Reverse Charge Mechanism Case Study Under UAE VAT Law
Reverse Charge Mechanism (RCM) under UAE VAT Law is one of the tax treatments applicable to import on concerned goods and concerned services. In Reverse Charge Mechanism (RCM) under UAE VAT Law, the supplier does not charge VAT to the customer, instead, the buyer or end customer pays the tax directly to the government authority. The supplier does not have to pay VAT on import items. Hence, the obligation of reporting a VAT transaction is shifted from the seller to the recipient.
Applicability of Reverse Charge Mechanism under UAE VAT Law
- Import of goods/services from other GCC and non-GCC countries. The supplier of these goods/services must be located in another country and they may or may not have a business in the UAE.
- Supply of hydrocarbons for resale by a registered supplier to a registered recipient in the UAE
- Supply of crude/refined oil by a registered supplier to a registered recipient in the UAE
- Supply of processed/unprocessed natural gas by a registered supplier to a registered recipient in the UAE.
Case Study on Reverse Charge Mechanism under UAE VAT Law: Facts of the Case
ABC LLC a registered supplier in UAE purchased diesel from XYZ LLC a local supplier amounting to AED 175,000/- for the purpose of trading it locally. Further, ABC LLC resells the diesel to its walk-in customer.
In this case who has the responsibility of recording and accounting the VAT on the supply of diesel?
Let us identify the applicable provisions of the Federal Decree-Law related to the transaction and understand the Taxability in detail.
Any Purchase of crude oil or refined oil, natural gas (processed or unprocessed), or hydrocarbons for processing and resale by a registered supplier to a registered buyer in the UAE is subject to reverse charge mechanism as per the UAE VAT Law.
What is the Reverse Charge Mechanism under UAE VAT law?
In the reverse charge mechanism, the seller of the goods need not charge VAT on the supply of goods. The buyer or the end customer has to report and account for VAT. The obligation of paying the tax will shift from the seller to the buyer/recipient. The buyer will then record the VAT Transaction on purchases (input vat) and sales (output vat) in their VAT return in the respective VAT Return period.
The taxability for oil & natural gas will vary for export sale or a local supply of goods as per the UAE VAT Law.
There are two VAT rates applicable to the supply of Oil & Natural gas in UAE:
- The local supply of crude oil & natural gas is zero-rated (0%)
- The local supply of non-crude oil & natural gas is taxable at a standard rate (5%)
- Export of oil & gas products are subject to zero rates (0%)
Reference for Reverse Charge Mechanism under UAE VAT Law
As per Article 48 (3) of Federal Decree-law No. (8) of 2017on Value Added Tax for Reverse Charge mechanism:
If a Registrant makes a Taxable Supply in the State to another Registrant of any crude or refined oil, unprocessed or processed natural gas, or any hydrocarbons, and the Recipient of these Goods intends to either resell the purchased Goods as crude or refined oil, unprocessed or processed natural gas, or any hydrocarbons or use these Goods to produce or distribute any form of energy, the following rules shall apply:
- The Registrant making the Supply shall not charge Tax on the value of the supply of the Goods referred to in this paragraph.
- The Recipient of the Goods shall calculate the Tax on the value of the Goods supplied thereto and shall be responsible for all applicable Tax obligations and for calculating the Due Tax in respect of such supplies.
As per Article 48 (5) of Federal Decree-law No. (8) of 2017on Value Added Tax for Reverse Charge mechanism:
Where a Recipient of Goods of any crude or refined oil, unprocessed or processed natural gas, or any hydrocarbons confirm in writing to the supplier that he is a Registrant for the purposes of applying Clause (3) of this Article, the following shall apply:
- The supplier shall not be liable for calculating the Tax in relation to the supply unless he was aware or supposed to be aware, that the Recipient was not a Registrant at the Date of Supply.
- The Recipient shall be liable for the calculation of any Due Tax in respect of the supply.
Applicability of the provisions of the UAE VAT Law in the current scenario:
As mentioned above in Article 48(3b) of the Federal Decree-Law it is understood that the recipient of the goods shall calculate and pay the tax to the government.
In the current scenario, ABC LLC is the recipient. Hence, they have to report and account the tax due and disclose it in their VAT returns. Further, XYZ LLC (registrant) shall not charge Tax on the value of the supply of the Goods but has to ensure and get a written confirmation from the recipient ABC LLC stating that the diesel will not be used for consumption and it will be used for the purpose of resale in the local market.
Also, the registrant (XYZ LLC) has the obligation to check the Tax Registration of the recipient (ABC LLC) in order to confirm that he is a registered supplier in the UAE.
The registrant XYZ LLC need not charge VAT on the supply of diesel to ABC LLC and such sale will be out of scope for XYZ LLC.
If the registrant (XYZ LLC) fails to fulfill the responsibility, then they have the liability to pay the VAT to the authorities.
In the second scenario when ABC LLC resells the diesel to their walk-in customer, ABC LLC will have to submit the VAT returns disclosing it under box number 3and box number 10 (reverse charge mechanism).
In this second case between ABC LLC and the customer, diesel will be taxable at a standard rate (5%).
Considering the transactions explained and the provisions of the UAE VAT Law discussed above, XYZ LLC need not charge VAT from the recipient ABC LLC. The recipient ABC LLC will record the transaction under reverse charge mechanism and they need to book this sale under box number 3 and box number 10 in their respective VAT return.
In the second transaction between ABC LLC and their walk-in customer, we understand that the customer used the diesel for consumption. Hence the responsibility of reporting and accounting the tax will be of the supplier ABC LLC. so, supplier ABC LLC has to charge VAT at the standard rate of 5% and book it under standard-rated supplies (box number 1) in their VAT return.
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