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Charging VAT a 'condition' or a 'right'?

Dubai - If a non-resident supplier is already VAT-registered, a question arises as to who should discharge the VAT responsibility - the actual supplier or the UAE-resident recipient?

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

I often come across invoices from non-resident suppliers including some of the leading software companies. The invoices mention their corresponding UAE Tax Registration Number (TRN) but no VAT is charged on such invoices. The non-resident suppliers assume that Reverse Charge Mechanism (RCM) applies on such supplies. Such a tax position exposes them to significant VAT risks.

Responsibility of VAT

VAT is imposed on every taxable supply by a VAT-registered person. The responsibility of VAT is on the VAT-registered person who makes such supplies. If a UAE-resident recipient is VAT registered and imports services from outside UAE. for its business purposes, then such recipient shall be treated as making a taxable supply (to himself). The recipient (instead of the non-resident supplier) will be responsible for the VAT compliances. This is generally referred to as RCM.

However, if a non-resident supplier is already VAT-registered, a question arises as to who should discharge the VAT responsibility – the actual supplier or the UAE-resident recipient?

Scope of RCM on services

RCM applies as per the conditions and instances specified in the VAT Executive Regulations. An important condition for RCM to apply on 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 whether RCM applies. It is not give a ‘right’ to the non-resident suppliers to opt out from charging VAT.

The non-resident software companies often confuse this important condition as a right to voluntarily decide when to charge VAT or not.

If a non-resident supplier is not already VAT-registered, it will not be able to charge VAT on B2B supplies to VAT-registered recipients. Only in such scenarios, RCM will apply. As per the registration thresholds, the non-resident supplier need not ever register for future B2B supplies due to RCM.

However, once VAT-registered, no exceptions from charging VAT have been provided under the VAT laws or guidance to the non-resident suppliers.

FTA guidance clarifies that RCM is a simplification measure to avoid the need for non-resident suppliers to register for VAT. In other words, the simplification is only aimed up to VAT registration and does not extend to the obligation to charge VAT after registration.

Tax complications for non-resident suppliers

The non-resident suppliers are required to register for VAT and undertake VAT compliances for even one dirham of B2C supplies i.e. supplies to unregistered recipients. Once registered, the non-resident suppliers appear to continue to opt out from charging VAT if the UAE-resident recipient provides a TRN.

Risks exists in the verification of TRN/registration status of 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 is at a risk of tax defaults as the customer will not account for RCM VAT and the government will lose tax revenue.

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

It is interesting to note that the RCM position in the UK and corresponding tax guidance is different as the UK VAT laws are worded very differently.

For non-payment of UAE VAT despite being VAT-registered, the non-resident suppliers could be liable for potential tax arrears and penalties. Such a financial exposure could not only eat into the profit margins but also attract bad press.

An application to the tax authorities for a clarification on the issue, or a general clarification from FTA, would immensely help the suppliers and/or the entire industry.

The writer is the managing director of AskPankaj Tax Consultants. Views expressed are his own and do not reflect the newspaper’s policy.