In a normal business supply transaction, a seller is required to pay VAT (Value Added Tax) to the federal government on supplies made by them. This means, whenever a registered VAT supplier is making their supply, they need to charge VAT and pay the taxes to the government.
In reverse Change mechanism, a buyer is required to pay VAT to the federal government on purchases made by them. Here the transaction is shifted from seller to the recipient and seller does not have to pay the import taxes. The recipient will have to record their input and Output VAT for each quarter. This mechanism is introduced in the UAE to ensure that there is no tax invasion in the import and export of any goods and services.
Why Reverse Charge Mechanism is Needed?
If you're a seller and buying goods from any buyer, chances are you don't have a business in the UAE. So it is difficult for the Federal Tax Authority (FTA) to track these suppliers or sellers. Hence the buyer is responsible to charge VAT on reverse charge mechanism only if they are residents of the UAE. Overseas seller don't have to register for the VAT in UAE, because this method eliminates the obligation. It is important to note here that the reverse charge method is only applicable if purchases are made from outside the UAE.How Does Reverse Charge Mechanism Work?
To understand this process lets take an example;
A company A sold spare parts of cars worth 100000 AED to company B and collected VAT of 5000 AED at 5% rate. This 5000 AED VAT is collected on the forward charge basis, which is the alternative of the reverse charge mechanism. Because company A has required services of company B, which is located outside the UAE. The company will have to record the reverse charge on their relevant VAT return. In this case, the place of supply is UAE for VAT purposes.
Where is the Reverse Charge Mechanism Applicable in the UAE?
A reverse charge method is applicable in the following cases:
- Supply of diamonds and gold
- Purchase of diamonds and gold for manufacture/production or resale purposes
- Import of goods and services outside of UAE
- Purchases of goods from a different designated zone
- Supply of hydrocarbons
- Supply of Refined/Crude oil
- Supply of processed or unprocessed natural gas
- Distribution or production of any form of energy
What is the Requirement of The Reverse Charge Mechanism in UAE?
- A registered buyer with the state must keep a record of their supplies
- Refund vouchers, Invoices and receipt voucher should all be specified
- The receiver must be registered for the VAT