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RCM and zero-rated services in GCC

The reverse charge mechanism (RCM) should not itself determine the VAT rate. It determines who accounts for VAT where the supplier is not the person required to charge and remit VAT. The rate should still be determined under the ordinary VAT classification of the supply: standard-rated or zero-rated.

This distinction follows from the GCC VAT framework. The GCC VAT Agreement defines RCM as the mechanism under which the taxable customer is obligated to pay the tax due on behalf of the supplier. It does not say that every reverse-charged supply is automatically standard-rated. It also defines taxable supplies as supplies on which tax is charged under the Agreement, whether at the standard rate or at the zero rate. 

The same logic appears in Article 9 of the GCC VAT Agreement. Where a taxable person in a Member State receives taxable goods or services from a person resident in another Member State, or receives services from a person not resident in the GCC territory, the recipient is deemed to have supplied those goods or services to itself and the supply is taxable under RCM. In other words, the recipient is treated as both supplier and customer for VAT accounting purposes. The Agreement does not add a separate rule that the standard rate must always apply. 

Therefore, the proper sequence should be:

  1. identify whether the place of supply is in the relevant GCC State; 
  2. identify whether the recipient is the person required to account under RCM; 
  3. determine the substantive VAT treatment of the supply: standard-rated, zero-rated, exempt, or outside the scope; 
  4. apply RCM only as an accounting mechanism for the tax due. 

If the relevant domestic rule says that the supply is zero-rated, RCM should not, as a matter of principle, convert that supply into a standard-rated one.

This article tests that proposition across four GCC VAT systems: Oman, the UAE, Saudi Arabia and Bahrain. The analysis is not intended to catalogue every domestic zero-rating rule. Instead, it asks a narrower question: once a service falls within RCM because the supplier is non-resident and the place of supply is in the relevant State, does the taxpayer still apply the ordinary substantive VAT classification of that service, including the zero rate where available? 

Oman

  1. Oman VAT follows the usual input and output VAT architecture. The OTA RCM Guide explains that VAT is collected at each stage of the supply chain. VAT registered persons collect VAT from customers on eligible sales and pay VAT to suppliers on eligible purchases. VAT collected from customers is Output VAT, while VAT paid to suppliers is Input VAT. 
  2. The RCM modifies the ordinary collection mechanism. According to Article 20 of VAT Law, instead of the non-resident supplier charging Oman VAT, the Oman taxable customer accounts for VAT as if it had supplied the service to itself. 
  3. Sec. 4.3 of RCM Guide makes an important point: the services received from a non-resident supplier are subject to reverse charge “at the applicable rate”. 
  4. This language is important for Special Zones. Article 107 of the Oman VAT Executive Regulation provides that the supply of services to a Special Zone is taxable at the zero rate where the customer is a taxable person, the customer is licensed and registered by the authority operating or supervising the Special Zone, the services are received for the customer’s activity in the Special Zone, and the services are not excluded categories such as restaurant, hotel, catering, cultural, artistic, sports, educational or recreational services, and are not exempt services under Article 47 of the VAT Law. 
  5. Therefore, where an Oman taxable person established in Duqm receives qualifying services from a non-resident supplier, two rules operate together:
  1. Because the supplier is non-resident and the place of supply is Oman, the RCM may shift the obligation to account for VAT to the Oman customer. 
  2. Because the customer is in a Special Zone and Article 107 conditions are met, the applicable VAT rate should be 0%. 

So, the RCM should not by itself convert a zero-rated service into a standard-rated service. It is a collection mechanism, not a rate-setting rule.

  1. For example, assume that a UAE consulting firm provides procurement support services to a VAT-registered company licensed in the Special Economic Zone at Duqm. The services are received for the Duqm company’s licensed trading activity in the Zone. The services are not hotel, restaurant, catering, cultural, artistic, sports, educational, recreational or exempt services. 
  2. In this case, the UAE supplier does not charge Oman VAT. The Duqm customer should analyse the services under the reverse charge mechanism. However, because the conditions of Article 107 are met, the applicable rate should be 0%, so the output VAT calculated under reverse charge should be nil.
  3. Section 6.1 of the OTA Reverse Charge Mechanism Guide creates a practical reporting point. It says that, for “Purchases from outside of GCC subject to Reverse Charge Mechanism”, the VAT return should include the total value of standard-rated supplies received, and that VAT is calculated automatically at 5% of the taxable value. 

