Reverse Charge Mechanism, RCM in short – Understanding the Concept
Businesses outside the UAE are not required to register for VAT in the UAE. How then is the VAT charged in case of any goods supplied by such suppliers outside the UAE to an entity in the UAE? Well, here is where the RCM comes into operation.
Normally, when the supplier supplies goods to any of its customers it raises an invoice with the VAT added. VAT is collected by the supplier from the purchaser and in turn paid to the Federal Tax Authority (FTA).
However through the Reverse Charge Mechanism, under the UAE VAT law, the supplier from outside the UAE is not paid VAT by the buyer or the purchaser in the UAE, but in turn, the VAT is paid to the UAE government directly by the purchaser of the imported goods or the end customer.
Reverse Charge Mechanism, under VAT in the UAE, is operational for transactions from across the UAE border. Since the supplier outside the UAE is not required to pay VAT on items imported into the UAE the responsibility of submitting quarterly VAT returns for such transaction is also transferred from the supplier to the receiver.
When is the Reverse Charge Mechanism applicable in the UAE?
- When goods/services are imported into the UAE from non-GCC and even GCC countries other than the UAE
- The suppliers that supply the goods/services will have to be based in a different country irrespective of having business in the UAE or not
- During the supply of Diamonds and Gold
- When diamonds and gold are bought for being resold or for further processing
- When goods are purchased from zones specifically designated
- When Hydrocarbons are supplied for being resold by a registered supplier to a receiver that is registered in the UAE.
- When crude/refined oil is supplied by a supplier that is registered to a receiver that is registered in the UAE
- When natural gas (both processed/unprocessed) is supplied by a registered supplier to a receiver registered in the UAE
- Generation and distribution of energy in any form and supplied to a registered receiver in the UAE by a registered supplier
Reverse Charge Mechanism – a Case Study
- A VAT-registered Company (ABC) in the UAE, imports goods from a United Kingdom Company (XYZ).
- Company (XYZ), not being registered under VAT in the UAE, is not required to file VAT return in the UAE or make tax payment in the UAE.
- Because Company (ABC) in the UAE has purchased products from a supplier not based in the UAE the responsibility of recording the reverse charge on their VAT return for the transaction lies with Company (ABC).
- In all the Receipt vouchers, Invoices and refund vouchers for this transaction Company (ABC) needs to specify if the tax payable pertains to reverse charge.
The transactions where Reverse Charge Mechanism (RCM), as per the VAT law in UAE, will be applicable can be assessed by tax professionals. GCC Filings based out of Dubai has experienced professionals to handle such issues.
GCC Filings is a firm providing professional services in accounting, finance, management, VAT, taxation, business analysis and other core business aspects of its clients.