As part of the Egyptian Tax Authority's commitment to keeping up with global developments in digital cross-border services, it has implemented the Reverse Charge Mechanism under Value Added Tax (VAT) Law No. 67 of 2016. This is a global tax system used to report cross-border transactions between companies, particularly for imported services, where the service provider is located in a different country from the service-importing client.

The reverse charge mechanism is a simplified system whereby the resident client is responsible for directly paying the tax to the Egyptian Tax Authority instead of the non-resident supplier. This approach represents a tax reform aimed at protecting taxpayers and ensuring fair tax compliance.

This system provides several advantages that help reduce the tax burden on Egyptian registered taxpayers:

1. Eliminates the need for tax payment in foreign currency – Instead, taxes are paid directly to the Egyptian Tax Authority in local currency.

2. Eases liquidity constraints – Registered VAT taxpayers who import services essential to their business operations only need to declare the tax without initially paying it from their own funds. They can then deduct or settle the tax accordingly.

To further streamline VAT collection, Law No. 3 of 2022 introduced a simplified VAT registration system for non-resident suppliers. This allows non-resident service providers to collect and remit VAT directly from the final consumer, ensuring fair competition for Egyptian service providers against foreign competitors.

Additionally, the Unique Identification Number (UIN) was introduced. This is a confidential number obtained by Egyptian taxpayers to prevent unauthorized use of their tax registration number when dealing with registered suppliers under the simplified supplier registration system.

The VAT declaration process under the Reverse Charge Mechanism depends on whether the non-resident supplier is registered under the simplified supplier registration system or not:

1. If the non-resident supplier is not registered under the simplified system:

o The Egyptian taxpayer must request that the non-resident supplier include their business name and tax registration number on the invoice to document service purchase costs.

o The Egyptian taxpayer must declare VAT using Form 111 VAT:

? Non-registered VAT taxpayers must report it monthly.

? Registered VAT taxpayers must declare the due tax as part of their monthly VAT return and can deduct it if the imported service is essential to their business and deductible.

2. If the non-resident supplier is registered under the simplified system:

o The Egyptian taxpayer must provide the non-resident supplier with their tax registration number along with their UIN for verification.

o The non-resident supplier issues an invoice without VAT.

o The Egyptian taxpayer calculates and declares the due VAT in their monthly return.

Conclusion

The Reverse Charge Mechanism in VAT plays a crucial role in regulating e-commerce and ensuring tax fairness. It simplifies tax procedures, ensures efficient tax collection, and enhances transparency and compliance, ultimately supporting the development of Egypt’s digital economy.