Reverse charge mechanism

What is reverse charge and what is it used for?

The reverse charge system is used for cross-border transactions. It ensures VAT compliance when the supplier’s business is not based in the UAE. Therefore, the recipient residing in the UAE reports VAT on reverse charge basis to relieve non-resident suppliers from registering for VAT in their buyer’s location.

How does reverse charge work?

If you are working with a supplier based outside of the UAE, they are not registered in the UAE for VAT and won’t have to submit VAT returns or pay taxes. Because you have acquired services from a business based outside of the UAE, you will have to account for VAT and record a reverse charge on your VAT return specifying the UAE as the place of supply.

When is a purchase subject to reverse charge?

  • The receiver of goods and services should be registered for VAT.
  • Registered businesses should keep a record of supplies subject to reverse charge.
  • Invoices, invoice receipts, and debit notes should indicate tax payable through reverse charge for their relevant transactions.

When should I apply reverse charge?

You should apply reverse charge in case:

  • You import goods and services from a supplier located outside of the UAE.
  • You purchase supplies from businesses based in designated zones.
  • You supply gold and diamonds.
  • You purchase gold and diamonds for further manufacturing or resale.
  • A registered vendor supplies hydrocarbons for resale to a registered recipient in the UAE.
  • A registered vendor supplies crude or refined oil to a registered recipient in the UAE.
  • A registered vendor supplies processed or unprocessed natural gas to a registered recipient in the UAE.
  • A registered vendor produces and distributes all forms of energy to a registered in the UAE.

Reverse charge is not applicable on:

  • Exports of gold and diamonds.
  • Supplies of investment precious metals such as greater than 99% pure tradable in global markets platinum or gold.
  • Exports of products with main components of gold or diamonds.

Add reverse charge in Wafeq

You can add a reverse charge to your purchases when you create your bills in Wafeq. In the Price column, click on +Add Tax, and select Reverse Charge (5.00%).

What should I do, if I am a recipient of a reverse charge?

  1. Calculate the tax amount that you should pay to the government.
  2. Account for the VAT amount during purchases as output tax.
  3. Declare the accounted output tax in your VAT return.
  4. If possible, claim input credit.
  5. For future notices, keep a record of the necessary documents such as invoices.