How to Account for Reverse Charge VAT in Your Tax Return

Accurate RCM reporting in the VAT return is the output of a process that starts long before the return is prepared. The most common reason businesses get the RCM wrong is not a misunderstanding of the rules — it is the absence of a systematic upstream process that captures the relevant transactions in the right way at the right time.

Before preparing any VAT return that includes reverse charge items, three things must be in place:

• A complete supplier register. Every non-resident supplier from whom services are regularly procured should be identified and flagged in the purchase ledger as an RCM supplier. New non-resident vendors should be reviewed at onboarding and tagged accordingly.
• A date-of-supply discipline. The posting of foreign service invoices in your accounting system must be keyed to the date of supply — not the date the invoice was received, not the date of payment, and not the accounting close date. The date of supply determines the VAT period.
• A SAMA rate reference process. For every foreign-currency invoice from a non-resident supplier, the Saudi Central Bank daily exchange rate on the date of supply must be recorded and stored alongside the invoice. This is not optional — it is the legally required conversion basis under Article 61.

Article 62(2)(d) of the Implementing Regulations explicitly requires the VAT return to disclose “the total value of all supplies of goods and services to the taxable person where the tax is payable by the taxable person under the reverse charge mechanism.”

This means the return has two separate, distinct components for reverse charge supplies:

For a fully taxable business, these two entries cancel each other out — the net VAT payable position is unchanged. But both entries must appear in the return. A return that omits the output tax on imported services is an output-tax understatement, regardless of whether the input tax was also omitted.

The reverse charge output tax and the corresponding input tax must be reported in the VAT return for the period in which the supply took place — not the period in which the invoice was received, processed, or paid.

Where invoices from non-resident suppliers arrive significantly late, businesses should establish an accrual process — estimating the RCM liability for services known to have been received but not yet invoiced, and correcting in the period the actual invoice is received if the estimate differs from the final value.

Correcting Past Errors

Article 63 of the Implementing Regulations sets out the correction process for returns. Where a Taxable Person becomes aware of an understatement in a prior return — including omitted RCM output tax — they must notify ZATCA within twenty (20) days of becoming aware of the error. The correction is made in the return for the period in which the error is discovered, subject to the conditions in Article 63.

For businesses that make both taxable and exempt supplies — including banks, insurance companies, and mixed real estate businesses — the input tax recovery on reverse charge supplies is subject to the same proportional deduction methodology as all other input tax under Article 51.

Partial-exemption businesses must therefore track the proportional recovery rate applicable to RCM supplies in each period, using the Article 51 default method or any approved alternative method. Claiming 100% input tax recovery on all RCM supplies when only a proportion is entitled is a specific form of input tax overclaim that ZATCA can identify straightforwardly by cross-referencing the return data.

Before finalising the VAT return for each period, work through this checklist for reverse charge items:

• Have all non-resident service invoices received in the period been reviewed? Flag every purchase from a supplier with a non-Saudi address and check whether RCM applies to each one.
• Have services received but not yet invoiced been accrued? If a non-resident supplier has delivered services in the period but has not yet issued an invoice, the date of supply may have already occurred. Accrue the RCM liability based on the contract value or estimated cost.
• Has the SAMA daily rate been applied on the correct date for each foreign-currency transaction? The rate on the date of supply — not invoice receipt, not payment — is the required basis.
• Has the total RCM supply value been populated in the correct return field? Article 62(2)(d) requires explicit disclosure of the total value of supplies subject to RCM.
• Has the corresponding output tax been declared? The 15% self-assessed output tax must appear in the output tax section of the return.
• Has the input tax been claimed correctly based on the applicable recovery rate? Fully taxable businesses claim 100%. Partial-exemption businesses apply their proportional deduction fraction. Fully exempt businesses claim nothing.
• Have any marketplace-supplied services been correctly excluded from RCM self-assessment? If a marketplace is acting as deemed supplier and charging VAT directly, the Saudi customer should not also self-assess on the same supply.

• Omitting the RCM output tax entirely. Processing foreign invoices as costs without self-assessing output tax. This produces an output tax understatement in every affected period.
• Reporting in the wrong period. Processing the RCM in the period the invoice is received rather than the period the supply occurred. Both periods are incorrect.
• Using the wrong exchange rate. Applying month-end, average, or payment-date rates rather than the SAMA daily rate on the date of supply.
• Claiming 100% input tax when the business is partially exempt. Partial-exemption businesses overclaim input recovery on RCM supplies when they fail to apply the proportional deduction.
• Self-assessing on marketplace-collected VAT. Double-assessing on a supply where the online marketplace is already collecting and remitting VAT as a deemed supplier.
• Missing non-obvious RCM triggers. Failing to identify digital advertising, data subscriptions, and online tools as within-scope electronic services, and processing them as ordinary costs without RCM treatment.