Welcome to your simplified guide to the reverse charge mechanism. Understanding VAT in the UAE can feel overwhelming, especially with changing rules. The reverse charge mechanism shifts VAT responsibility from the supplier to the buyer—making VAT compliance easier, especially for imports.
Normally, suppliers charge VAT and remit it to the government. Under the reverse charge mechanism, the buyer reports and pays VAT directly to the FTA. This is especially helpful when dealing with foreign suppliers who are not registered for UAE VAT.
This guide covers what the reverse charge mechanism is, how it works in the UAE, and why businesses should apply it correctly. You’ll also learn the steps, benefits, and common challenges.
What is Reverse Charge Mechanism in UAE VAT?
The reverse charge mechanism is widely used across global VAT systems, including the UAE. It shifts the obligation of reporting and paying VAT from the seller to the buyer. This is especially important in B2B transactions.
The main idea is simple: instead of the supplier charging VAT, the buyer accounts for VAT as if they supplied the goods or services to themselves. This improves compliance, reduces the risk of tax evasion, and simplifies cross-border transactions.
Why Is the Reverse Charge Mechanism Important?
The reverse charge mechanism is an essential tool in the UAE VAT system because:
- It prevents VAT evasion by ensuring VAT is paid even when the supplier is outside the UAE.
- It reduces the administrative burden for foreign suppliers.
- It allows businesses to manage VAT more accurately and avoid incorrect invoicing.
- It ensures that VAT is correctly applied in cross-border and B2B transactions.
Overall, it strengthens compliance and creates a fairer, more transparent tax environment.
Read more: How File VAT Return in UAE
How the Reverse Charge Mechanism Works
The reverse charge mechanism is crucial for cross-border supplies and certain local transactions. It changes who pays the VAT and how it is recorded in VAT returns.
Basic Principle
The mechanism shifts the VAT reporting responsibility to the buyer. When goods or services are supplied by a foreign seller who is not VAT-registered in the UAE, the local buyer must declare and pay VAT directly to the Federal Tax Authority.
Key Elements
1. Buyers
They must account for VAT under the reverse charge mechanism and report it in their VAT return.
2. Sellers
Foreign suppliers do not charge VAT. Instead, they issue invoices without VAT.
3. Tax Authorities
The FTA ensures correct VAT reporting and reduces the chances of fraud.
4. Importer of Record
Responsible for paying import VAT and ensuring all duties are correctly declared.
Understanding these roles helps businesses avoid VAT errors and penalties.
Reverse Charge Mechanism in the UAE VAT System
The UAE introduced VAT in 2018 at a standard rate of 5%. To simplify cross-border business, the country applies the reverse charge mechanism to many imported goods and services.
Application of Reverse Charge in the UAE
The reverse charge applies when a UAE-based business:
- Imports goods from outside the UAE
- Receives services from a foreign supplier
- Deals with suppliers not registered for UAE VAT
In these cases, the buyer must declare VAT in their return and pay it directly to the government.
Read more: VAT Late Payment Penalty UAE
Who Must Apply the Reverse Charge Mechanism?
The reverse charge mechanism applies to:
1. VAT-Registered Businesses
Businesses importing goods or services from foreign suppliers must apply the reverse charge.
2. Certain Tax-Exempt Goods and Services
Some activities—such as specific financial services, residential properties, and local transportation—may require reverse charge in special cases to ensure compliance.
3. Non-VAT Registered Entities
Even if a business is not VAT-registered, it may still be required to apply the reverse charge when importing goods under certain conditions.
4. Businesses Under VAT Deregistration
Companies that cancel their VAT registration must still settle outstanding VAT obligations, including reverse charge VAT, to avoid penalties.
Summary Table
| Criteria | Description |
|---|---|
| VAT Taxpayers | Importing goods or services where the supplier isn’t responsible for VAT |
| Tax-Exempt Goods | Certain exempt financial services, transportation, and residential properties |
| Non-VAT Taxpayers | Must pay VAT on imports subject to reverse charge |
| VAT Deregistration | Must still account for reverse charge VAT before deregistration finalization |
Steps to Apply the Reverse Charge Mechanism
Correct implementation is essential for accurate VAT return filing.