This wording appears to describe the reporting box for standard-rated reverse charge purchases. It should not be read as a substantive rule that all imported services must be charged at 5%, because earlier sections of the same guide state that reverse charge applies only to taxable supplies and at the “applicable rate”. 

  1. Accordingly, for zero-rated imported services into a Special Zone, the correct technical analysis should be that the RCM applies, but at 0%. The difficulty is administrative: if the VAT return box for non-GCC reverse charge purchases automatically calculates VAT at 5% and is designed only for standard-rated supplies, the taxable person may need to determine how the OTA expects zero-rated reverse charge services to be reported. 

In our view, this may mean that such supplies can probably be omitted from the RCM boxes of the VAT return, since they do not create output VAT, do not generate recoverable input VAT, and therefore do not affect the tax payable or recoverable in the return. This conclusion is also supported by the apparent absence of a dedicated reporting box for zero-rated imported services subject to RCM. However, the taxpayer should retain supporting documents evidencing that the Article 107 conditions for zero-rating are met, in case the OTA later requests substantiation.

  1. Thus, Oman is a useful example of the distinction between liability mechanism and rate classification. The RCM identifies who accounts for VAT when a non-resident supplier makes a taxable supply in Oman. It does not determine whether the applicable rate is 5% or 0%. In the Duqm or another Special Zone context, if Article 107 conditions are met, the imported service should be treated as zero-rated even though the non-resident supplier is not Oman VAT registered. 
  2. More generally, there appears to be no logical or policy reason to confine this conclusion only to Special Zone services. If an imported service is, under the substantive Oman VAT rules, subject to VAT at the zero rate, the RCM should apply, if at all, at that same zero rate. The fact that the supplier is non-resident and not registered in Oman should affect only the person responsible for accounting for VAT, not the applicable VAT rate. Therefore, the same logic should apply to any imported service that is zero-rated under Oman VAT law, whether or not it is connected with a Special Zone.

Saudi Arabia

  1. Saudi Arabia follows the GCC reverse charge framework, but it does not have an Oman-style general Special Zone VAT rule under which services supplied to a special economic zone are zero-rated merely because the customer is located in that zone. Accordingly, for imported services into Saudi Arabia, the usual result is different from Oman’s Duqm scenario. If a KSA taxable person receives consultancy, software, advertising or similar services from a non-resident supplier and the place of supply is KSA, the recipient normally accounts for VAT under RCM. The mere fact that the recipient is in an economic zone does not, based on the sources reviewed, create a Special Zone 0% treatment equivalent to Oman Article 107. 
  2. Neither Saudi VAT legislation nor ZATCA’s clarification, including the RCM Circular, appears to expressly address a case where imported services are subject to the zero rate. However, this does not mean that RCM should necessarily convert such services into standard-rated supplies. Saudi Arabia appears to follow the GCC VAT Agreement framework, under which RCM is a mechanism for determining the person liable to account for VAT, rather than a rule determining the applicable VAT rate. 
  3. Accordingly, the general argument set out above in relation to the GCC VAT Agreement should apply equally in Saudi Arabia. If, under the substantive Saudi VAT rules, the relevant service is taxable at the zero rate, the recipient’s obligation under RCM should be to account for VAT at that applicable rate. In such a case, RCM should result in VAT being calculated at 0%, rather than at the standard rate. The absence of a specific ZATCA clarification on zero-rated imported services should not, in itself, prevent the zero rate from applying where the conditions for zero-rating are otherwise satisfied. 
  4. Therefore, in Saudi Arabia, the key question is not whether the supplier is non-resident or whether the RCM applies, but whether the imported service falls within a specific zero-rating provision under Saudi VAT law. If it does, the GCC framework supports the view that the RCM should operate at 0%. If it does not, the imported service should normally be reverse-charged at the standard Saudi VAT rate. 

