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(MENAFN – Khaleej Times)

Ever since Value Added Tax (VAT) was implemented in the UAE, the implications of VAT on non-resident suppliers have puzzled everyone.

I often come across invoices from non-resident vendors, including some of the major software companies. Invoices show their corresponding United Arab Emirates Tax Registration Number (TRN), but no VAT is charged on these invoices. Non-resident suppliers assume that the reverse charge mechanism (SCM) applies to these supplies. Such a tax position exposes them to significant VAT risks.

VAT liability

VAT is imposed on each taxable delivery made by a person subject to VAT. Responsibility for VAT rests with the person subject to VAT who makes these deliveries. If a UAE resident beneficiary is VAT registered and imports services from outside the UAE. for his business purposes, this recipient is then considered to be making a taxable supply (to himself). The recipient (instead of the non-resident supplier) will be responsible for VAT compliance. This is generally referred to as RCM.

However, if a non-resident supplier is already registered for VAT, the question arises as to who should bear the VAT liability – the actual supplier or the UAE resident beneficiary?

Scope of RCM on services

The RCM applies according to the conditions and cases specified in the Executive VAT Regulations. An important condition for the RCM to apply to UAE resident recipients is that the non-resident supplier does not charge VAT on the supply.

It is a “condition” for the recipients to test if the RCM applies. This is not about giving a “right” to non-resident suppliers to refuse to charge VAT.

Non-resident software vendors often confuse this important condition with the right to voluntarily decide when to charge VAT or not.

If a non-resident supplier is not already subject to VAT, he will not be able to charge VAT on B2B deliveries to recipients subject to VAT. Only in such scenarios will RCM apply. In accordance with registration thresholds, the non-resident supplier never needs to register for future B2B supplies due to RCM.

However, once VAT is recorded, no exceptions to VAT invoicing have been made under VAT laws or guidelines for non-resident suppliers.

The FTA guidelines specify that the RCM is a simplification measure designed to prevent non-resident suppliers from having to register for VAT. In other words, the simplification only covers up to VAT registration and does not extend to the obligation to collect VAT after registration.

Tax complications for non-resident suppliers

Non-resident suppliers are required to register for VAT and comply with VAT even for one dirham of B2C supplies, i.e. supplies to unregistered recipients. Once registered, non-resident suppliers appear to continue to refuse to charge VAT if the UAE resident recipient provides a TRN.

Risks exist in verifying the TRN status / registering recipients. For example, a taxpayer’s registration details are available on the TRN verification module of the FTA portal during the entire deregistration process. In such cases, the non-resident supplier runs a risk of default as the customer will not account for RCM VAT and the government will lose tax revenue.

Once registered, it would be rather administratively convenient for these suppliers to charge VAT on all supplies instead of keeping contemporaneous records of customers’ VAT registration status for each supply / invoice.

Interestingly, RCM’s position in the UK and the corresponding tax guidelines are different, as UK VAT laws are worded very differently.

In the event of non-payment of UAE VAT despite their VAT registration, non-resident suppliers could be held liable for possible back taxes and penalties. Such financial exposure could not only eat into profit margins, but also attract bad press.

A request to the tax authorities for clarification on the matter, or a general clarification from FTA, would help suppliers and / or the entire industry immensely.

The author is the Managing Director of AskPankaj Tax Consultants. The opinions expressed are his own and do not reflect the policy of the newspaper.

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