UAE VAT Reverse Charge Mechanism

VAT Reverse Charge Mechanism

Reverse Charge is a mechanism under which the recipient of goods and services is required to pay VAT instead of the supplier, when the supplier is not a taxable entity in the member state where the supply has been made. It’s used because the VAT registered purchaser has to account for VAT in respect of supplies. It’s typically used for cross-border transactions to relieve a non-resident supplier from the requirement to register and account for VAT in the country of the purchaser. Reverse charging is meant to put local and international suppliers on equal footing.

The purchaser will account for VAT on its normal VAT return and he may be able to claim that VAT back on the same return, subject to the normal VAT recovery rules. It’s applied in UAE in the situations where a VAT registered entity imports goods or services into the UAE which would be subject to VAT if purchased in the UAE.

The exception to this rule occurs when the registered entity imports goods into UAE with the intention of transferring them to another GCC State. In that situation, the importer pays Import VAT 5% and can’t recover the VAT paid in UAE but it should be recoverable in the GCC State the goods are being transferred to.