UAE

  1. The UAE position should be considered separately in two respects.
    1. The first issue is whether the UAE has an Oman-style Special Zone rule that zero-rates services merely because they are supplied to a person established in a special (designated) zone. The answer appears to be no. The UAE has “Designated Zones”, but Designated Zone treatment is primarily relevant for certain supplies of goods. The services supplied within Designated Zones are treated in the same way as services supplied in the rest of the UAE. Accordingly, unlike Oman’s Article 107 Special Zone rule, the mere fact that a UAE recipient is established in JAFZA or another Designated Zone does not itself zero-rate imported services supplied to that recipient. 
    2. The second and more important issue is the general RCM question: if an imported service is substantively subject to VAT at 0% under the UAE VAT rules, does Article 48 of VAT Law require the UAE recipient to account for VAT at the standard rate, or only at the applicable zero rate? This is the question relevant for the present article. 
  2. Article 48(1) of VAT Law provides that where “the Taxable Person imports Concerned Goods or Concerned Services for the purposes of his Business, then he shall be treated as making a Taxable Supply to himself, and shall be responsible for accounting for the Due Tax on that Supply and complying with all other Tax obligations arising, with the exception of issuing a Tax Invoice to himself”. Due Tax is defined in Article 1 as “Tax that is calculated and imposed pursuant to this Decree-Law”. Article 48(1) states only one express exception from the normal consequences of being treated as making a taxable supply to oneself: the taxable person is not required to issue a tax invoice to itself. In other words, Article 48 expressly removes the tax invoice requirement, but it does not say that zero-rating is excluded, nor does it say that the imported concerned service must always be standard-rated. 
  3. This wording is important. Article 48(1) is framed as a mechanism for identifying the person who must account for the tax due on the imported supply. It does not appear to be a rate-setting provision. The phrase “Due Tax” refer to the VAT due after applying the ordinary VAT classification rules to the relevant supply. If, under those rules, the service is zero-rated, the tax due should be nil. The fact that the supplier is non-resident and does not charge UAE VAT should shift the accounting obligation to the UAE recipient, but should not, by itself, change the applicable VAT rate. 
  4. This reading is also consistent with the structure of the definition of Concerned Goods and Concerned Services. Both concepts are built around the idea that the relevant imported goods or services would not be exempt if supplied in the UAE. The wording does not state that they must be standard-rated. Therefore, the fact that a supply is not exempt does not necessarily mean that it must be taxed at 5%. It may also be taxable at 0%. 
  5. In relation to goods, Section 9.2 of the Taxable Person Guide No. VATG001 states that “VAT is due on the import of goods into the UAE where those goods, if otherwise supplied in the UAE, would be taxable at the standard rate. This means that no import VAT will be due in respect of goods which would ordinarily be zero-rated or exempt from VAT”. It further explains that no import VAT will be due in respect of goods which would ordinarily be zero-rated or exempt from VAT. This supports the view that import (RCM) mechanics should not override the substantive VAT rate. If imported goods would be zero-rated domestically, import VAT should not be charged at 5%. 
  6. The same logic should apply to services, although the guidance is less explicit for services than for goods. This is because Article 48(1) does not contain separate substantive rules for Concerned Goods and Concerned Services. It treats them together within the same operative provision: where a taxable person imports Concerned Goods or Concerned Services for the purposes of its business, it is treated as making a taxable supply to itself and must account for the Due Tax on that supply. 

Therefore, if the FTA has interpreted this same Article 48 mechanism, in the context of goods, as not requiring import VAT where the imported goods would ordinarily be zero-rated or exempt if supplied in the UAE, the same interpretation should reasonably apply to services, unless there is a clear textual basis for distinguishing them. Article 48 does not state that imported services must be standard-rated, nor does it say that zero-rating is excluded for Concerned Services. 

Accordingly, if a service imported by a UAE taxable person would be zero-rated under the UAE VAT rules, there is a reasonable argument that the Article 48 self-supply should also be accounted for at 0%. Otherwise, Article 48 would operate not merely as a reverse charge mechanism, but as a rule converting zero-rated imported services into standard-rated services, even though the same provision has not been understood to have that effect for zero-rated imported goods. That result does not follow clearly from the text. 

