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VAT Reverse Charge Mechanism

What is reverse charge under UAE VAT?

Under the UAE VAT Law, the duty to levy, collect and pay tax to the government is on the person who is making taxable supplies, that is, the supplier. The registered taxable person needs to charge VAT and pay the same to the government whenever he is making a taxable supply. This process of a registered supplier collecting tax from his customers is known as forward charge mechanism. However, the UAE VAT Law and Executive Regulations notify certain type of supplies on which VAT need to be charged on Reverse Charge Mechanism.

What is VAT Reverse Charge Mechanism?

Under reverse charge mechanism, on certain notified supplies, the responsibility of paying VAT shifts from the supplier to the buyer. That is, the recipient or the buyer of goods or services is responsible to pay the tax to the Government, unlike in the forward charge, where the supplier is liable to pay the tax.

Why is VAT Reverse Charge Mechanism Imposed?

The UAE government has introduced the concept of reverse charge in order to ensure that the VAT is collected on the supply of goods or service where the supplier is not a taxable person and the supply has been made in the state of UAE. In turn, the recipient or the buyer is treated as a person making taxable supplies and will be responsible to pay VAT to the government.

What are the supplies subjected to Reverse Charge under the VAT Law in UAE?

Under the UAE VAT Law, generally the import of concerned goods or services and supply of any crude or refined oil, unprocessed or processed natural gas, or any hydrocarbons for resale or to produce and distribute any form of energy are under reverse charge VAT. The UAE VAT Law has listed the following supplies which will be subjected to VAT on reverse charge mechanism, provided the applicable conditions are met as prescribed in UAE Executive Regulations:

Does a nonresident need to register under VAT?
  • Imports of concerned goods or concerned services for business purpose
  • Taxable supply of any crude or refined oil, unprocessed or processed natural gas, or any hydrocarbons for resale or to produce and distribute any form of energy by registered supplier to registered buyer in the State of UAE
  • Supply of goods or services by a supplier who does not have a place of residence in the state to a taxable person who has a place of residence in the State of UAE.

All of the above mention supplies are liable to reverse charge mechanism. However, for each of the above supplies, specific conditions are mentioned in the UAE VAT Executive Regulations which need to be full filled, to be liable for reverse charge VAT.

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