All About Reverse Charge Mechanism (RCM) in UAE VAT

Updated on: Oct 27th, 2023

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5 min read

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In the United Arab Emirates (UAE) Value Added Tax (VAT) Law, whenever a registered supplier makes a taxable supply, they must charge VAT, collect it and pay it to the government. This mechanism is known as the forward charge mechanism. 

For example, ABC Television Ltd sold an LED worth AED 10000 to Ahmad Associates Ltd and collected VAT of AED 1500 at 15%. The VAT of AED 1500 is collected on a forward charge basis.

However, the UAE's VAT Law and Executive Regulations notified specific supplies under the Reverse Charge Mechanism (RCM). This article explains all about the Reverse Charge Mechanism under UAE VAT.

What is the reverse charge mechanism in UAE VAT?

As mentioned above, the UAE VAT law notifies specific supplies under RCM. When a transaction involves notified supplies, the buyer of goods or recipient of services is responsible for paying the tax to the government, unlike the forward charge, where the supplier is liable to pay the tax.

The significant change in RCM is the responsibility to pay tax shifts from supplier to buyer.

Why reverse charge mechanism?

The government has introduced the concept of the reverse charge mechanism to ensure that the VAT is collected when a supplier is not a taxable person; however, the supply has been made in the state of UAE.

Accordingly, the buyer or recipient is considered a person making taxable supplies and will be held responsible for paying VAT to the government.

What are the reverse charge supplies in UAE VAT?

The UAE VAT Law has listed a few supplies that fall under the reverse charge mechanism and notified a few conditions to be met under the UAE Executive Regulations.

The below supplies fall under the reverse charge mechanism:

  • Imports of specific goods or services for business
  • Taxable supply of any unprocessed or processed natural gas, crude or refined oil, or any hydrocarbons for resale. Further, using the same for the production and distribution of energy between a registered supplier and buyer in UAE.
  • Supply of goods or services by a person who does not have a place of residence to a taxable person who has a place of residence in UAE.

It is to be noted that each of the above supplies comes with specific conditions to meet under UAE VAT Executive Regulations to be liable for reverse charge VAT.

Responsibilities under the reverse charge mechanism 

Under RCM, the buyer of goods or recipient of services will be liable to pay tax to the government. Thus, the concerned person must discharge the below responsibilities under the reverse charge mechanism:

  • Determine the value of supply on which VAT must be levied
  • Account for the VAT due on reverse charge supplies
  • Pay the VAT to the government
  • Claim Input Tax, based on eligibility
  • Maintain the records as proof of tax payment and to claim input tax

Reverse charge mechanism Example

ABC Ltd, a registered dealer in Televisions in Dubai, imported TV parts worth AED 1000 from XYZ Components Ltd in India.

Here, ABC Ltd, being a registered importer, is required to pay VAT @ 15% on AED 1000, i.e. AED 150, to the government.

 

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