  1. The point is not completely free from uncertainty because the FTA’s public RCM guidance, including VATP044, mainly discusses the standard case where concerned services are imported and VAT is due under RCM at 5%. It also clarifies that exempt services are outside the RCM treatment. However, it does not appear to deal expressly with the intermediate category: imported services that are taxable but zero-rated. The absence of an express discussion should not be treated as an exclusion of the zero rate, but it does mean that the point should be presented as an arguable position rather than a settled administrative clarification. 
  2. A difficult example is Article 31(1)(b) of VAT Executive Regulation. Assume that a UK law firm represents a UAE VAT-registered company in commercial litigation before a UK court. The legal representation is actually performed in the UK, and the work relates to court proceedings outside the UAE. One may argue that the relevant service is actually performed outside the UAE and should therefore be considered under Article 31(1)(b), rather than treated simply as an ordinary imported professional service subject to RCM at 5%. 
  3. However, the applicability of Article 31(1)(b) to a customer resident in the UAE is itself uncertain. The introductory wording of Article 31(1), together with the definition of “Export” in Article 1 of the Executive Regulation, may suggest that Article 31 operates within the framework of exported services, i.e. services supplied from the UAE to a person outside the UAE, rather than imported services received by a UAE customer. 

This uncertainty is the subject of the separate discussion in the earlier article on services actually performed abroad. It is not the main issue of the present article. For present purposes, the narrower point is this: if Article 31(1)(b), or any other zero-rating provision, applies to the imported service as a matter of substantive UAE VAT classification, Article 48 should not prevent the RCM from being applied at 0%. 

  1. Clearer examples should therefore be taken from zero-rating provisions that are not dependent on the Article 31 export-services controversy. One example is Article 35 of VAT Executive Regulation, which deals with goods and services supplied in connection with qualifying means of transport. 

If, for instance, a non-resident supplier provides a service that falls within Article 35, such as repair, maintenance or other qualifying services connected with a qualifying aircraft, vessel or other qualifying means of transport, and the UAE recipient is required to account for the service under Article 48, the better view is that the RCM self-supply should be accounted for at the applicable rate, i.e. 0%, provided all Article 35 conditions are met. 

  1. Another example is Article 40 of Executive Regulation, which applies the zero rate to educational services. If a non-resident supplier provides educational services that would qualify for zero-rating under Article 40 if supplied in the UAE (for example, because the services are provided in accordance with a curriculum recognised by the competent government agency and by a recognised educational institution) then Article 48 should require the UAE recipient to account only for the Due Tax on that supply. Where the substantive classification is zero-rated, the Due Tax should be nil. The same approach should apply to any other imported service that is taxable at 0% under a specific UAE zero-rating rule, provided the conditions of that rule are met. 
  2. Accordingly, the UAE differs from Oman in the source of zero-rating, but not necessarily in the logic of RCM. In Oman, Article 107 of the VAT Executive Regulation can itself zero-rate qualifying services supplied to a Special Zone customer. In the UAE, Designated Zone status does not have that effect for services. However, where a UAE zero-rating provision independently applies to the imported service, the same conceptual logic should follow: RCM is a liability (collection mechanism), not a rule that converts a zero-rated supply into a standard-rated supply. 

