VAT reverse charge mechanism : what does it mean?
As a general rule, the taxable person supplying goods or services is liable to pay VAT.
As a derogation, the reverse charge mechanism allows to designate the recipient of the supply as the person liable for the payment of VAT.
Under this reverse charge mechanism, VAT is not charged by the supplier but accounted for by the customer (a taxable person) in his VAT return. This VAT is then deducted in that same VAT return and, therefore, insofar this person has a full right of deduction, the result is nil.
To keep in mind
VAT reverse charge mechanism applies in different kinds of transactions:
- Reverse charge on specific goods and services
- Reverse charge on domestic transactions performed by foreign suppliers
- Reverse charge on intra-EU transactions
Reverse charge on postponed import VAT
The application of the reverse charge is not an option for foreign companies. They need to know if they qualify for the reverse charge. Local tax authorities may refuse to refund local VAT when the reverse charge has not been applied or conversely reclaim VAT when the reverse charge has been applied incorrectly.
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