Effective Monday, October 30, 2023, the Federal Tax Authority (FTA) and Value Added Tax (VAT) registrants under the FTA’s purview will initiate the implementation of a significant decision. This decision introduces the Reverse Charge Mechanism (RCM) for electronic devices supplied among tax registrants.
Under the Reverse Charge Mechanism (RCM), the responsibility for VAT liability on electronic devices, including mobile phones, smartphones, computer devices, tablets, and their respective components, will shift from the registered supplier to the registered recipient. This change occurs when these goods are intended for resale or utilization in the manufacturing of electronic devices.
As a result of this new mechanism, registered recipients will assume the responsibility for calculating VAT on such supplies. They are obliged to include this VAT in their Tax Return, thereby meeting specific tax obligations associated with these transactions.
This implementation marks a crucial step in VAT compliance for electronic devices, streamlining the process and ensuring that the appropriate party is responsible for VAT calculations and reporting. It is important for all affected parties to be aware of and adhere to these changes to ensure a seamless transition into the new VAT framework.
The Authority emphasized that the implementation of this Mechanism aligns with the Cabinet Decision concerning the Application of Reverse Charge Mechanism (RCM) on Electronic Devices for VAT purposes, which is slated to take effect on October 30, 2023.
The FTA affirmed that these recent amendments are part of an ongoing commitment to update legislative frameworks and tax procedures, ensuring they remain current and responsive to evolving dynamics. These changes aim to enhance the efficiency of the tax system, foster trust and collaboration between the Authority and taxpayers, and provide comprehensive support to taxpayers in fulfilling their tax obligations. Furthermore, these measures are expected to bolster the liquidity levels of registered investors and electronic device suppliers while concurrently lightening their tax burden.
In a recently issued Clarification accessible via the Public Clarifications service on the FTA’s official website, the Authority delineated the scope of the Decision, specifically covering “mobile phones and smartphones.” This includes devices encompassing basic call and text functions, as well as those with additional features. Notably, this Decision pertains exclusively to phones and devices operating via wireless transmission and does not encompass those functioning through physical means, such as wired or fiber optic cables.
The Cabinet Decision encompasses a wide array of computing devices, spanning personal computers, desktop computers, minicomputers, both analogue and digital computers, hybrid models, servers, and computerized engine control units (ECUs) designed for automotive applications, among other similar devices. Furthermore, it extends its coverage to tablets, which are essentially wireless, portable, personal computers featuring a touchscreen interface, blending the functionalities of both smartphones and traditional computers.
However, it’s crucial to note that the definition of electronic devices within this Decision excludes e-readers, provided they are marketed as such and lack additional features like gaming or web browsing capabilities.
As outlined in the clarification provided by the FTA, it’s essential to meet the specific requirements set forth in the Cabinet Decision. Failure to do so would result in the application of the standard VAT rule, where the supplier is obligated to calculate VAT. Nevertheless, this standard procedure may have the consequence of the registered recipient being unable to recover the input tax incurred.
In accordance with the clarification, the term “Resell” is interpreted as an integral component of the recipient’s business operations concerning electronic devices. The recipient’s resale activities can encompass both wholesale and retail levels, ensuring flexibility in their commercial operations.
The Reverse Charge Mechanism is not applicable when electronic devices are supplied to a recipient who is obtaining these devices for their internal business purposes, without the intention of using them for production, manufacturing, or resale. For instance, in scenarios where smartphones are procured for distribution among employees for their professional use, the Decision does not come into play. This holds true even if the employees are charged for the acquisition or use of these smartphones. Such internal distribution for employee use is not regarded as resale within the taxpayer’s trade activities.
The expression “producing or manufacturing” electronic devices, as stipulated in the Decision, encompasses both partial and complete production or manufacturing processes related to electronic devices. For instance, if a registered recipient acquires components, which are categorized as electronic devices, with the intention of assembling them into a part of an electronic device and integrating this into a semi-finished computer owned by another party, the Reverse Charge Mechanism (RCM) applies. This is because the parts are procured with the clear intention of contributing to the production or manufacturing of electronic devices.
The FTA’s Clarification offers an in-depth elucidation of the compliance criteria concerning the implementation of the Reverse Charge Mechanism for electronic devices among registered entities.