VAT - Reverse Charge

43

@Justin, your explanation makes my head hurt. :confounded:

If I understand you correctly, Customs is adding a false insurance amount so more duty can be collected, matching what would be collected if the shipment had been insured. I have no idea what UAE law is in this respect, but that would be illegal in some, if not most, jurisdictions. But I leave that to you.

Iā€™m having trouble even thinking this through. But if you want to make your numbers match the governmentā€™s, I think you are going to have to add the insurance line item to your purchase invoices as amounts subject to VAT. Then you are going to need to add an additional, no-tax line item to offset the insurance line item. You will have to calculate the amount manually or go back and forth between Edit and View and do it by trial and error.

The problem is that VAT is applied on a percentage basis, so you need to have something to provide the basis for the calculation. I would definitely model all this in a test company to figure it out.

44

@Tut, I am going to try the trial and error method and see if I can make it work.

@lubos, any chance you have come across this scenario before? Am I the only one to raise this query from the UAE?

45

So far, yes.

46

Hello, @Justin, there seems to be a lack of clarity between your different statements.

1 - VAT is then calculated on the Customs purchase value (local currency) and on the Duty which now includes the insurance amount.

2 - When shipments are imported on CNF (cost and freight) basis, the customs system automatically adds insurance to this amount and then charges duty on the total amount (invoice value converted to local currency plus insurance value)

Statement 1 implies that VAT is paid on top of the Duty and Statement 2 makes no mention of VAT.

It is rare for VAT to be paid on top of Duty as you would have a government charge being made on top of a government charge - therefore you need to clarify.

Also if you provide a real life situation it is easier to provide a valid solution, remembering that the current inbuilt Freight-in process can cater for quite complex situations if you want to re-distribute these charges back over inventory items.

47

Hi @Brucanna,

Point 2 was in answer to what Tut had asked with regards to who adds the insurance premium and when.

Okay so here is a real life situation;

I import a container of goods for an invoice amount of USD 50,000/-. The agreement with the importer is the amount is inclusive of Freight. This is referred to as CNF.

I make payment via the bank channel on the banks exchange rate of 3.68. So the amount paid out is AED 184,000/- and select this entry as a RCM entry.

Manager now has the purchase amount recorded as AED 184,000/- and tagged as a reverse charge entry.

Upon receiving the Original Invoice and BL, I hand it over to my clearing agents to have the container released once it arrives. The clearing agent has to enter details to pay customs duty to get the container cleared.

The customs process is all shipments are to be paid customs duty on a CIF bases, i.e., cost insurance and freight basis. Since I have my invoice amount on a CNF basis, the cost and freight is entered in the customs system. As per my agent an insurance amount is then autopopulated based on the value of my shipment. For this shipment AED 584/-. This insurance amount is calculated by the customs system and according to my clearing agent, it is not a fixed amount or a % on the invoice value.

Here is where I have a mismatch that happens

  • The USD 50,000/- is now converted at the customs standard exchange rate of 3.69, so the value of the invoice on the clearing document is AED 184,500/-
  • The AED 584 is added to the above AED 184,500

The total purchase value is now AED 184500+584 = AED 185,084/-

Customs duty is 5% of the above amount which is AED 9,254.2/- (185,084 * 5%). This amount is posted in Manager as freight and also tagged as a RCM entry.

Now comes the VAT reports

As per manager my total Purchase value is AED 193,254.2 (184,000 + 9,254.2) and VAT to be reverse charged is AED 9,662.71/- (5% of the above amount)

As per the tax authority figures obtained from the customs the total purchase value is AED 194,338.2 (185,084 + 9,254.2) and VAT charged is AED 9,716.91.

As you can see there is a mismatch between manager and authority figures on the total VAT payable to be reverse charged, due to the currency exchange rate considered as well as the extra insurance amount added to the invoice for duty to be calculated.

How do I account for this mismatch to reconcile the data. As mentioned earlier other accounting softwares such as Tally, give the user a pop box to enter the value that is taxable after they tag a reverse charge entry, so the users just enter the total amount that is on the clearing document and the VAT is calculated on that and hence matches the authority figures.

48

@Justin, my head still hurts after reading your example, but not quite so much. Yet I have questions:

  1. Why is the original invoice balance of 184,000 AED converted by Customs at a different rate? Is there no method for documenting the actual amount paid?

  2. Why does Customs add an insurance charge that you have not paid? Can this be avoided by having the supplier annotate the invoice as being inclusive of insurance? (That would not be a misrepresentation. The insurance benefit provided would simply be zero. This would be much like annotating a sales invoice for tax-exempt items as being tax-inclusive.) The process you describe sounds like one in which boxes are being filled in for the sake of filling them in, especially when you say the insurance amount is neither fixed nor a percentage of the invoice. Does that mean the insurance charge is completely arbitrary?

