VAT Reverse Charge Mechanism

Under UAE VAT Law, the responsibility to levy, collect and pay tax to the government is on the person who is making taxable supplies i.e. on the supplier. This means, whenever a registered supplier is making a taxable supply, he needs to charge VAT and pay the same to the government. The mechanism of collecting tax by a registered supplier from his customers is known as forward charge mechanism.

What is VAT Reverse Charge Mechanism?

As a general rule, businesses charge VAT on supplies and deduct VAT on purchases. The reverse charge mechanism is a deviation from this rule where the supplier does not charge VAT on the invoice and the customer pays and deducts VAT simultaneously through the VAT return. The client will pay the net amount to the supplier, however, when completing the VAT return, he will manually calculate the VAT on the reverse charge invoice and report that amount as input VAT and as output VAT, hence having a nil effect for the customer's and supplier's cash flow.

Why VAT Reverse Charge Mechanism?

In order to ensure that the VAT is collected on the supply of goods or service where the supplier is not a taxable person and the supply has been made in the state of UAE, the government has introduced the concept of reverse charge mechanism. Due to this, the recipient or the buyer is treated as a person making taxable supplies to himself and will be responsible to pay VAT to the government.

Reverse charge is applicable in the following cases:

Import of goods/services from other GCC and non-GCC countries.

The supplier of these goods/services must be located in another country and they may or may not have a business 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

Thus, as a recipient or buyer of goods or services under reverse charge mechanism, the following responsibility needs to be discharged:

  • Determine the value on which tax needs to be levied
  • Account the VAT due on reverse charge supplies
  • Remit VAT to the government
  • Claim Input Tax, if eligible.
  • Maintain the records such as invoice and other documents to substantiate the tax payment and input tax claim

How would recipients deal with the reverse charge transaction?
Businesses should calculate the amount of tax to be paid to the Federal Tax Authority (FTA), self-account the VAT amount as output tax during the purchase and then declare it in their VAT return. Businesses may claim input credit if possible. Make sure you maintain the necessary documents like invoices for future reference.

Example

ABC is a VAT-registered firm in UAE, they are importing goods from an XYZ firm which is in USA. As XYZ firm is not registered in the UAE, they do not have to file any UAE returns or pay UAE tax. Because ABC firm in UAE has acquired products from a non-UAE-based supplier, they will have to record the reverse charge on their relevant VAT return. In this example, because the recipient accounts for the VAT under the reverse charge mechanism, the place of supply for VAT purposes is the UAE.