The supplier is usually responsible for collecting VAT from the buyer and paying it to the Federal Tax Authority, but in some cases, reverse charging applies, whereby the buyer is responsible for collecting VAT from the supplier and paying it to the Federal Tax Authority.
Thus, reverse charge in VAT is a mechanism in which the responsibility for collecting the tax is transferred from the supplier to the buyer. Therefore, the Buyer is not obligated to issue a tax invoice, nor is the Buyer obligated to pay VAT to the supplier.
Instead, the buyer calculates the VAT on the value of the supply, includes it in the value of the supply itself, and pays it to the Federal Tax Authority. So in the following lines we will discuss what is rcm in uae vat?
Contents
- 1 What is VAT Reverse Charge Mechanism (RCM)?
- 2 When is reverse charge applicable?
- 3 How does reverse charge mechanism on services work?
- 4 What is the need for a reverse charge mechanism?
- 5 What are the requirements for the reverse charge mechanism?
- 6 Reverse Charge VAT Example
- 7 Responsibilities under the reverse charge mechanism
- 8 Conclusion
- 9 FAQS
What is VAT Reverse Charge Mechanism (RCM)?
What is RCM in VAT? A reverse tax is one in which the supplier supplies supplies or services and collects the value-added tax and pays it directly to the government. However, under a special rule called the reverse charge mechanism
The responsibility for paying VAT on certain transactions is transferred from the supplier to the recipient. In such cases, the recipient pays the VAT directly to the government and then reports it on their tax return as input tax (a tax collected on sales transactions).
When is reverse charge applicable?
Cabinet Resolution No. (91) of 2023 AD regarding the application of the reverse charge mechanism on electronic devices among those registered in the country for the purposes of value-added tax was issued on August 25, 2023 AD, which will be applied sixty days after the date of its publication in the Official Gazette.
The decision stipulates that electronic devices include mobile phones, smart phones, personal and desktop computers, digital and small computers, servers, computer control units for car engines, tablets, and their spare parts.
According to the decision, those subject to value-added tax must register for the input tax and the output tax in the tax return within the period specified for submitting the tax return, which is known as reverse charging.
How does reverse charge mechanism on services work?
What is rcm in uae vat calculator? The reverse charge mechanism applies to services that are inherently taxable and that a taxable customer receives from a supplier who is not resident in the Gulf Cooperation Council countries, and also services that the customer receives from a person residing in another member state.
Until the time when the electronic services system for supplies between GCC countries is implemented. Gulf Cooperation Council The reverse charge mechanism does not apply to the import of goods because the customer pays the value-added tax on the imported goods through the customs authority.
There are no official procedures for importing services, and the value-added tax is not collected when importing services by UAE customs, as happens when importing goods from outside the Kingdom, and accordingly. VAT is levied on services supplied in the UAE to a taxable person by a non-resident supplier according to the reverse charge mechanism.
What is the need for a reverse charge mechanism?
In addition, what is rcm in uae vat? The reverse charge mechanism allows non-resident suppliers to provide taxable goods and services to beneficiaries registered for VAT in UAE without registering for VAT in the UAE.
However, the reverse charge mechanism does not apply when taxable goods or services are provided by non-resident suppliers to beneficiaries who are not registered in UAE. In such cases, the non-resident supplier is required to register for VAT in UAE to apply VAT to the supplies they make.
What are the requirements for the reverse charge mechanism?
What is rcm in uae vat calculator? The reverse calculation mechanism is applicable when:
1.A taxable trader imports taxable services:
Services do not pass through customs like imported goods, and therefore VAT cannot be collected at the border. Instead, the buyer calculates the input tax using the reverse charge mechanism in its tax return.
2. A taxable trader receives services from a non-resident importer in the Kingdom:
When a VAT registered person receives services from a non-resident person in the UAE (i.e. a person who does not have a tax presence in UAE, the VAT registered person should calculate the amount of VAT due using a reverse charge mechanism.
3.When trade takes place within the borders of the Gulf Cooperation Council countries:
When trade occurs within the GCC, the supplier is not required to register for VAT in the buyer’s country or be required to pay the tax. Therefore, the buyer is required to calculate the VAT he owes using the reverse charge mechanism.
Reverse Charge VAT Example
What is rcm in uae vat example?
Reverse charging is a mechanism applied to imports that are subject to VAT, whereby the customer who is subject to the tax is obligated to pay the tax that must be paid on behalf of the supplier. The Customer shall be responsible for all obligations determined in accordance with tax laws;
- Legal services and consultations.
- Subscriptions and memberships.
- Advertising services.
For these services, VAT is not collected when imported by customs, unlike what happens in the case of importing goods. Therefore, a reverse charge mechanism is applied, whereby the taxable customer bears all obligations on behalf of the supplier.
Responsibilities under the reverse charge mechanism
The Unified VAT Agreement contains rules that help determine VAT liability in general cases (one-time supplies) and special cases (ongoing supplies)
General case – In such a case, the taxable person must pay the tax as close as possible to the following dates.
1-Date of supply of goods or services.
2-Date of issuance of the tax invoice.
3-The date of the consideration received (only to the extent of the payment received).
Here the date of supply may be earlier than the date on which the actual delivery of the goods takes place in cases where the invoice is issued in advance (before the actual delivery of the goods).
Conclusion
In conclusion, rcm in uae vat are vital tools in any tax system, and they affect the economy and individuals in multiple ways. The appropriate type of tax must be chosen based on the objectives of the state’s economic and social policy, and in light of a careful study of its potential effects on the economy and society.
FAQS
What is RCM in VAT?
The supplier usually supplies goods/services and collects VAT on behalf of its customers, which is later paid to the government. Under the reverse charge mechanism, the final consumer pays the tax directly to the government.
The buyer will have to register VAT on purchases (input tax) and sales (output tax) in the tax return for each month or quarter (based on the annual minimum). The VAT calculated by the buyer will be deducted as input tax on the same tax return.
How to reconcile RCM?
The reverse charge mechanism is necessary to apply the domestic tax rate to foreign purchases. This is intended to remove any financial advantage of purchasing services from abroad compared to purchasing locally.