Federal Tax Authority of UAE or UAE FTA was set up in 2017 to implement and manage the introduction of Excise and Value Added Tax in the UAE. UAE and specifically, Dubai being a trading hub with a significant volume of imports and re-exports, the tax treatment for these involved the application of Reverse Charge Mechanism or RCM as it is commonly referred to.
This erstwhile tax-free region, where businesses focused more on business and less on accounting and taxation got its head around most of the compliance requirements. However, Reverse Charge Mechanism was a new area to get a better understanding. As an accounting firm, based on our interaction with our clients and queries from prospective customers, we felt the need to put out a detailed post on the Reverse Charge Mechanism or RCM aspect of the law to explain the guidelines in place.
- 1 UAE FTA – Reverse Charge Mechanism (RCM)
- 2 RCM for Goods Imports
- 3 RCM for Services imports
- 4 Scenarios of Reverse Charge Mechanism for UAE VAT registered businesses?
- 5 Scenarios of VAT Reverse Charge Mechanism UAE for NON-UAE VAT registered businesses?
- 6 A unique but common scenario:
- 7 Tax Return – Reporting of Reverse Charge mechanism VAT UAE: (as per UAE Federal Tax Authority)
UAE FTA – Reverse Charge Mechanism (RCM)
All imports are subject to Reverse Charge Mechanism. RCM refers to the mechanism for charging VAT on imports. Generally for a transaction the seller applies VAT and pays to the Government, while the buyer accounts for the VAT and takes input credit (or reduces) the tax payable to the Government. However, in case of imports, it is not feasible to have the exporter from a foreign country (other than GCC countries) to register for VAT in UAE.
In case of imports, the importer is expected to play the dual role of both seller and buyer, hence, expected to charge both Output VAT (As seller) and Input VAT (As buyer) for an import transaction. Hence, the term reverse charge mechanism or RCM.
The treatment for Goods and Services are very different when applying Reverse Charge Mechanism VAT.
RCM for Goods Imports
This post is primarily focused on treatment of Reverse Charge Mechanism for import of goods into the country other than GCC countries. Goods when imported pass through the customs, where it is assessed and applicable duties and charges levied. The VAT is to be applied on the total including all import costs. Please ensure that appropriate local currency value of the imports is used to calculate the RCM VAT
RCM for Services imports
Services availed by businesses from beyond the boundaries of the UAE are availed directly and does not pass through Customs. For e.g. digital marketing or advertising on Google and Facebook. For services imports the reverse charge mechanism applies. The VAT using RCM should be calculated and accounted for based on the invoice date and reported in the tax returns.
Scenarios of Reverse Charge Mechanism for UAE VAT registered businesses?
Five scenarios exist for UAE FTA registered businesses for treatment of Reverse charge mechanism in case of goods being imported to UAE. You may be a business registered in a designated zone or on mainland / non-designated free zone. Designated free zones are considered as outside the UAE for VAT purposes by UAE FTA, hence, the treatment is different. You can read more about Designated Zones on the FTA website.
When goods are imported to UAE, the purchase of the goods needs to be recorded in your books of accounts, in the currency of purchase, as on the date on the invoice. VAT is not immediately applicable on this purchase, as scope exists for the goods to arrive at the ports of UAE, much later.
Once the goods land in the ports of UAE, the Bill of Entry is generated, this reflects the AED value of the goods imported, as per the customs authority, the applicable customs duty and other related charges. Account for this Bill of Entry by recording the Customs duty, adding the AED value of goods imported, customs duty and other applicable charges, to arrive at the cost of goods imported, on this value, calculate the reverse charge VAT as per applicable VAT rates (usually standard rated VAT).
The VAT amount for UAE FTA registered business is not required to be paid at point of import, but accounted for at the point of import and paid as part of the tax return tax payment.
