REVERSE CHARGE MECHANISM AND FORM VAT 301-IN UAE

By Alia Noor, FCMA, CIMA, MBA, Oxford fintech programme, GCC VAT Comp Dip,COSO Framework.
Associate Partner Ahmad Alagbari Chartered Accountants, UAE 
Founder xpertsleague

 

What is Reverse Charge Mechanism (RCM) ?

In a typical business, the supplier supplies goods and collects VAT on behalf of the customers, which is later paid to the government. Under reverse charge mechanism, the buyer or end customer pays the tax directly to the government.  

The supplier does not have to pay VAT on import items, so the obligation of reporting a VAT transaction is shifted from the seller to the recipient. The recipient will have to record the VAT on purchases (input VAT) and the VAT on sales (output VAT) in their VAT return each quarter.

Why Reverse Charge Mechanism?

Reverse Charge Mechanism is incorporated in UAE VAT Law with a view to avoid tax evasion on any taxable supplies.

If the supplier does not possess business in UAE, tracking transactions and ensuring VAT compliance is not practical option for FTA. Hence, recipients of taxable supplies who are residents of the UAE are made to pay VAT on reverse charge basis. It mainly applies on cross-border transactions and eliminates the obligation for the overseas seller to register for VAT in the UAE.

Exceptions: –

  • When goods are imported with the intention of transferring the same to another GCC State, the place of supply of import is still the UAE, but
  • The importer must pay import VAT without availing the reverse charge and cannot recover this VAT
  • This import VAT is recoverable in the GCC State to which the goods are transferred
  • When the import VAT was recovered in the UAE under the expectation that goods would not be transferred to another GCC State, but at a later date if they are moved to another GCC State, the importer will be required to “repay” the import VAT by treating the transfer as a deemed supply subject to VAT.

 

When RCM becomes applicable in the UAE?

“In the context of the UAE, reverse charge is only applicable if purchases are made outside the UAE. If all purchases are made locally, reverse charge is not applicable,” 

Reverse charge is applicable in the following cases:

  • 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. 
  • Purchase of goods from a designated zone
  • Supply of gold and diamonds 
  • Purchase of gold and diamonds for resale or further production/manufacture 
  • 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
  • Production and distribution of any form of energy supplied by a registered supplier to a registered recipient in the UAE

Note: Reverse charge mechanism is not applicable on the export of gold and diamonds, supply of investment precious metals (platinum or gold with purity greater than 99% that is tradable in global markets), and export of products where the main component is gold or diamonds.

Responsibilities of Importer under the RCM

Businesses should calculate the amount of tax to be paid to the Federal Tax Authority (FTA), self-account the VAT amount as output tax during the purchase and then declare it in their VAT return.

  • The receiver of the goods or services must be registered for VAT.
  • Determine the value on which tax needs to be levied
  • Account the VAT due on reverse charge supplies
  • Remit VAT to the government
  • Claim Input Tax, if eligible.
  • Maintain the records such as invoice and other documents to substantiate the tax payment and input tax claim
  • Invoices, receipt vouchers, and refund vouchers should all specify whether the tax payable for that particular transaction is through reverse charge

Treatment of Reverse charge Mechanism in Filing VAT Return

The value of supplies of goods and services under Reverse Charge Mechanism should be declared separately. The value of goods imported into UAE will be auto-generated to the extend it was declared under the Taxable Person’s customs registration number. 

FTA and Custom Department collaboration on VAT collection on Imported Goods in the UAE 

The RCM provision helps the Importers to link their Customs account with TRN makes more transparency in Imports. 

The Federal Tax Authority (FTA) and the UAE Customs Departments are working in collaboration to collect VAT on the import of goods.  This means that where a business is registered for VAT, it should provide its VAT registration number (also known as a Tax Registration Number or TRN) to the Customs Department at the point of submitting the Customs import declaration.  The Customs Department will verify the validity of the TRN on their system, and where the TRN is valid the shipment will be cleared without payment of the VAT being required at import.

 

Since the implementation of VAT in UAE, the VAT301 form has been available on e-services portal to manually process the VAT payment on Customs Declarations using the Tax Registration Number (TRN).

Recently, FTA has communicated that form VAT301 will be discontinued on 23 February, 2021 for users who have a valid TRN and were using this form earlier for settlements via their VAT returns.

Anyone registered for VAT purposes and having a valid TRN, in order to continue being able to import goods via Customs, ensure that your
Customs Registration Numbers (CRN’s) are linked to your Tax Registration Number (TRN).

If you do not have a CRN, ensure you register with the Customs Department and link your CRN with TRN. Alternatively, you will only be able to import goods via a clearing company registered with the FTA or use form VAT301 to utilize the payment option.

If you are from those whom the condition and rules applies on as it is shown below :-

1– Designated entities exempted by FTA.
2- Free zone Companies that exports through land to GCC Countries from designated zones[AHA1] for the VAT purpose.
3- FTA accredited Shipping and Clearance Agencies to clear shipments of on behalf of registered/non-registered importers with FTA.

 

NOTE: You can request to open form VAT301 for VAT settlements based on customs declarations through FTA’s online services. To submit application download VAT-301-SETTLEMENT-ACCESS-FORM

This will need to be filled and sent to VAT301application@tax.gov.ae along with applicable documents such as sample GCC transit customs declarations for review and approval.

What if your TRN is not Recognized on the Customs Department system

If you find yourself in the situation where your TRN is not recognized on the Customs Department system as valid, you should take the following action:

  • Login to the FTA eServices portal using the credentials associated with your TRN;
  • Navigate to the ‘VAT’ section on the navigation bar at the top of the page;
  • Click on the form “VAT301 – Import Declaration Form for VAT Payment”.  This is the form which is normally used in the case of non-VAT registered importers;
  • Enter the port of entry, customs declaration number, and declaration date, then click next;
  • On the next screen, click the button to “Fetch associated registration number”.  This will populate the TRN in the declaration form;
  • Complete the remainder of the declaration form and click submit;
  • You will then be taken to a number of payment options.  By having a used the option to “Fetch associated registration number”, you should now see the option to defer the payment of VAT to the tax return.  Click this option and submit the form.

Accordingly, FTA will electronically update the customs declaration at the customs department that the VAT payment has been completed.This process might need to be followed for certain times until the FTA has updated your TRN on the Customs Department. And once its resolved businesses should be able to clear the shipments on the basis of including TRN on the customs import declaration.

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