three categories of goods/services under this law: exempt supplies, zero-rated supplies, and supplies with a 5% VAT rate. One of the crucial aspects of VAT provisions in the UAE is the reverse charge mechanism (RCM). Let’s look at RCM provisions in detail. 


What is the VAT reverse charge mechanism in the UAE? 


Under normal circumstances, the supplier supplies the goods/services to the buyer and collects the payment, including VAT from the buyer. Additionally, the supplier also pays the VAT on those items to the Federal Tax Authority (FTA).

On the other hand, suppliers often provide goods/services to the buyer without charging any VAT. However, the buyer pays VAT, and it reaches the FTA.

The first scenario is called the forward charge mechanism, while the latter is called the reverse charge mechanism (RCM).

Therefore, the UAE VAT reverse charge mechanism is a transaction where the liability to pay VAT applies to the recipient of the goods/services instead of the supplier. 


When is the reverse charge mechanism applicable? 


RCM is applicable in the following cases. However, must meet specific criteria for each of these cases, as mentioned in UAE’s VAT executive regulations.

  • In the case of imported goods/services for his own business, the taxable person is the recipient, who is considered as making a supply to himself and hence, pays the VAT. 
  • If the buyer purchases gold or diamonds for further processing or resale, the buyer pays the VAT. 
  • When a registered recipient in UAE receives the supply of hydrocarbons, crude/refined oil, and un/processed natural gas from a registered supplier to resell it as it is or use it to produce any form of energy or distribute any form of energy, the recipient is responsible for VAT obligations. 
  • When a supplier with no residence in the UAE supplies goods/services to a recipient with a place of residence in the UAE, the recipient is imposed the VAT.

What is the purpose of introducing the reverse charge mechanism? 


Generally, the reverse charge mechanism is used in the cases of cross-border transactions. When the goods/services are imported into UAE, it is difficult for the tax and government authorities to keep track of these foreign suppliers to pursue them to pay their tax liabilities. The tax authorities are concerned about the payment of the VAT liability on those goods/services; therefore, the liability is shifted to the recipient on a reverse charge basis to ensure VAT compliance.  

Another reason is that the supplier or seller of imported goods/services is not required to register for VAT in the UAE, thereby saving them an operational requirement and time.

In such transactions, the recipient is treated as a supplier selling taxable supplies to himself, and hence, he must pay VAT to the FTA.

Therefore, the UAE government introduced the reverse charge mechanism to eliminate the possibility of tax evasion by foreign suppliers. Additionally, foreign suppliers can get rid of the requirement to register for VAT in the buyer’s country, UAE. 


What are the requirements under the reverse charge mechanism VAT Law? 


The recipient of imported goods is liable for VAT payments in UAE while meeting the below requirements. 

  • He must be registered under the VAT law. 
  • Determine the value of goods/services on which tax would be levied 
  • Account for the VAT  on the goods and/or services 
  • Remit VAT to the FTA 
  • If eligible, claim input tax
  • Maintain all records such as invoices, VAT payment records, and others as proof of tax payment and for claiming input tax 
  • All the records must explicitly state that the transaction is through the reverse charge mechanism 

What are the accounting entries for UAE VAT reverse charge mechanism transactions? 


Sr No Particular Debit Amount Credit Amount 
1At the time of Import of Goods/Services 
Purchase/Expenses account XXXX
Input VAT @ 5% (RCM) XXXX
            To Output VAT @ 5% (RCM) XXXX
            To Supplier account XXXX
2At the End of Month/Tax Period 
1. In case of VAT payable position 
Output VAT @ 5% XXXX
Output VAT @ 5% (RCM) XXXX

             To Input VAT @ 5% 
XXXX
             To Input VAT @ 5% (RCM) XXXX
             To VAT Payable Account XXXX
2. In case of VAT refund position 
Output VAT @ 5% XXXX
Output VAT @ 5% (RCM) XXXX
VAT receivable Account XXXX
             To Input VAT @ 5% XXXX
             To Input VAT @ 5% (RCM) XXXX

Reverse Charge Mechanism Example 


Suppose a firm named XYZ from India supplied goods worth AED 6,500.0 to a firm named ABC, a VAT-registered person in the UAE. As it is a supply of goods on which VAT is applicable, someone must pay the applicable taxes.

Since it imports goods from India, XYZ will not charge VAT to ABC, as it is not registered in the UAE. ABC will only pay the costs of goods to XYZ and pay the VAT liability to the government.

While filing VAT returns, ABC claims the 5% VAT liable amount as input tax and adjusts it against the output tax liability. RCM only shifts the liability of VAT from the supplier (XYZ) to the recipient (ABC).


How does the reverse charge mechanism work? 


The above example shows that ABC is a VAT-registered person in the UAE, while XYZ is not VAT-registered in the UAE. Therefore, XYZ is not required to pay UAE taxes or file any UAE returns.

Since ABC purchased goods from XYZ (a non-UAE-based supplier), he will declare the reverse charge on his relevant VAT returns. In this case, the place of supply for VAT returns will be the UAE, even though the goods came from India.


Why is a professional accounting firm required to handle reverse charge mechanism transactions? 


In transactions attracting RCM provisions, it is better to hire a professional accounting firm to help you deal with the reverse charge mechanism accurately and effectively.


The firm must be able to maintain proper transaction records, accurate VAT filing for the reverse charge mechanism transaction, and claiming VAT through the appropriate form while ensuring the arrangement and collection of import records.


FAQs


1. Are the suppliers from the free trade zone treated as foreign suppliers in reverse charge mechanism (RCM) transactions?

Yes, companies from the free trade zone supplying goods and services to anyone in mainland UAE are treated as foreign suppliers. 

2. If I imported items from a foreign country in one taxable period, but I resold them in another taxable period when do I have to pay VAT through RCM? 

You must pay VAT through RCM at the time of importing goods from a foreign country to the UAE.


Testimonials



N R Doshi Loader
VAT Consulting Services 

N R Doshi & Partners


NR Doshi has been one of the topmost VAT consultants in the UAE since the day FTA implemented VAT in the country. With experienced and knowledgeable consultants at our firm, you will receive the best guidance & assistance related to VAT matters. Our tax consultants accurately calculate your VAT liability, complete the procedure for you to pay the liable amount, and file VAT returns on your behalf. Last but not least, we deal with any inquiry by the government or representation in front of the FTA.

N R Doshi also provides reverse charge mechanism services, among other VAT services. Our team of experienced and knowledgable VAT consultants will assist you with the following:

  • Ensuring compliance with the RCM rules.
  • Maintaining accurate records of RCM transactions that are useful while filing VAT returns.
  • Manage documentation like filing the required forms for VAT claims under RCM.
  • Preserve proper records for all invoices and documents required for RCM transactions.

As explained above, NR Doshi’s expert services help you comply with RCM requirements under the UAE VAT law effectively.

Besides VAT consulting services, we are also adept in providing other services that include accounting and finance, advisory services, different types of company formation, ESR advisory services, outsourcing, internal audit, external audit, and forensic audit. Our scope of services expands to multiple industries, including but not limited to retail, energy and utilities, gold, jewelry and precious stones, real estate and infrastructure, financial and banking services, and healthcare.



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