UAE implements reverse charge mechanism on supply of electronic devices

Background

On 25 August 2023, the United Arab Emirates (UAE) Cabinet of Ministers issued Cabinet Resolution No. (91) of 2023 which implements a domestic reverse charge mechanism on the supply of electronic devices.

The Cabinet Decision is issued in accordance with article 48 of the UAE VAT Law, which allows the Cabinet to specify which goods and services are subject to the reverse charge mechanism, as well as the relevant conditions.

 

Electronic devices

Electronic devices are defined as: mobile phones, smart phones, computers, tablets, and their parts and components.

The Minister of Finance is to issue a decision to define the term ‘parts and components’ of the electronic devices, as this will further delineate the scope of the new reverse charge mechanism.

 

Reverse charge mechanism

In a domestic context, the “reverse charge mechanism” serves as a simplification measure, primarily designed to streamline VAT accounting procedures between VAT-registered entities within the same jurisdiction. Under this mechanism, the supplier of goods or services does not account for VAT on a taxable supply. Instead, the VAT-registered recipient of the supply is responsible for accounting for the VAT, treating it as output tax at the applicable rate, which is subsequently declared in their VAT return. This essentially means that the recipient self-accounts for the VAT in respect of the received goods or services, and this output tax may then be reclaimed by the recipient as input tax, subject to the prevalent input tax recovery rules applicable to the recipient. This domestic adaptation of the mechanism ensures compliance, mitigates tax fraud risks, and negates the need for the supplier to charge and remit VAT, placing the onus on the recipient.

 

Objective

The implementation of a domestic reverse charge mechanism, particularly on the supply of items like electronic devices, can have several motivations from a tax policy perspective.

• One of the most significant reasons for the adoption of the reverse charge mechanism is to mitigate the risk of VAT fraud, especially carousel fraud (also known as “missing trader” fraud). This kind of fraud occurs when a company purchases goods VAT-free, sells them with VAT added, and then disappears without remitting the VAT collected to the government. By shifting the VAT payment responsibility to the recipient, the opportunity for this type of fraud is substantially reduced.
• The reverse charge mechanism can help alleviate cash flow pressures on businesses. Instead of the supplier charging, collecting, and then remitting VAT to the government, the buyer directly accounts for it, which can streamline the process, especially for business-to-business (B2B) transactions.
• Certain sectors, such as electronics, can be particularly susceptible to rapid movement of goods and the associated VAT fraud risks. By implementing reverse charges on high-risk sectors, this may significantly reduce the risk of VAT fraud.

 

Conditions

The new reverse charge mechanism will apply where the following conditions are met:

• Condition 1: a VAT registered supplier makes a supply of electronic devices to a registered recipient in the UAE (B2B supply);
• Condition 2: the recipient intends to resell or use such devices to produce or manufacture electronic devices;
• Condition 3: before the date of supply, the recipient has provided the supplier with a written declaration stating (1) that the electronic devices will be used for resale or the production or manufacturing of electronic devices, and (2) that the recipient is registered for VAT purposes with the Federal Tax Authority; and
• Condition 4: the supplier should receive and retain the declaration received from the recipient and verify that the recipient is registered for VAT purposes according to the ways approved by the Federal Tax Authority in this regard.

If the above conditions are met, then the supplier is relieved from the responsibility of calculating and recording the tax related to the supply of electronic devices in their tax return. Conversely, the recipient of the electronic devices is tasked with calculating the tax on the value of the supplied devices and assumes responsibility for all resultant tax liabilities and the payment of the due tax thereon.

The Cabinet Decision explicitly stipulates that the reverse charge mechanism is not applicable to exports that are zero-rated. This clarification, although seemingly evident, appears to be aimed at preventing any potential ambiguity. Presumably, the intention of the legislator is to avoid any uncertainties regarding whether a zero-rated export of electronic devices should be accounted for in the VAT return of the supplier.

 

Effective date

The Cabinet Decision was promulgated in the Official Gazette No. (758), dated 30 August 2023 and will come into force sixty (60) days following its publication date. As such, the Decision will be effective from 30 October 2023.

 

Key takeaway

Cabinet Resolution No. (91) of 2023 introduces a new VAT reverse charge mechanism on the supply of electronic devices within the UAE. It is crucial for suppliers, distributors, producers, manufacturers and importers dealing with electronic devices to be aware of this change in VAT treatment when dealing with business customers. The reverse charge mechanism will come into effect on 30 October 2023 so the aforementioned businesses should act promptly to align their processes and make the necessary adjustments in their accounting and reporting systems to avoid any discrepancies and ensure compliance with the new provisions. This proactive approach is essential to navigating the changes efficiently, maintaining streamlined business operations and avoiding penalties.