Let's Talk UAE VAT | Reverse Charge Mechanism | Part II

Hi Mates,

Greetings!

I believe in the philosophy of building things simple yet impactful for the business users.

Back to action, in this blog post, I would like to highlight the reverse charge mechanism(RCM) and will try my level best to explain the complete end to end process.

First come first, What is Reverse Charge Mechanism(RCM)?

RCM Applied: RCM is applicable when imports are made from outside UAE and Vendor is from another country, which may or may not have a business in UAE.

RCM Not Applied: If all purchases are made locally, the reverse charge is not applicable.

Article (48) (1) Reverse Charge 

1) If the Taxable Person Imports Concerned Goods or Concerned Services for the purposes of his Business, then he shall be treated as making a Taxable Supply to himself and shall be responsible for all applicable Tax obligations and accounting for Due Tax in respect of these supplies.

Points to Remember

• RCM is applicable only for purchase not for sales
• We need to show RCM transactions in our VAT returns
• The responsibility for reporting of a VAT transaction is shifted from the seller to the buyer.
• Under Reverse Charge Mechanism. Here the buyer reports the Input VAT (VAT on purchases) as well as the output VAT (VAT on sales) in their VAT return for the same quarter.
• The reverse charge is the amount of VAT one would have paid for that goods or services if one had bought it in the UAE.
• Reverse Charge Mechanism eliminates the obligation for the overseas seller to register for VAT in UAE.

 Step by Step

Prerequisite setup for RCM in Microsoft Dynamics AX2012R3

Sales Tax Code

• Create sales tax groups for RCG (reverse charge mechanism)
• Select the sales tax code in setup fast tab

• Sales tax code value, in percentage, has been created for RCG standard (+5%) and RCG negative (-5%)

 Sales Tax Group

• Below is the screenshot for sales tax groups, sales tax codes associated with setup fast tab.

 RCM Business Process:

• Create the purchase order for Vendor outside UAE, Sales tax group(RCM) must be selected for Vendor
• Select the standard item in purchase order line, item sales tax must be associated with item master.
• Confirm the purchase order, system will automatically pick the value (+5% and -5%) for RCM defined in the item sales tax codes

• Invoice the purchase order, below is the screenshot

• Because of RCM, the net value of VAT receivable account is zero. Below is the purchase invoice voucher for RCM

Posted Sales Tax

• In the posted sales tax form, the system is maintaining the record for all the VAT transactions.
• Business user can search the RCM transactions in this form with voucher number
• VAT transaction is available with the sales tax codes, we can use this form for report customization as well

 Path: GL> Inquiries> Tax> Posted sales tax

Your feedback and blessing will definitely enhance the quality of this article.

Look forward with great anticipation 

Cheers!

Ali Danish