Strategic Guide to the Reverse Charge Mechanism in Tax Law

The reverse charge mechanism is used in cross-border transactions between companies, where the service provider is located in a different country from the customer importing the service.

Definition of reverse charge: It is a system in which the beneficiary of the goods or service is directly responsible for paying the tax to the tax authority instead of the supplier of the goods or non-resident service provider, in cases specified in the Value Added Tax Law.

Practically, when applying the reverse charge mechanism, the foreign supplier does not impose VAT on their invoice. The importing company must calculate the VAT due on the supply and declare it in their monthly VAT return or reverse charge form to fulfill their obligations relating to VAT.

The reverse charge mechanism applies to transactions between a non-resident supplier company and another resident company (B2B), while the simplified supplier registration system that applies to transactions between a non-resident supplier company and a final consumer (B2C).

Definition of the simplified supplier registration system: It is a system that allows for the simplified registration of non-resident suppliers as specified in the executive regulations.

Cases Related to Services Imported From Abroad and Treated Under the Reverse Charge Mechanism:

Importing a service for the purposes of business activities subject to VAT, or subject to the schedule tax in addition to VAT (according to Law 67 of 2016, second schedule which includes goods and services subject to schedule tax in addition to VAT and input tax deduction from VAT only).

• In the case of importing services subject to tax at the standard rate, companies must calculate the VAT due on the imported service and declare it in the monthly tax return as collected tax as well as deductible tax in the same tax return.
• In the case of importing services subject to schedule tax, companies must calculate the schedule tax due on the imported service and declare it in the monthly tax return as collected tax only, and they are not entitled to include it in the deductible tax in the same tax return.

The company is importing a service only for activities that are subject to the table tax

• If these companies import a service subject to tax at the general rate, they must calculate the VAT due on the imported service and declare it in the monthly tax return as collected tax only. They are not allowed to include it in the deductible tax in the same tax return.
• If these companies import a service subject to table tax, they must calculate the table tax due on the imported service and declare it in the monthly tax return as collected tax only. They are not allowed to include it in the deductible tax in the same tax return.

The company is importing a service that is not necessary for its activities.

• If these companies import a service subject to tax at the general rate but not necessary for their activities, they must calculate the VAT due on the imported service and declare it in the monthly tax return as collected tax. They are not allowed to include it in the deductible tax in the same tax return.
• If these companies import a service subject to table tax and not necessary for their activities, they must calculate the table tax due on the imported service and declare it in the monthly tax return as collected tax. They are not allowed to include it in the deductible tax in the same tax return.

The company is importing a service for its tax-exempt activities (not registered for VAT and only registered for income tax).

• If these companies – not registered for VAT – import a service subject to VAT at the general rate, they must register for reverse charge purposes. In this case, the company is not required to submit a monthly VAT return if it did not import any service during the month. However, the company must calculate the tax due on the imported service and pay it on the reverse charge form within 30 days of receiving the service.

Conclusion

Overall, the reverse assignment mechanism is designed to simplify international tax compliance, ensuring that VAT is paid in the location where goods or services are used, thereby maintaining tax neutrality and enhancing compliance.

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