To ensure that both individuals and organisations are compliant, the United Arab Emirates has a strong VAT rulebook in place. The VAT-able transactions are specifically indicated, whether it be an export to another country or an import from outside the UAE. Businesses that import and export goods need to be aware of the various UAE VAT laws and regulations.
Taxes are paid in some of these transactions by the suppliers and by the buyers in others. You may come across certain terms like forward VAT and reverse charge; they both indicate specific requirements. But before we dive into the details, let us understand what exactly the VAT reverse charge mechanism is.
Keep reading to find out!
What is VAT Reverse Charge Mechanism?
Contrary to the forward charge method, where the provider is obligated to pay the tax, under the VAT reverse charge mechanism, the recipient or purchaser of goods or services is responsible for paying the tax to the government on certain notified supplies. The primary modification is the transfer of tax liability from the provider to the purchaser. In this mechanism, the buyer is now responsible for reporting and paying the FTA’s VAT on imported goods and services instead of the supplier. The technique is mostly used for cross-border transactions.
Breaking down the term
In typical commercial situations, the supplier provides the clients with the goods or services and then charges VAT for such supply. The Federal Tax Authority receives the tax payment on these supplies later on. The procedure is referred to as the forwarding charge mechanism, where the responsibility lies with the supplier.
It works the other way around in a reverse charge mechanism. Since they will be paying the VAT directly to the FTA or government, suppliers are not required to collect it. The recipient or the purchaser will keep track of the VAT on sales as well as the input VAT on imported goods or services (Output VAT). Due to the reverse charge, suppliers operating outside of the UAE are exempt from paying tax.
Situations where VAT Reverse Charge Mechanism is applicable
The VAT reverse charge is only applicable in certain situations and for certain types of transactions, according to the UAE VAT law. Anyone or any company that has purchased something outside of the UAE should consider paying reverse VAT to the FTA. Here are some instances when you should think about using the reverse VAT mechanism.
a) Import from a GCC country:
When you avail goods or services from another GCC country, the VAT reverse charge mechanism is applicable. The supplier should not have any business interests in the UAE. For the terms to be applicable, the supplier of the products or services must be based in another country.
b) Purchase from a designated zone:
The UAE VAT laws mention a number of specified zones. An individual or a company are subject to the VAT reverse charge mechanism if they are importing products or services from these designated regions. Businesses often lack this information, making it essential to onboard a good VAT consulting firm.
c) Gold and Diamonds supply:
Gold and diamond supplies fall under the applicable category of goods. Hence, they are responsible for the reverse VAT mechanism.
Do note that the VAT reverse charge is not applicable to the export of gold and diamonds, the supply of precious metals (gold or platinum with a purity of greater than 99% that can be traded on international markets), or the export of goods in which gold or diamonds are the primary components.
d) Other applicable conditions:
Some additional circumstances under which transactions are subject to the VAT reverse charge mechanism are stated below:
- Purchase of gold or diamonds for manufacturing or resale
- Production and distribution of energy delivered to a VAT-registered recipient in the
- Supply of crude or refined oil to a VAT-registered supplier in the UAE
- Supply of natural gas (processed or unprocessed)
- Supply of hydrocarbons for resale
The locations of all the suppliers involved in the aforementioned transactions should be outside the UAE. On the other hand, the recipients must be UAE-based.
Example of VAT Reverse Charge
As we already learned, the concept of the VAT reverse charge mechanism is implemented in the UAE in order to ensure that VAT is collected on the supplies where a supplier is not a taxable person in the state of the UAE. According to this, the recipient of the goods or services should be responsible for paying taxes to the government. Therefore, as a recipient or purchaser of goods or services under the reverse charge mechanism, the following obligations need to be fulfilled:
- Determine the value that requires taxation
- Calculate the VAT owed on supplies with reverse charges
- Remit VAT to the government
- If eligible, claim the Input Tax
- Keep records, including invoices and other documentation, to support tax payments and input tax claims.
Let’s use the following example to better understand the reverse charge mechanism:
An authorised distributor of spare parts and accessories in Dubai, Millennium Spares Ltd, purchased spare components worth AED 5,500 from MTB Motors Ltd in India.
Being a registered importer, Millennium Spares Ltd. is obligated to pay a 5% VAT or AED 275 to the government for importing goods worth AED 5,500.
Business entities frequently follow a formal procedure for paying VAT on particular goods and services. They must complete a number of steps in the procedure, which can be overwhelming and arduous. Also, due to a lack of basic information, the majority of businesses fall short when it comes to paying VAT to the government. Such circumstances may have detrimental effects and put the company on the wrong side of the law. Employing a qualified consultant to manage your VAT reverse charge mechanism is the best course of action in these circumstances.
At Nair and Nelliyatt, we distinguish ourselves from the rest by delivering effective VAT assistance to our clients. Our qualified VAT consultants will examine your needs and recommend suitable solutions in addition to educating you on how to deal with present and future challenges. All you need to do is reach out to us at email@example.com or +97143577678.