The VAT Reverse Charge Mechanism (RCM) in the UAE simplifies VAT compliance for businesses operating outside the country.
What is RCM?
RCM shifts the responsibility of VAT payment from the seller (supplier) to the buyer (recipient) for specific transactions. This eliminates the need for non-UAE businesses to register for VAT in the UAE.
When does RCM apply?
Importing goods/services from outside the UAE, regardless of the supplier’s location.
Buying goods from designated zones within the UAE.
Supplying or purchasing gold and diamonds (for resale or further production).
Supplying specific energy products like crude oil or natural gas between registered businesses in the UAE.
How does RCM work?
Imagine a VAT-registered company in the UAE (Company A) imports goods from a company based outside the UAE (Company B) that isn’t registered for UAE VAT. Under RCM, Company B wouldn’t charge VAT, but Company A would:
Calculate VAT owed: Company A determines the VAT amount based on the import value.
Self-account for VAT: Company A records the VAT as “output tax” on their VAT return.
Claim input credit (optional): If eligible, Company A can claim a credit for the VAT paid.
Maintain records: Company A keeps invoices and other documents for future reference.
Important points for RCM:
Only VAT-registered businesses can use RCM.
Proper record-keeping of RCM transactions is crucial.
Invoices for RCM transactions must clearly state “reverse charge” for VAT payment.
Seeking RCM expertise?
Understanding RCM intricacies requires VAT law knowledge. Consider consulting a qualified tax agent for guidance.
