Reverse Charge Mechanism and the purpose of this mechanism


The UAE VAT Law states the person who is making the taxable supplies is the supplier responsible for levying, collecting, and paying taxes to the government. The registered supplier must charge a VAT whenever they make a taxable supply and pay VAT to the UAE government.

The forward change mechanism refers to the process by which the registered supplier collects tax from their customers. The UAE VAT Law and regulations specify certain types of supplies which focus on the subject of Reverse charge mechanisms for VAT purposes.

What is a Reverse charge Mechanism in UAE?

When the reverse charge mechanism is used the recipient or buyer is liable for paying the tax. However, when the forward mechanism is used the supplier is liable for paying the tax. The major change that one can identify is now the buyer is responsible for paying the tax rather than the supplier.

The UAE Government has recently launched the concept of reverse charging. This concept ensures the VAT is collected on goods and services imported and supplied within the state regardless of the supplier being a non-taxable person. In this scenario, the recipient or buyer is treated as if he or she were creating the taxable supplies for himself so that the government will collect VAT from him or her.

Significance of Reverse Charge Mechanism in the UAE

The Federal Tax Authority finds it difficult to track the supplier's business transactions and ensure it is under VAT compliance when transactions are not taking place in the UAE. The buyers who are living in the UAE will be charged the VAT on a reverse charge basis.

The reverse method majorly applies in international transactions. The suppliers who are not UAE residents are not entitled to register or account for VAT where their buyers are located.

Supplies that are subjected to come under Reverse charge VAT

In the UAE, the import of the concerned product, services, or supplies of any crude or refined oil, unprocessed or processed, natural gas, or any type of hydrocarbon for resale for the production of the energy product or services is entitled to come under the reverse charge taxes.

The following supplies that are listed in UAE VAT law are in reverse charge mechanism. They will be liable for paying the VAT if  some specific requirements are met according to regulations of UAE Executives such a

1. Supply of Gold and Diamonds.

2. Goods purchased from designated zones.

3. The goods and services are used for business purposes.

4. The supplies of crude and refined oil, unprocessed natural gas, and any hydrocarbon to registered buyers or for resale. These items used to produce or distribute any form of energy are taxable under the law.

5. The goods are purchased from different designated zones.

6. The goods and services are imported from the other Gulf Cooperation Council and non-GCC countries. They are located in different countries and their supplier may or may not have an established business in the UAE.

The above-mentioned supplies come in the reverse charge mechanism. However, some conditions should be met for the eligibility for reverse charge VAT as defined in the UAE VAT Executive Regulations.

Need help?

If you are a supplier or have a business that is facing issues related to reverse charge mechanism or VAT? Consult the FlyingColour Tax for assistance related to paying the VAT or reverse charges. Our experts assist you with the paperwork and the whole process without any hassle. We help you understand the whole process and provide explanations related to the same.

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