1. Assess Taxable Transactions
Review all transactions and identify which ones fall under the reverse charge. Follow FTA guidelines to avoid classification mistakes.
2. Apply Reverse Charge Accounting Procedures
- Issue reverse charge invoices
- Apply the correct VAT rate (usually 5%)
- Record the VAT in both the output and input VAT sections (often resulting in no cash outflow if fully recoverable)
3. Maintain Documentation
Keep accurate records, including:
- Import documents
- Reverse charge invoices
- Supplier contracts
- Customs declarations
Good documentation protects you during VAT audits.
Read more: How to Register for VAT in UAE for New Company?
Common Challenges and How to Solve Them
1. Identifying Applicable Transactions
Many businesses struggle to identify when the reverse charge applies. Stay updated with FTA guidelines and use internal checklists to avoid mistakes.
2. Handling Compliance Issues
Strong internal controls are essential. This includes:
- Proper accounting workflows
- Staff training
- Internal VAT reviews
- Consulting VAT experts for complex cases
Timely compliance prevents penalties and incorrect VAT filings.
FAQs about Reverse Charge Mechanism in UAE
What is the RCM rule in UAE?
The Reverse Charge Mechanism (RCM) in the UAE requires the buyer (recipient of goods or services) to account for VAT instead of the supplier, mainly for imports and certain designated local supplies.
What is the reverse charge mechanism?
The reverse charge mechanism shifts the responsibility of reporting and paying VAT from the supplier to the buyer when the supplier is not registered or not required to register for VAT in the UAE.
What is RCM in GST with an example?
RCM under GST means the buyer pays tax instead of the seller. For example, if a business imports consulting services from outside the UAE, the local business must account for VAT on that service.
What is reverse charge with an example?
Reverse charge applies when the buyer reports VAT on behalf of the supplier. For example, when a UAE company buys goods from a foreign supplier, the UAE business must calculate and pay the VAT due.
Who pays the VAT on reverse charge?
The buyer pays the VAT directly to the UAE Federal Tax Authority (FTA) through the VAT return instead of the supplier charging VAT on the invoice.
How to comply with reverse charge rules?
To comply, businesses must identify RCM transactions, calculate VAT on the value of the supply, record it in VAT returns (output and input), and keep proper documentation such as contracts and invoices.
Who pays GST in reverse charge?
Under reverse charge, the buyer or recipient of goods or services pays GST instead of the supplier who would normally charge it.
Is VAT reverse charge mandatory?
Yes, VAT reverse charge is mandatory for imports of goods and services and for specific items listed under UAE VAT law, such as certain supplies in the oil and gas sector and specific metals.
Does reverse charge apply to labour only?
Reverse charge does not automatically apply to all labour services. It only applies when the supply type falls under designated RCM categories or when services are imported from outside the UAE.
Is reverse charge mandatory?
Yes, reverse charge is mandatory for all transactions specified by VAT law, especially cross-border supplies and certain local supplies defined by the FTA.
How do you calculate reverse charge VAT?
Reverse charge VAT is calculated by applying the UAE VAT rate (usually 5%) to the value of the imported goods or services. The same amount is recorded as output VAT and, if eligible, reclaimed as input VAT.
How is reverse charge different from standard VAT?
Under standard VAT, the supplier charges VAT to the buyer. Under reverse charge, the buyer self-accounts for VAT instead of the supplier issuing a VAT-charged invoice.
Resources:
FTA Guides, References & Public Clarifications
Taxable Person Guide for Value Added Tax (VATG001)
FTA Public Clarification (e.g. for Electronic Devices: RCM on certain supplies)
Recent FTA Clarification on Imported Services (VATP044)
Disclaimer: This publication is for informational purposes only and should not be considered professional or legal advice. While we strive for accuracy, we make no guarantees regarding completeness or applicability. mazeed, its members, employees, and agents do not accept or assume any liability, responsibility, or duty of care for any actions taken or decisions made based on this content. For official guidance, please refer to the UAE Ministry of Finance and the Federal Tax Authority.
