- Under UAE VAT Law, the responsibility to levy, collect and pay tax to the government is on the supplier who is making taxable supplies. Under reverse charge mechanism, on certain notified supplies, the recipient or the buyer of goods or services is responsible to pay the tax to the Government. The key change is the shift in the responsibility of paying tax, which is moved from the supplier to the buyer.
- Used for cross-border transactions.
- Obligation of paying VAT is shifted from non-resident seller to the recipient who is the resident of UAE. The recipient/buyer is treated as a person making taxable supplies to himself and will be responsible to pay VAT to the government. The recipient will record the VAT on purchases (input VAT) and the VAT on sales (output VAT) in their VAT return each quarter.
- The receiver of the goods or services must be registered for VAT.
- To ensure that VAT is collected on the supplies made in UAE where the supplier is a non –resident and not a taxable person in the state of UAE.
- Relieves non-resident suppliers of the burden of registering and accounting for VAT UAE.
- Determine the value on which tax needs to be levied
- Account the VAT amount as output tax during the purchase and then declare it in your VAT return
- Remit VAT to the government
- Claim Input Credit, if eligible.
- Maintain the records such as invoice and other documents to substantiate the tax payment and input tax claim
The UAE VAT Law has listed the following supplies which will be liable for VAT on reverse charge mechanism, provided the applicable conditions are met as prescribed in UAE Executive Regulations:
- Imports of concerned goods or concerned services for business purpose;
- Taxable supply of any crude or refined oil, unprocessed or processed natural gas, or any hydrocarbons for resale or to produce and distribute any form of energy by registered supplier to registered buyer in the State of UAE;
- Supply of goods or services by a supplier who does not have a place of residence in the state to a taxable person who has a place of residence in the State of UAE
Let’s understand concept of Reverse Charge Mechanism using an imported service (import of service from UK to UAE):
Mr. ABC is a VAT-registered person in the UAE, but he uses the services of a Designer called Dew who is based in UK. As Dew operates from UK and not UAE, she is not tax registered in the UAE and does not have to file any UAE returns. Because Mr. ABC has acquired services from a non-UAE-based supplier, he will have to record the reverse charge on his relevant VAT return. In this example, because the recipient accounts for the VAT under the reverse charge mechanism, the place of supply for VAT purposes is the UAE. The net result of reverse charge mechanism is same as that of forward charge basis. The only difference in reverse charge VAT is the shift in the responsibility of paying VAT which is moved from supplier to the recipient i.e. from Dew to Mr. ABC.
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