The Reverse Charge Mechanism (RCM) puts the onus of reporting VAT on the buyer rather than the supplier.
What is Reverse Charge?
In a standard transaction, the supplier collects VAT from the buyer and pays it to the government. Under the Reverse Charge Mechanism, the buyer is responsible for calculating and reporting the VAT directly to the government.
This is primarily used for cross-border transactions to avoid the need for non-resident suppliers to register for VAT in the UAE.
In a typical business, the supplier collects VAT on behalf of customers and pays it to the government. Under the reverse charge mechanism, the obligation of reporting a VAT transaction is shifted from the seller to the recipient. The recipient will have to record the VAT on purchases (input VAT) and the VAT on sales (output VAT) in their VAT return.
Why is it needed?
It relieves non-resident suppliers of the burden of registering and accounting for VAT in their buyers’ location. It is mainly used for cross-border transactions.
When is Reverse Charge applicable?
Reverse charge is applicable in the following cases:
- Import of goods/services from other GCC and non-GCC countries.
- 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, processed/unprocessed natural gas.
- Production and distribution of any form of energy supplied by a registered supplier to a registered recipient.
Note: Not applicable on export of gold/diamonds, supply of investment precious metals, and export of products where the main component is gold/diamonds.
How does it work?
Example: Mr. Abdul (UAE VAT-registered) uses the services of a bookkeeper named Sam (based in Italy). Sam is not registered in UAE. Mr. Abdul has acquired services from a non-UAE-based supplier, so he will have to record the reverse charge on his VAT return. The place of supply is UAE.
Requirements for the recipient
- 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.