An Essential Guide for Reverse Charge Mechanism Under VAT in the UAE
Understanding the reverse charge mechanism is crucial for businesses that are engaged in importing goods into the UAE as the provision starkly differs from other clauses in the UAE VAT Law. Normally, businesses charge the VAT from the end customers and pay it to the Federal Tax Authority (VAT) later. However, under the Reverse Charge Mechanism, the responsibility of paying the tax to the authority shifts to the buyer.
The buyer pays the tax directly to the FTA under Reverse Charge Mechanism as per the UAE VAT Law and therefore the supplier is not required to pay VAT on import goods. Also, the Reverse Charge Mechanism is applicable if the purchases are made outside the UAE. The provision can’t be applied to any purchase that has been made locally. A more informed knowledge and the practical applications of the provision could be provided by reputed VAT consultants in Dubai. Now, let us delve deep into the applicability of the provision and how the Reverse Charge Mechanism works in the UAE.
Applicability of Reverse Charge Mechanism Under UAE VAT Law
A taxable person who has made purchases outside the UAE must consider if the Reverse Charge Mechanism is applicable to the purchase. The UAE VAT Law has outlined certain circumstances under which the provision can be applied:
- Import of goods/services from other GCC and non-GCC countries. The supplier of the goods/services should be based in another country. The supplier 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 manufacture
- Supply of hydrocarbons for resale by a supplier to a registered buyer in the UAE
- Supply of crude/refined oil by a supplier to a registered recipient in the UAE
- Supply of processed/unprocessed natural gas by a supplier to a registered recipient in the UAE
- Production and distribution of energy supplied by a supplier to a registered recipient in the UAE
If you have registered for VAT and your company has recently imported goods from outside the UAE, then you have to analyze whether the reverse charge mechanism can be applied to that transaction. Hiring the best VAT consultants in Dubai enables you to have more clarity on the application of the reverse charge mechanism.
How Does Reverse Charge Mechanism under VAT Work in UAE?
Consider a company named ABCD LLC operating in Dubai has imported some goods worth AED 5000 from a company called XYZ in the UK. ABCD is registered for VAT in the UAE but XYZ is not registered in the UAE. In this case, XYZ is not required to pay any returns or pay any tax in the UAE. Under the VAT Law perspective, ABCD has purchased goods from a supplier not based in the UAE, and hence the Reverse Charge Mechanism is applicable. ABCD LLC should record this transaction while filing their latest VAT return.
The companies often fail to record such transaction on the VAT returns due to the lack of knowledge about the Reverse Charge Mechanism but the assistance of experienced VAT consultants in Dubai help them comply with the FTA requirements.
How Should Recipients of Goods Deal with Reverse Charge Transactions?
Dealing with reverse charge transactions requires a special focus on the specific provisions of the UAE VAT Law. Each situation where the imports have been made must be analyzed to confirm whether the reverse charge mechanism can be applied or not. Further, the recipients of the goods must ensure certain essential requirements listed below. To apply for the Reverse Charge Mechanism,
- The companies that receive the goods or services should be registered for VAT
- Businesses should keep valid records of the supplies eligible for Reverse Charge
- Invoices, receipt vouchers, and refund vouchers should all specify whether the tax payable for that particular transaction is through reverse charge
VAT Consultants in Dubai to Assist with Reverse Charge Mechanism
The Reverse Charge Mechanism is a specific tax treatment of the VAT in the UAE which generally applies to the businesses that purchase goods from suppliers based outside the UAE. Normally, the recipient of the goods collects the tax from the end customer and pays later to the government authority. However, under the Reverse Charge Mechanism, the recipient pays the tax directly to the authority and the supplier is not required to pay the tax.
The businesses need to understand the complexities of the Reverse Charge Mechanism to apply it to the transactions. The business owners must know when and how they should apply the provision on the transactions. Under such circumstances, the business owners need to seek the assistance of reputed VAT consultants in Dubai such as Jitendra Chartered Accountants (JCA). JCA’s highly qualified Chartered Accountants assist the companies to comply with VAT as per the requirements of the FTA.