Andersen

2021/09/29

Reverse Charge Mechanism Definition

The reverse charge mechanism is defined according  to the GCC VAT agreement whereby a taxpayer is obligated to pay the tax due on behalf of a non-resident supplier, and is responsible for all obligations specified in this agreement.

Reverse Charge Mechanism Application

The reverse charge mechanism is applied to all taxable services received by the taxpayer (customer) from a non-resident supplier in any of the GCC countries, including the services received from a person residing in another member state until the implementation of the electronic services system between the GCC. However, the RGM does not apply to the imported goods because the customer pays the value-added tax through the customs authority. Accordingly, value-added tax is imposed on all services supplied in the Kingdom and provided to a taxpayer by a non-resident supplier.

A non-resident supplier is a supplier who does not have a permanent establishment or place of business in the Kingdom. Whereas, the permanent establishment is the main place for business activities where human and technical resources are permanently located which allow to supply or receive goods or services.

The reverse charge mechanism does not apply to the following:

• The receipt of exempted services such as financial services from a non-resident supplier is not considered a taxable supply and is not included in the tax return.

• If the supply of taxable goods or services is provided by a non-resident supplier to a tax-exempt person in the Kingdom, this supply is subject to normal tax rules in the Kingdom. Furthermore, the non-resident supplier will be obligated to register for VAT and the tax will be imposed on all supplies.

Tax deduction mechanism and due dates

According to reverse charge mechanism, VAT rules is applied to supplies made on the date of supply of services, the date of issuance of the tax invoice, or on partial or full receipt of the amount received, whichever comes first.

The declaration of the calculated value-added tax according to the reverse charge mechanism is a condition for deduction. The VAT deduction applies on all taxable goods or services received by the taxpayer. As a result, VAT will be considered as an input tax only for clients who calculate the tax by themselves according to the RGM. As for the customers who are subject to tax in full or who receive taxable goods or services for use, then no VAT will be paid.