Bahrain

  1. Inn Bahrain, RCM is defined under Article 1 of VAT Law as “ the mechanism whereby a taxable customer is obliged to pay the tax due on behalf of the supplier, and is required to meet all the obligations stipulated in the law”. Further Article 4 of the VAT Law mandates a taxable customer receiving goods or services in Bahrain from a non-resident supplier to declare it in their tax returns in accordance with the reverse charge mechanism. 
  2. VAT General guide under Section 8.3.2 confirms that the RCM is applicable in Bahrain by default when a VATable person in Bahrain purchases supplies of services and goods subject to VAT from a supplier not resident in Bahrain. It further explains that RCM allows a non-resident supplier to supply goods or services subject to VAT in Bahrain without being required to register for VAT in Bahrain.
  3. Bahrain appears to follow the same basic GCC VAT Agreement logic. The RCM is a mechanism for shifting the obligation to account for VAT from the non-resident supplier to the Bahrain VATable customer. It should not, by itself, determine whether the supply is subject to VAT at the standard rate or at the zero rate. 
  4. Bahrain does not appear to have an Oman-style Special Zone rule under which services supplied to a free zone or special zone customer are zero-rated merely because the customer is located in such a zone. Therefore, unlike Oman’s Article 107 Special Zone rule, the location of the Bahrain customer in a special customs or investment area should not, by itself, make imported services zero-rated. 
  5. The usual Bahrain position is therefore that, where a Bahrain VATable person receives services from a non-resident supplier and the place of supply is Bahrain, the Bahrain recipient accounts for VAT under the RCM. In ordinary cases, where no exemption provision applies, the RCM should result in VAT being accounted for at the standard Bahrain VAT rate. 
  6. However, as in Saudi Arabia and the UAE, this does not mean that the RCM should convert a zero-rated service into a standard-rated service. Bahrain’s VAT system distinguishes between standard-rated supplies, zero-rated supplies and exempt supplies. Zero-rated supplies remain taxable supplies, but at 0%. Therefore, if an imported service falls within a Bahrain zero-rating provision as a matter of substantive VAT classification, the RCM should apply, if at all, at the applicable zero rate. 
  7. This conclusion follows from the same conceptual sequence used above:
  • First, one determines whether the place of supply is Bahrain. 
  • Secondly, one determines whether the Bahrain recipient is required to account for VAT under RCM because the supplier is non-resident. 
  • Thirdly, one determines the substantive VAT treatment of the supply under Bahrain VAT law. If the supply is standard-rated, RCM should be applied at the standard rate. If the supply is zero-rated, RCM should not change that classification and should produce no VAT payable. 
  1. The practical difficulty is that Bahrain NBR guidance generally discusses the ordinary case of imported services where VAT is accounted for by the Bahrain customer under RCM. It does not appear to provide a detailed worked example of imported services that are taxable but zero-rated. However, the absence of a specific example should not be read as a rule that zero-rating is excluded. RCM identifies the person liable to account for VAT; it is not a rule that determines the VAT rate. 
  2. Accordingly, Bahrain should be treated in the same way as Saudi Arabia for purposes of the main thesis of this article. There is no special-zone zero-rate comparable to Oman’s Duqm rule, but the GCC framework still supports the general proposition that RCM should not override the substantive VAT classification of the service. If the imported service is zero-rated under Bahrain VAT law, RCM should operate at 0%. If it is not zero-rated or exempt, RCM should normally operate at the standard Bahrain VAT rate. 

Comparative conclusion

  1. The comparison shows that the GCC systems should be analysed at two different levels.
    1. The first level concerns special-zone treatment. Oman is distinctive because Article 107 of Oman VAT Executive Regulation can zero-rate qualifying services supplied to a Special Zone customer, including a customer in Duqm, provided the statutory conditions are satisfied. The UAE, Saudi Arabia and Bahrain do not appear to have an equivalent general rule under which services are zero-rated merely because the customer is located in a free zone, designated zone, special economic zone or similar area. 
    2. The second level concerns the more general RCM question. This is the main issue considered in this study. Once a service is within the RCM because the supplier is non-resident and the place of supply is in the relevant GCC State, does the RCM itself prescribes the standard VAT rate? In our view, the answer should be no. 
  2. The RCM is a liability and collection mechanism. It determines who must account for VAT when the supplier is not the person required to charge and remit VAT. It does not determine whether the supply is standard-rated, zero-rated, exempt or outside the scope. That classification must be made under the ordinary domestic VAT rules of the relevant State. 
  3. Oman provides the clearest example. The OTA confirms that where zero rate conditions are met, the RCM should operate at 0%, not 5%. 
  4. Saudi Arabia and Bahrain do not appear to provide specific guidance on zero-rated imported services under RCM. However, both systems appear to follow the GCC VAT Agreement logic. Therefore, if an imported service is zero-rated under the substantive domestic rules, the recipient should account for the RCM at 0%. If the service does not fall within a zero-rating provision, the normal result is RCM at the standard rate. 
  5. The UAE position is more developed but also more complex. Article 48 of the UAE VAT Law treats the taxable recipient as making a taxable supply to itself where it imports Concerned Goods or Concerned Services for business purposes. The only express exception in Article 48 is that the taxable person does not issue a tax invoice to itself. Article 48 does not say that zero-rating is excluded, nor does it say that concerned services must always be standard-rated. 
  6. The UAE FTA has also interpreted the import mechanism for goods as not applying where the goods would ordinarily be zero-rated or exempt if supplied in the UAE. Since Article 48 treats Concerned Goods and Concerned Services within the same operative framework, there is a reasonable argument that the same interpretation should apply to services unless there is a clear textual basis for distinguishing them. Therefore, where an imported service would be zero-rated under the UAE VAT rules, the Article 48 self-supply should also be accounted for at 0%. 
  7. The practical difference between the jurisdictions is therefore not the basic RCM logic, but the availability of zero-rating provisions:

