Reverse Charge Mechanism under VAT

What is Reverse Charge Mechanism (RCM)?

Reverse charge is a mechanism under which VAT is required to be paid for the goods or services by the recipient instead of the supplier when the supplier is not a resident in the member state where the supply takes place. When the reverse charge is applied, the recipient of the goods or services makes the declaration of both their purchase (input VAT) and the supplier’s sale (output VAT) in their VAT return. In this way the two entries cancel each other from a cash payment perspective in the same return. Imports are goods brought into the state from outside the GCC. As a general rule, imported goods are liable to VAT at the point of entry into the state. In most cases, a registered taxpayer can reclaim the VAT paid on the goods they have imported as input tax. The taxpayer will need the import VAT document to show that import VAT has been paid. Individuals and non-registered persons must also pay VAT on imported goods, but will not be able to recover this as inputReverse Charge Mechanism (RCM) under VAT eliminates the responsibility for the businesses outside the UAE to register for VAT in UAE. The reverse charge mechanism under VAT is mainly used for transactions from cross the border. In a typical business, the supplier supplies goods to the customers and collect VAT from the customers, which is later paid to the Federal Tax Authority (FTA). Under reverse charge mechanism (RCM), the supplier does not charge VAT to the customer, the buyer or end customer pays the tax directly to the government authority.

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

What are the requirements for the reverse charge mechanism?

• The receiver of the goods or services must be registered for VAT
• Every registered business owner must keep proper records of their supplies that incur reverse charge
• Invoices, receipt vouchers, and refund vouchers should all specify whether the tax payable for that particular transaction is through reverse charge.

How and when to use the concept of Reverse Charge Mechanism (RCM) is a complex question and it needs professional and experienced opinion to define the mechanism as per the VAT law in UAE. OTC is authorized Tax Agent by Federal Tax Authority (FTA) who can help you in understanding the concept of Reverse Charge Mechanism under VAT.