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Reverse Charge Mechanism Under VAT in The UAE

One of the many critical aspects of VAT regulations is the Reverse Charge Mechanism. This resource will provide an overview of the applications, benefits, and implications of Reverse Charges under VAT.

What is The Reverse Charge Mechanism?

Typically, companies providing taxable supplies are responsible to levy and collect VAT on the government’s behalf. However, the VAT Law in The UAE lists certain supplies on which tax has to be charged by the recipient (as opposed to the supplier). Under the Reverse Charge Mechanism, the liability of collecting VAT is on the purchaser, or the recipient of goods and services.

When is Reverse Charge Applied?

Under VAT in The UAE, Reverse Charge is applicable on both goods and services when a taxable person residing in any of the Gulf Cooperation Council (GCC) countries purchases from a supplier located in another country, whether it is a GCC member state or any country outside the GCC.

Essentially, reverse charge is applied when purchases are made from outside The UAE.

Here’s an example to illustrate this:

AES Automobile Company Ltd, a VAT-registered auto parts dealer in the UAE, has imported goods from an Indian company, Speed Motocorp Ltd.

In this case, Speed Motocorp, the supplier of goods, is not a taxable entity in The UAE. Therefore, AES Automobile Company Ltd, being the buyer or the recipient of goods, is required to pay VAT at 5% to the government.

Benefits of The Reverse Charge Mechanism

The Government of The UAE has introduced the of Reverse Charge Mechanism concept to ensure that VAT is collected on the supply of goods or services even when the supplier is not a taxable entity in The UAE. This transfers the liability of paying tax to the buyer’s side, eliminating the need for overseas sellers and suppliers to registering for VAT in The UAE to let Manage My Vat assist you with reverse charge VAT accounting and other VAT related services.