  3. Why is duty tagged as RCM? It is charged by Customs, not your foreign supplier. Do you not pay the duty directly to Customs (or at least to your in-country agent)? Assuming you do, if VAT is assessed on duty, it should be a normal transaction, not RCM.

I cannot avoid the impression that Customs and your agent are both struggling to apply your new tax scheme and have not yet quite figured everything out.

49

Customs have their own standard exchange rate and the banks in UAE provide customers with preferential exchange rates depending on how they are classified by the bank.

Having spoke to my clearing agent again, I am told that insurance is an option that is available for the clients to safeguard their shipment, and it is not mandatory for a client to avail it and not all take on insurance on their shipment. However, as a rule Customs charges duty on cost+insurance+freight and hence the insurance amount appears for duty calculation.

However, if I have to ask my supplier to document the invoice value as CIF then the supplier has to pay the carrier/vessel an insurance amount, which will then be transferred to me and collected by my clearing agent from me as they will have to pay the vessel that amount while they collect the delivery order.

I have asked my agent and another forwarder to check on this again.

This is because VAT is charged on the duty as well and hence to allocate this amount in the RCM bracket, I tag the duty entry as RCM. That is how my total purchase value in manager will match the total purchase value with the tax authority. This is taking into consideration that insurance was 0 in the customs declaration form.

50

I understand why exchange rates may differ. But my question is why Customs substitutes its rate in the first place if there is documented evidence of what the actual amount paid in AED was. After all, if the supplier invoiced you in AED, Customs would not substitute some other number. The fact is that your bank account was charged 184,000, so how is taxing you based on some other number justified. I may have missed it, but Iā€™ve read your entire decree-law and the executive regulations and donā€™t recall any such provision.

This seems like Customs saying the supplier should have charged you more than they did, or the carrier should have charged more for shipping, therefore, we (Customs) will base our calculation on what they should have charged you. Personally, I would probe further, looking not toward what they are doing now but what is actually legal.

I am very hopeful to hear from some other UAE users of Manager whether they are encountering similar situations and what they are doing about it. But, of course, these issues really have nothing to do with Managerā€™s functionality.

51

@Tut Supplier is not invoicing in AED. Supplier invoices in the foreign currency. Thats the reason I mentioned the exchange rates, as I do a bank transfer in the foreign currency. So customs converts this to local currency using their standard rate.

After speaking to a few different clearing agents, I have now been told that the insurance value is not a random number that is prepopulated but is 1% of the invoice value in the local currency. This again will be based on the exchange rate applied by customs.

52

Yes, I understood this. My point was that, if they had invoiced in AED, Customs would not be substituting some other number. So why do they substitute another number when you have a correct figure in AED from the bank? It just seems that there should be a method for reporting the actual number instead of having Customs invent an incorrect one. They are aware exchange rates fluctuate.

53

Ok without being distracted by the unwarranted debate on personal perspective vā€™s authority practices, the accounting focus is this.

The Components:
Supply 184,000 + 5% 9200.00
Customs Supply 500 + 5% 25.00
Customs Insurance 584 + 5% 29.20
Customs Duty 9254.20 + 5% 462.71

Which gives total authority VAT of 9716.91 (9200.00 + 25.00 + 29.20 + 462.71)

Manager has naturally taken up of the Supply + Customs Duty VAT components, therefore the missing Custom Supply and Customs Insurance VAT components need to be taken up as additions to the Customs Duty invoice posting by adding 4 additional lines.

Custom duty invoice posting:
Customs Duty 9254.20 + 5% 462.71
Customs Supply 500 + 5% 25.00
Customs Supply -500 > note the minus sign and no VAT
Customs Insurance 584 + 5% 29.20
Customs Insurance -584 > note the minus sign and no VAT

Now this will add the missing VAT components without adding in the Custom Supply or the Custom Insurance values as they contra / cancel themselves out.

For the additional four lines you could create / use an account called Import Clearing or any existing balance sheet account which can be used as a clearing account.

1 Like
54

Reviving this thread, since I have been doing the final VAT for last year :wink:

I think this should appear on a sales invoice only to indicate the fact that VAT is reversed to the purchaser.

This is both for the purchaser to know that he/she is liable for the VAT to purchasers local tax authority at local rate in case it is for (partial) private use for example, and for the sellers administration and proof to sellers tax authority that seller is not liable for VAT on that particular sale.

55

Iā€™ve been going through this thread and I agree it should appear on a sales invoice.

Ideally, selecting a reverse charge tax code should trigger a note on the invoice saying something like ā€˜this invoice is with vat that is reverse charged according to article so and so from law so and soā€™.

56

@novica, such a notice cannot be built into Manager, because the details of it would be different in every country. So you would need to add it as a custom field.

But at 54 posts, this topic has become unwieldy and wandered far from its original subject. So I am going to close it. If there are further points to be made, please start a new topic.