A Complete Guide on VAT Reverse Charge Mechanism in UAE

The United Arab Emirates has a solid VAT handbook in place to make the individuals and businesses compliant. Whether it's an import from outside the UAE or an export to another country, the VATable transactions are mentioned in detail. Businesses involved in importing and exporting need to understand the VAT terms and conditions prevailing in the UAE. The UAE VAT law has mandated some transactions to be VATable. Among these transactions, some taxes are paid by the suppliers while some by the buyers. You may come across the terms forward VAT and reverse charge VAT; these terms specify certain conditions. Our focus in this article is on the reverse charge mechanism (RCM) in UAE. Keep reading to learn more!

What is a Reverse Charge Mechanism (RCM) in VAT?

In a VAT reverse charge mechanism, the recipient or the buyer of the goods or services will have to pay the tax to the government. The obligation of reporting and paying the VAT to the FTA on the imported goods and services shifts from the supplier to the buyer. The mechanism is mainly used for transactions from across the border.

Breakdown of the Term:

In normal business scenarios, the supplier supplies the goods or services to the customers and collects VAT on these supplies. The tax is later on paid to the Federal Tax Authority (FTA). The process is known as the forwarding charge mechanism, where the responsibility lies on the supplier's shoulders.

In a reverse charge mechanism, it is the opposite. Suppliers don't have to collect the VAT since they will pay it directly to the FTA or government. The recipient or the buyer will record the VAT on imported goods or services (Input VAT) and the VAT on sales (Output VAT). Suppliers operating outside the UAE don't have to pay tax since the importer in the UAE will, on the reverse charge basis.

Applicability of the Reverse Charge Mechanism:

The UAE VAT law has defined specific circumstances and transactions where the reverse charge VAT is applicable. Anyone or any business that has made a purchase outside the UAE will consider paying reverse VAT to the FTA. Following are some of the circumstances where you should consider the reverse value-added text mechanism.

i) Import from another GCC country:

The reverse charge mechanism is applicable in times when you supply goods or services from another GCC country. The supplier should not have any business in the UAE. The supplier of the goods/services must be based in another country to qualify the terms.

ii) Purchase from a designated zone:

There are various designated zones mentioned in the UAE VAT provisions. If you are importing goods/services from these areas, you are liable to the reverse charge mechanism. Businesses often lack such knowledge, so having the best VAT consultancy in Dubai on board is necessary.

iii) Supply of gold and diamonds:

The supply of gold and diamonds falls under the applicable category of goods. Hence, they should be liable for the reverse VAT mechanism.

Some other conditions where the transactions are liable for reverse charge VAT mechanism are mentioned in the coming lines:

• Purchase of gold/diamonds for resale or manufacture

• Production and distribution of energy supplied to a VAT registered recipient in UAE

• Supply of crude/refined oil to a VAT registered supplier in the UAE

• Supply of processed or unprocessed natural gases

• Supply of hydrocarbons for resale by a supplier

All the suppliers in the transactions mentioned above should be based outside the UAE. In contrast, the recipients must be UAE-based.

How Does It Work in UAE?

The mechanism of action is simple and has been discussed so far in the points. Any VAT registered firm in the UAE imports certain goods and services from a company based in the UK. Since not VAT-registered in the UAE, the UK firm does not have to pay VAT on the transaction. In comparison, the UAE resident company will have to record the transaction and pay VAT. The payment should be made directly to the FTA or government.

Most companies fail to deliver on such fronts since they lack basic knowledge. They fail to record the transactions on the VAT returns, hence failing to pay the reverse charge VAT. Such circumstances can result in serious consequences, leaving the firm in trouble. The best way to combat such troubles is to hire the best VAT consultancy services. Expert assistance will guide you the entire way.

How Should Recipients Deal with It?

The UAE VAT law has outlined specific provisions for businesses to focus on. The best way to deal with the reverse charge mechanism is to know these provisions. Some of the mentioned below might help your cause.

i) Recipients should be UAE-based

ii) Businesses should keep records of the transactions

iii) The documents/receipts should mention that a particular transaction is liable for reverse charge VAT.

Opt for Expert Assistance When Dealing with VAT-related Matters!

Business entities often go through a systematic process of paying VAT on certain goods and services. The process requires them to undertake numerous steps that can easily overwhelm anyone. The best way to deal with these situations is to hire an expert VAT consultant.