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Reverse Charge Mechanism (RCM)

Reverse Charge Mechanism (RCM) under VAT eliminates the responsibility for the businesses outside the UAE to register for VAT in UAE. The reverse charge mechanism under VAT is mainly used for transactions from cross the border.

In a typical business, the supplier supplies goods to the customers and collect VAT from the customers, which is later paid to the Federal Tax Authority (FTA). Under reverse charge mechanism (RCM), the supplier does not charge VAT to the customer, the buyer or end customer pays the tax directly to the government authority.

The supplier does not have to pay VAT on import items, so the obligation of reporting a VAT transaction is shifted from the seller to the recipient. The recipient will have to record the VAT on purchases (input VAT) and the VAT on sales (output VAT) in their VAT return each quarter.

If the supplier is from outside the country and does not have a business in the UAE, the VAT does not implement on the businesses who are not in UAE. Hence, recipients who are residents of the UAE and receiving goods from the supplier who is not in UAE are made to pay VAT on reverse charge basis.

Applicability of Reverse Charge Mechanism Under UAE VAT Law

Reverse charge is applicable in the following cases:

  • Import of goods/services.
  • Purchase of goods from a designated zone
  • Purchase of gold and diamonds for resale or further production/manufacture
  • Supply of hydrocarbons for resale by a registered supplier to a registered recipient in the UAE
  • Supply of non-crude/refined oil and processed/unprocessed natural gas by a registered supplier to a registered recipient in the UAE for resale or for consumption on production process.
  • Supply of by a registered supplier to a registered recipient in the UAE for resale or for consumption on production process.
  • Production and distribution of any form of energy supplied by a registered supplier to a registered recipient in the UAE
  • Purchase of electronic device by a registered supplier to a registered recipient in the UAE for resale or for consumption on production process.

 

Here, we are talking about Import of goods worth AED 100,000 from Russia.

Smartbook LLC, company located in Russia, selling goods worth AED 100,000 to Financial Solution, VAT Registered company located in UAE.

Here, Smartbook LLC will not charge vat because they are not registered under VAT.

So, Financial solution will charge vat and must record the reverse charge on their relevant vat return. And claim the input vat while filing vat return and adjust with Output tax liability.

The conclusion of the above-mentioned example is that 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.

How and when to use the concept of Reverse Charge Mechanism (RCM) is a complex question and it needs professional and experienced opinion to define the mechanism as per the VAT law in UAE. Smart Book Accounting and Bookkeeping is accounting and auditing firm who can help you in understanding the concept of Reverse Charge Mechanism under VAT.

If you are looking for any clarification in terms of RCM VAT in UAE, Contact Smart Book Accounting and Bookkeeping. We are covering all the elements of VAT such as VAT registrationVAT return filingVAT auditVAT refundVAT accounting and VAT deregistration.

Contact
Office No. M06, Mezzanine Floor,
Alphamed Building, Abu Hail Road,
Hor Al Anz East, Dubai, UAE.
Mob:+971 54 402 3300
T: +971 4 451 9196
Web: www.smartbookarabia.com
Email:info@smartbookarabia.com
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