In the UAE VAT system, the Reverse Charge Mechanism (RCM) plays a critical role in ensuring that VAT is properly accounted for when goods or services are purchased from abroad or from suppliers not registered for VAT in the UAE. Despite being one of the core VAT concepts, many businesses still misunderstand how and when it applies — leading to reporting errors and potential penalties.
What Is the Reverse Charge Mechanism?
Under the RCM, the responsibility to report and pay VAT shifts from the supplier to the recipient (the buyer).
In simpler terms — when a business in the UAE buys goods or services from a foreign supplier or a non-registered entity, the UAE buyer must self-account for VAT as if they were both the supplier and the customer.
This mechanism ensures that imported goods and services are taxed in the UAE, maintaining neutrality between local and foreign suppliers.
When Does RCM Apply?
The RCM applies in several cases, as outlined under Article 48 of the UAE VAT Decree-Law and the Executive Regulations:
- Import of goods or services from outside the UAE.
- Purchases from non-resident suppliers who are not VAT-registered in the UAE.
- Transactions involving designated zones (when goods move into the mainland).
- Specified local supplies — such as certain precious metals and electronic devices, as per Cabinet Decision No. 127 of 2024 and Public Clarification VATP043.
How to Account for RCM in Books
When an RCM transaction occurs, the UAE business must:
- Record output VAT (as if selling to itself).
- Simultaneously record input VAT, if eligible for recovery.
- Report both amounts in the VAT return — the net impact is usually zero if input VAT is fully recoverable.
Example:
A UAE company imports services worth AED 10,000 from a UK consultant.
- Output VAT (5%) = AED 500
- Input VAT (recoverable) = AED 500
- Net VAT impact = AED 0
However, both entries must appear in the VAT return, typically in Box 3 (Imports subject to RCM) and Box 10 (Recoverable Input VAT).
Common Mistakes Businesses Make
- Failing to apply RCM when buying from foreign or non-registered suppliers.
- Recording imports as normal local purchases.
- Not including both output and input VAT in the return.
- Missing documentary proof (invoices, import declarations, contracts).
Such errors can result in VAT under-declaration penalties and complications during FTA audits.
Finzoryx Insight
At Finzoryx, we’ve noticed many small and mid-size businesses overlook RCM transactions simply because payments go through bank transfers or online subscriptions. These are still taxable imports and must be declared in the VAT return — even if no physical goods enter the UAE.
Final Thought
Proper understanding and application of the Reverse Charge Mechanism can save businesses from costly penalties and compliance stress.
If you’re unsure whether your cross-border transactions trigger RCM, seek professional advice before filing your VAT return.
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