What is Reverse Charge Mechanism for VAT in UAE?
28

May 2021

Setting up a company in the United Arab Emirates can be very profitable for people from all over the world. For such companies understanding how Value Added Tax is applicable to the companies is very important. These businesses must import goods into the county to continue all the business activities. Such companies must have a good understanding of the Reverse Charge Mechanism and how it can affect the business.

Let us understand all about the Reverse Charge Mechanism for Value Added Tax in the United Arab Emirates.

Reverse Charge Mechanism in UAE

Under the Reverse Charge Mechanism, the buyer or the recipient of certain specified goods or services is required to pay taxes to the government of the country. the reverse charge mechanism is different from the forward charge as in the forward charge the supplier of the goods or services is required to pay the taxes to the government. The responsibility to pay the taxes change from the buyer of the goods and services to the supplier of the goods and services.

This mechanism is mostly applicable to a business in case it imports any goods or services. This importer of goods or services is required to pay taxes to the government of the country.

Why is the Reverse Charge Mechanism required in UAE?

The Reverse Charge Mechanism was introduced in the United Arab Emirates to ensure that no business is involved in any kind of tax evasion. A supplier of goods or services is not considered a taxable person in the United Arab Emirates. So to compensate the taxes to be received by the government the buyer of the goods or services is treated as the entity which makes taxable supplies to himself and thus is responsible to pay taxes to the government. 

As it will be difficult for the UAE government authorities to track a seller or supplier, the buyer is considered responsible for submitting the VAT according to the Reverse Charge Mechanism. The Reverse Charge Mechanism is applicable to an entity only if the purchase of the goods or services is made outside the boundaries of the United Arab Emirates. Due to this fact, a non-resident supplier does not have to register for VAT in the location of the buyer.

Goods on which Reverse Charge Mechanism Are Applicable

If a purchase is made outside the United Arab Emirates by a taxable entity, then the complete transactions should be considered under the Reverse Charge Mechanism. Here are some of the activities in which Reverse Charge Mechanism is applicable:

  1. Import of the Goods or Services which have been done from GCC or Non-GCC countries and the supplier should not have a business in the United Arab Emirates.
  2. If any goods or services are purchases from any of the designated zones by the business.
  3. If a supply of either gold or diamonds is made.
  4. If Gold or Diamond is purchased with the intention of reselling or any kind of manufacturing process is performed on them.
  5. If any kind of hydrocarbon is supplied with the intention of reselling.
  6. If Crude or Refined oil is supplied to a recipient which is already registered for Value Added Tax (VAT).
  7. Any supply of Processed or Unprocessed natural gas to a registered recipient.
  8. The production or supply of energy to a registered recipient.

If any of the above-mentioned cases are applicable to the business, then the management needs to analyse if the reverse charge mechanism will be applicable to the business.

How Can JAXA Chartered Accountants Help?

Availing the services of a reputed VAT consultant will help the management of the business to understand and analyse if the Reverse Charge Mechanism is applicable to the business. JAXA Chartered Accountants is a reputed Chartered Accounting firm in the UAE and strives to provide quality services to its clients. The experts at JAXA will help the management to understand the requirements of the business and will also provide services according to the needs.

JAXA Chartered Accountants also provide many different services for a business such as Auditing and Assurance Services, Accounting Services, Tax and Payroll Services etc. For more details on the services provided by JAXA, feel free to Contact Us. We will be happy to help.