Oman’s Special Zone rules may themselves create a zero-rated imported service scenario. 

In the UAE, the relevant zero-rate must arise independently under the ordinary UAE zero-rating rules, because Designated Zone status does not zero-rate services. 

In Saudi Arabia and Bahrain, the same approach applies: the taxpayer must first identify a domestic zero-rating provision. If one exists and its conditions are met, the RCM should apply at 0%; if not, the RCM should apply at the standard rate. 

  1. On balance, the RCM should not change the VAT rate. It should only change the person accounting for the tax. If the imported service is substantively zero-rated, the tax due under RCM should be nil. If the imported service is standard-rated, the tax due under RCM should be calculated at the standard rate. 
  2. This conclusion should still be treated as more certain in jurisdictions where guidance expressly refers to the “applicable rate” or where the statutory framework clearly supports the same result. Where the tax authority’s public guidance discusses only standard-rated imported services, the taxpayer should preserve supporting analysis and evidence for the zero-rating treatment, because the reporting mechanics may not always contain a dedicated box for zero-rated imported services under RCM. 

Disclaimer

This article discusses VAT rules and administrative guidance in several GCC jurisdictions, including the UAE, Oman, Saudi Arabia and Bahrain. It should be read with caution. Tax authorities in these jurisdictions may issue official guidance, clarifications, public notices, manuals, decisions or administrative positions that affect the interpretation and practical application of the rules discussed in this article.

Pursuant to the MoF’s press-release issued on 19 May 2023 “a number of posts circulating on social media and other platforms that are issued by private parties, contain inaccurate and unreliable interpretations and analyses of Corporate Tax”. The Ministry issued a reminder that official sources of information on Federal Taxes in the UAE are the MoF and FTA only. Therefore, analyses that are not based on official publications by the MoF and FTA, or have not been commissioned by them, are unreliable and may contain misleading interpretations of the law. See the full press release here. 

The same principle applies to the other jurisdictions discussed in this article. For Oman, official positions should be verified against publications of the Oman Tax Authority and the relevant legislation and regulations. For Saudi Arabia, official positions should be verified against publications of the Zakat, Tax and Customs Authority. For Bahrain, official positions should be verified against publications of the National Bureau for Revenue.

This article has not been commissioned, reviewed, approved or endorsed by the UAE MoF, the UAE FTA, the Oman Tax Authority, the Saudi ZATCA, the Bahrain NBR, or any other public authority. The author is not a policy maker and is not authorised to state, interpret or determine the official policy or position of any of those authorities.

Accordingly, all interpretations, conclusions, proposals, assumptions, surmises, guesswork, and other comments in this article represent only the author’s humble personal opinion on the matters discussed. Furthermore, it is not legal or tax advice. Like any human job, it may contain inaccuracies and mistakes that I have tried my best to avoid. If you find any inaccuracies or errors, please let me know so that I can make corrections.