A Complete Knowledge Base on Reverse Charge in the UAE: FAQs

What is reverse charge?

The conventional method of collecting VAT dictates that the seller of supplies or services should collect VAT from the buyers and pay it to the FTA. Reverse charge shifts the responsibility for reporting VAT from the seller to the recipient. If a customer buys goods from a supplier under the reverse charge mechanism, the customer will be responsible for paying VAT for the procured goods. 

Example: You are a VAT-registered resident of the UAE and you buy a refrigerator from a company outside the country. 

Conventional method: The conventional method obligates the seller to register for VAT in the UAE. The seller will collect the 5% VAT for the refrigerator from the buyer and pay it to the FTA.

Reverse charge: The reverse charge method eliminates the need for the non-resident seller to register for VAT. The buyer has to pay the VAT for the product or service imported.

Under what conditions is reverse charge applicable?

• Reverse charge is applicable on both goods and services, provided they are purchased from outside the UAE. Reverse charge is not applicable on domestic purchases.
• Reverse charge is applicable when a business owner in the UAE purchases goods or services that are imported from outside the UAE. The seller must be located in another country, and they may or may not have a business in the UAE.
• The buyer must be registered under the VAT regime.

To understand these conditions, let us look into the procurement process of a textile company owned by Ms. Aafiya.

Case 1: * Ms. Aafiya owns a textile retail shop in the UAE and is a VAT registrant. She sometimes procures pashmina (which is subject to VAT) from a retailer in Kashmir, India. Mr. Aboud, the retailer who sells pashmina to Ms. Aafiya, is not registered for VAT in the UAE, so he doesn’t have to file taxes for the supply. Ms. Aafiya will have to file taxes through reverse charge for the pashmina because the supply is from outside the UAE.

Case 2:  * Sometimes, Ms. Aafiya uses the services of a freelance accountant, Mr. Aadil, who is a resident of Abu Dhabi. The supply of services from a non-resident of the UAE is subject to VAT under reverse charge, so Ms. Aafiya will have to pay the VAT for the services provided by Mr. Aadil.

Does it matter whether imported supplies are provided from inside the GCC or outside?

There is no practical difference between import goods provided from outside the GCC and ones provided from within the GCC. The reverse charge mechanism applies for both of them.  For example, if a supply is imported from Saudi Arabia into the UAE, the reverse charge mechanism comes into effect. The registered buyer will have to pay the VAT for the supply to the authorities.

If a product or service is imported from the UK into Abu Dhabi, the process of VAT collection is the same. The registered buyer will still have to pay the VAT to the authorities.

Does the reverse charge mechanism still apply if the seller has a business in the UAE?

Yes. If the seller is not a resident of the GCC countries, then the supply is considered taxable under the reverse charge mechanism, whether or not the seller has a business in the UAE.

How should the recipient complete their VAT return for a supply subject to reverse charge?

The recipient of the service or supply must self-account the VAT charges as output tax during the purchase and then declare it in their VAT return. 

Will I be able to use my imported goods in the UAE before filing my VAT return?

Yes. A registered VAT user can clear imported goods through customs and use them in the UAE even before the import VAT is accounted for.

What else do I need to know to use the reverse charge mechanism?

The recipient of imported goods must: 

• Be able to prove that they were VAT-registered during the import of the service or product.
• Provide the customs registration number issued by the Customs Authority. 
• Comply with any other rules levied by the FTA for that particular import. 

What goods/services are liable for reverse charge in the UAE?

Reverse charge mechanism is applicable on the following:

• Import of goods/services for business purposes
• Supply of goods/services made by a supplier who does not have an established business in the UAE to a taxpayer who is based in the UAE
• Purchase of goods from a designated zone
• Purchase of crude oil or refined oil, natural gas (processed or unprocessed), or hydrocarbons for processing and resale by a registered supplier to a registered buyer in the UAE 
• Supply of gold and diamonds 
• Purchase of gold and diamonds for resale or further production or manufacture What else do I need to know to use the reverse charge mechanism?

Why is the reverse charge mechanism needed?

When the seller does not have a business in the UAE, tracking them is hard for the tax authorities. In order to track these imported supplies and suppliers, the buyers in the UAE are made responsible for paying VAT on a reverse charge basis. This helps the FTA ensure the collection of VAT in cases where the suppliers are non-residents and do not have fixed establishments in the UAE, though the supply is made in the UAE. 

What are the responsibilities of buyers and sellers under the reverse charge mechanism?

Buyers and sellers should make sure they adhere to the following rules:

• Every registered business owner must keep proper records of their supplies that incur reverse charge.
• Invoices, receipt vouchers, and refund vouchers must all specify whether the tax payable for that particular transaction is through reverse charge.

Is the reverse charge mechanism applicable on the export of gold and diamonds?

No, the reverse charge mechanism is not applicable on any of the following:

• Export of gold and diamonds.
• Export of products where the principal component is gold or diamonds
• Supply of investment precious metals (such as platinum and other metals that are >99% pure and tradable in global markets)

Is the reverse charge mechanism applicable on supplies of gold and diamonds?

Yes, provided that the buyer and seller are both registered under VAT and the supply meets one of the following conditions: 

• The principal component of the supply is made up of gold and diamonds (e.g., jewellery). 
• The buyer is purchasing gold or diamonds for resale or further manufacturing, and has provided written confirmation of their VAT registration status, the purpose of the supply, and their intent to account for the VAT due.

What is the domestic reverse charge mechanism and how is it different from normal reverse charge?

Under the domestic reverse charge mechanism in the UAE, the supplier shall not charge VAT on the goods and services, even if their business is VAT registered. The recipient of the goods is liable to account for the supplies and pay any tax due as per the tax obligations set by the tax authority.

The only difference between domestic reverse charge and normal reverse charge is that under domestic reverse charge, the goods are being exchanged within the same country, whereas normal reverse charge is applicable on imports of goods and services from outside the UAE.

What goods and services are liable for domestic reverse charge in UAE?

Domestic reverse charge will be applicable on the following goods and services:

1. Crude oil or natural gas
2. Purchases of gold and diamonds

How is the domestic reverse charge mechanism applicable in the state?

Let us assume that a registered business makes a taxable supply of concerned goods, like crude or refined oil, processed or unprocessed natural gas, hydrocarbons, or gold and diamonds to another registered business in the UAE. When the recipient of these goods either sells them in the same form or distributes them as any other form of energy, then the following rules will apply:

1. The supplier should not charge VAT on the supply of the above-mentioned goods.
2. The recipient will have to calculate the VAT applicable on the value of goods, will be responsible for all tax obligations, and should also calculate the due tax.

The recipient of the goods should provide the supplier a written statement saying that it is a registered business. The supplier does not need to calculate tax on the supply, unless the supplier is aware that the recipient is not actually registered. If the recipient is not registered on the date of supply and the supplier is aware of that fact, they will both be liable for the tax and any associated penalties.

Under what conditions will domestic reverse charge not be applicable?

The VAT rules on domestic reverse charge will not be applicable under the following conditions:

1. When the supply includes goods or services other than the concerned goods like refined oil, processed/unprocessed natural gas, other hydrocarbons, gold, or diamonds.
2. When the recipient of the goods does not give a written confirmation stating that the acquired goods are for resale, before the date of supply.
3. When the recipient hasn’t given a written confirmation to the supplier stating that their business is tax registered, before the date of supply.
4. When the supplier has not checked whether the recipient’s business is tax registered following the rules set by tax authority prior to the date of supply.
5. When the taxable supply is zero-rated.