Reverse Charge Mechanism in KSA
Reverse Charge Mechanism, also known as RCM is a mechanism where the end consumer pays the tax directly to the government. The reverse charge mechanism is a very common approach for VAT or GST tax regimes all over the world.
So when is reverse charging of VAT required? It is needed when you get an item that has no tax levied on it but the VAT is unpaid. One example is the sale of service outside Qatar where the VAT is out of sight, which means no tax is actually on the invoice. Incase you buy the service from overseas, it should appear cheaper but that doesn’t happen. This is when the reverse charge mechanism comes into play. Any product procured from overseas needs to have the domestic tax rate applied, which eventually means that there is no financial advantage even if you procure the product from overseas.
The buyer will have to account VAT on sales and purchases in their VAT return for every month. The VAT accounted by the buyer will be reduced as input VAT on the same VAT return.
Application of Reverse Charge
There are situations when Reverse charge has to be applicable and such situations require the help of this function. Imported services do not go through the customs department so VAT cannot be collected at an airport or a border.
The buyer accounts for input VAT on the transaction using the reverse charge mechanism. To understand the mechanism better, let’s look at an example using an imported service:
Melissa is unregistered in Saudi Arabia, so she does not have to file any VAT returns or pay KSA tax. However, Ahmad is a KSA taxpayer and has acquired services from a non-KSA-based software store, so he must record the reverse charge for the transaction on his relevant VAT return.
When a taxable person receives services from a non-resident, the taxable person must accumulate the amount of VAT which is calculated by the reverse change mechanism.
Need of Reverse Charge Mechanism
The reverse charge mechanism is very important when you procure an overseas product as the domestic tax rate is applied. Any financial benefit you get by purchasing services overseas removes its financial advantage.
Online services
The VAT mechanism taxes the online services and if the consumer is a taxable person, the reverse charge method is applied. Incase the service provider is a non-resident, a person within their boundaries is appointed.
Online services are taxable under the VAT regime. If the recipient of the services is a taxable person, they will pay tax on a reverse charge basis.
If the service provider happens to be a non-resident, they appoint a representative within their boundaries.
Real estate
If a non-resident supplier supplies a VAT-registered person in KSA, VAT is levied on the supply and should be entitled by the supplier. As per the reverse charge mechanism, the recipient should now report VAT on their VAT return. Similarly, the non-resident supplier need not register under the VAT regime to report such supplies, nor do they need to issue VAT compliant tax invoices.
Reverse charge mechanism is a very powerful technique which is currently applied to many overseas purchases to make sure the financial benefits of the products doesn’t have any effect.
Source : Zoho
General Authority of Zakat & Tax
