Reverse Charge – The Concept of Levy of Tax on the Recipient

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Forward charge

Under the general applicability of UAE VAT rules, the ownership and responsibility to levy, collect and pay VAT to the Government is on the person who is making taxable supplies i.e., on the supplier.

This implies that whenever a registered supplier is making a taxable supply, he needs to charge VAT and discharge the liability to the Government. This concept of collection of tax by a registered supplier from the customers is known as ‘forward charge mechanism’ in tax language.

 Reverse charge

Now, in contrary to the said general rule, there lies a concept of reverse charge mechanism (‘RCM’), which as the title suggests, it works in the reverse direction, i.e., the ownership and responsibility to pay VAT to the Government lies with the recipient of supplies instead of the supplier.

Under this mechanism, recipient or the buyer of goods or services is responsible to pay tax to the Government, unlike in the forward charge, where the supplier is liable to pay the tax. The radical change in both the concepts is the shift in the responsibility of paying tax, which is moved from the supplier to the buyer.

On 17 June 2021, the Zakat, Tax and Customs Authority (‘ZATCA’) has issued a Circular No. 2106001 explaining the application of RCM in accordance with the Common VAT Agreement of the States of the Gulf Cooperation Council and KSA VAT Law.

Inclusions and Exclusions

The Circular has provided a non-exhaustive list of services for the application of RCM as follows:

a) Legal and professional services

b) Membership / subscription services

c) Advertising services

Also, the Circular had mentioned the below services to fall outside the scope of RCM application:

a) Receipt of exempt services (e.g.  Financial services received from a non-resident person)

b) Services provided by a non-resident supplier to non-taxable customers in KSA

c) Services that fall under special cases as outlined in the GCC Unified VAT Agreement

Import of services

Similarly, under UAE VAT, tax is charged on services which are supplied by a non-resident supplier to the taxable person by way of RCM. When a service is provided by a person who is not obliged to pay tax under VAT law (i.e.  a non-resident supplier) to a person who is registered under VAT, the Revenue has intended to put the ownership of payment of tax on the registered person under RCM. 

Intention of Revenue

When a service is received within the region of KSA, the application of tax on the same helps the Government to generate revenue and to monitor the transaction. When a service is provided by a person who is non-resident and unregistered under UAE VAT laws, the Government cannot include him under the radar of ambit of VAT laws and regulations and therefore, the application of rules cannot be enforced on him.

Considering that service is consumed within KSA, it becomes apparent to bring the transaction within the corners of law, in order to do the same; the Revenue has made the service/goods recipient in this case, the person liable to pay tax.

In this case, the recipient is deemed to have provided the service to himself and is an ‘implied registered supplier’. Therefore, being a registered supplier, he should discharge the VAT liability to the Government, report the output VAT in returns and also, at the same time, he is eligible to deduct corresponding input VAT, provided all the standard conditions are met.

In this way, the Government tracks such transactions and monitors the revenue gained from such supplies under RCM. 

 Considerations for RCM

Considering the shift of ownership and obligation of payment and reporting of tax from a supplier to a recipient by the Government, it becomes imperative to understand as a consumer / recipient the factors and reporting obligations, so that due compliance can be made.

Thus, as a recipient or buyer of goods or services under RCM, the following responsibility needs to be discharged:

a) Determine the value on which tax needs to be levied – Valuation of supplies becomes crucial for RCM cases

b) Account the VAT due on reverse charge supplies – Books of entries should be executed considering all such supplies

c) Remittance of VAT to the Government – If there shall be any delay on such payment, recipient shall be levied interest and late     charges

d) Claim Input Tax, if eligible – The benefit of availment of credit should also be considered being a recipient and should be accounted for in books

e) Maintenance of records such as invoice and other documents to substantiate the tax payment and input tax claim – All records and documentation are necessary for RCM to justify the payment and availment of credit 

Recent crucial update – Electronics sector

Considering the above backdrop, it becomes relevant to discuss the recent addition made to the list of RCM services for electronics sector.

On October 30, 2023, the UAE electronics sector switched to RCM on VAT for B2B supplies of devices intended for resale or further manufacture. These include smart phones, computer devices, parts and accessories.

Thus, pieces and parts meeting any of the following criteria will be eligible for RCM facility:

a) Those used for the manufacture of the electronic devices.

b) Those necessary for the operation of the electronic devices, such as chargers, power cords, battery packs, etc.

c) Those pieces and parts that are a replacement for the above.

However, those that enhance the functioning of electronic devices, but are not necessary for their operations or activate their features will not be covered under RCM. It will also not apply on SIM cards or other external smart cards of the same nature or with the same purpose.

 Also, it becomes important to note that RCM on B2B supplies for further resale / manufacture does not appear to be optional. As per the clarification issued by FTA, if a VAT-registered buyer did not declare his intent of use of electronic devices, the input VAT incurred on the supply is not recoverable.

The registered buyers intending to resell / further manufacture should, therefore, ensure the VAT is not charged on supplies of electronic devices to them by sellers. Else, in such a scenario, if VAT is charged by seller, then buyer will not be able to avail the input VAT credit.

As a vice versa, if RCM is applied on an item that is not an electronic device, the registered supplies shall have to face consequences of non-levy and non-payment of taxes.

Considering the same, the classification of goods has assumed paramount importance in order to decide the ambit of RCM cases. A careful evaluation of classification of goods enhancing the features and operations of devices shall also be necessary to determine the RCM applicability and this stands as an interesting area to explore for tax professionals in the electronics industry.

Disclaimer: The content on this website is provided for general informational purposes only. It is not intended as professional advice and should not be construed as such. The information is based on the knowledge and experience available at the time of writing and is subject to change