The net impact of this is the amount of VAT on imports becomes Zero at the point of import as both the input and output VAT at same amount is accounted, these appear in two different places on the Tax Return one under Output VAT and one under Input VAT
Considering the above the scenarios possible explained:
- Goods imported into UAE – Account as explained above and pay tax via tax return
- Goods imported into the UAE and then re-exported out of UAE – Account for the import as explained above and pay tax via tax return
- Transfer goods from one Designated zone to another Designated zone – As explained Designated zone are considered outside the UAE for FTA, hence considered out of scope (NO VAT IMPACT)
- Import goods into a designated zone – Same as point 3 above
- Business in UAE buys from outside UAE and Sells outside UAE with direct shipments of goods by seller to buyer without touching the shores of UAE – This again is to be treated as point 3 above. No VAT Impact / Out of scope.
Scenarios of VAT Reverse Charge Mechanism UAE for NON-UAE VAT registered businesses?
Non-UAE VAT registered refers to persons who have not yet registered for UAE VAT. This could be because of the qualification criteria for registration not yet being met. In such cases, a Non-UAE-VAT registered business can still undertake imports of goods. However, in such cases, the business will have to import the goods using the clearing agents authorized by UAE FTA. You can find the same on UAE FTA website here.
Only registered businesses have the option to claim input VAT credit and file tax returns. Hence, the reverse charge mechanism is not applicable to non-UAE-VAT registered businesses. In this case, the importer will be required to use the clearing agents notified to clear the goods from customs. Before the clearance of goods, either the clearing agent can pay the VAT amount at the point of import or the importer can create an account on FTA e-services portal and make an online payment for the applicable VAT online at the point of import to have the goods cleared and delivered to their place of business.
Considering the above, the possible scenario’s explained:
- Goods imported into UAE – Pay at the point of import
- Goods imported into the UAE and then re-exported out of UAE – Pay at the point of import
- Transfer goods from one Designated Zone to another Designated zone – Provide eGuarantee (Refer to info box below on the process)
- Import goods into a designated zone – No impact
A unique but common scenario:
In our accounting practice, we have come across a unique scenario not covered by the above two regularly. The scenario is “a UAE Federal Tax Authority registered business imports using a clearing agent who pays the VAT at the point of import and recovers the same from the importer.”
This is a common occurrence, prompting the UAE FTA to release a clarification note on how to treat such transactions for reverse charge mechanism. This is available under the title Importation of goods by agents on behalf of VAT-registered persons in the VAT guides section.
The synopsis of the clarification is as follows:
- The clearing agent will have to reduce the amount of VAT from their return as adjustment (as the same is not imported by them)
- The clearing agent can claim the same from the importer under a tax invoice.
- The importer can include the VAT paid under the line for expenses subject to VAT to claim input credit for the VAT amount.
Tax Return – Reporting of Reverse Charge mechanism VAT UAE: (as per UAE Federal Tax Authority)
Output VAT leg of Reverse charge mechanism:
The key lines are:
Line number 6 in the tax return when the goods imported into UAE values are to be reflected. Please note, this line is non-editable on the online tax return. This line is pre-populated by the value of imports and related VAT values based on customs update to FTA on imports by a registered importer using their own linked customs and TRN numbers.
Line number 3 in the tax return, this line is required to be populated for services imported during the tax period.
Line number 7, this is the line where a clearing agent can make adjustments for VAT paid on behalf of customers as explained in the aforesaid sections.
Input VAT leg of Reverse charge mechanism:
Line number 9 – All expenses subject to VAT are captured here to get input credit, in case of imports through clearing agents, wherein the clearing agent has paid VAT and recovered from the registered business, the input VAT needs to be claimed by including the amount in this line.
Line number 10 – This will be the sum total of Line number 6 (minus) line number 7 (plus) line number 3. Reverse charge by nature is a zero-sum game, as the value of output VAT is equal to the Value of input VAT.
Overture Accounting and Bookkeeping is a Dubai mainland registered accounting firm, providing accounting, bookkeeping, and VAT services to clients since 2017. This post is based on FTA guidelines as published on their website for general consumption and our experience of managing VAT compliance for our customers in the region. You can view details of our accounting and bookkeeping services offered here