Reverse Charge VAT might sound complicated and bureaucratic, but in reality, it provides a significant cash flow relief for importers of goods. It will also make life a lot easier if you want to sell your services to customers in other GCC countries once the common GCC VAT framework is fully implemented.
The different country VAT Laws cover multiple scenarios where the Tax Payers are required to apply the Reverse Charge Mechanism. For instance, in UAE Reverse Charge is applied on all import of goods and services from outside UAE by VAT registered entities. In Saudi Arabia, however Reverse Charge is not automatically applied on import of goods, but only if the company applies for special approval to apply Reverse Charge. In Bahrain, Reverse charge is applied not only in case of imported purchases, but there is also a Domestic Reverse Charge Mechanism in specific cases!
The challenge however is in proper accounting and reporting of Reverse Charge transactions in order to be compliant.
What is Reverse Charge?
What is Reverse Charge?
Normally, the supplier of a service is the person who must account, to the tax authorities, for any VAT due on the supply. In reverse charge situations, instead of the supplier of the service, it is the customer who must account for any VAT due to the tax authorities.
Under Reverse Charge accounting, you simply credit your VAT account with an amount of output tax, calculated on the full value of the supply you have received and at the same time debit your VAT account with the input tax to which you are entitled. If you do not make any exempt supplies and can therefore reclaim the entire input VAT, the reverse charge has no net cost to you.
Reverse Charge Accounting - Process Challenges
Reverse Charge Accounting — Process Challenges
So if reverse charge is so simple, what is the issue? The issue is awareness of the Reverse Charge rules and the timely accounting and reporting to ensure correct VAT compliance. Reverse Charge is a very tax technical and accounting concept which has no impact on the commercials of the transaction between the supplier and the customer — so many companies struggle to set up a standard process to comply with the Reverse Charge rules. The solution is to automate the reverse charge accounting in your financial system or ERP - but it is widely known that ERP vendors are usually expensive when you request custom changes to setups.
This is where Emtax can help. Emtax is a SaaS platform so you do not spend on IT CAPEX to make custom changes in the ERP systems. At a nominal subscription charge, you get access to the right Reverse Charge compliance without any IT spend.
How can Emtax help with Reverse Charge compliance?
The Emtax’s Tax Engine comes with predefined reverse charge rules based on the country VAT Laws issued by the GCC Countries. These rules are regularly updated for any clarifications and guidance issued by the tax authorities.
When you upload your purchases data into Emtax, the Tax Engine automatically computes Reverse charge on applicable transactions.
Shows the Emtax Summary Form including the Reverse Charge transactions
Emtax not only helps with the determination of the Reverse charge, it also places it in the relevant box in VAT Return form of each country. For example, the way reverse charge is reported in the Return form in UAE is different to the requirements in the return forms of Saudi Arabia and Bahrain- which is already addressed in Emtax Country specific modifications.
Disclaimer: Content posted is for informational & knowledge sharing purposes only and is not intended to be a substitute for professional advice related to tax, finance or accounting. The view/ interpretation of the publisher is based on the available Law, guidelines and information. Each reader should take due professional care before you act after reading the contents of that article/ post. No warranty whatsoever is made that any of the articles are accurate and is not intended to provide, and should not be relied on for tax or accounting advice.
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