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Tax Connect Flash | Algeria: the reverse charge mechanism for VAT, a new legal framework


The Article 83 of the Turnover Taxes Code (TTC), inserted by the article 36 of the Finance Law for 2011, imposes an obligation on Algerian recipients of goods or services to make a declaration as to the VAT payable by their foreign suppliers which are established outside Algeria ("the reverse charge mechanism"), and to pay it to the Treasury. It provides: "Where the supply of goods or services is made by a taxable person outside Algeria, the tax is subject to the reverse charge and is paid by the purchaser or the recipient of services…"
This new provision represents a response to a tax enforcement problem arising from the very wide applicability of VAT (part 1). The introduction of this new provision seems to be connected with the rapid and remarkable increase in Algerian tax treaties, and the wish of the Algerian authorities to apply strictly the provisions of those treaties (part 2). Lastly, the application of this new provision raises practical issues which should be addressed by the implementing regulations provided for by article 36 of the Finance Law (part 3).

1. A tax enforcement problem arising from the very wide applicability of VAT

By article 7 of the TTC, any supply of services used in Algeria, even if provided outside Algeria by a foreign supplier, falls within the territorial scope of VAT, as does a sale of goods which involves a delivery of the good in Algeria.

The sale of goods in Algeria by a foreign undertaking which is not established there seems to be an academic proposition. By contrast, it frequently happens that undertakings not established in Algeria supply services to undertakings which are established in Algeria, which will use them in that country. VAT is applicable to such services. For the Algerian Treasury, there remains the issue of collecting the tax, in a situation which entails that the tax payer is established outside Algeria.

To resolve this issue, Algerian domestic law provides that the withholding tax of corporate profits tax (CPT), also covers VAT.

Nonetheless, the tax treaties which Algeria has signed substantially limit its right to impose that withholding tax. Those limitations do not concern VAT because the tax treaties do not extend to that tax. Thus, the exemption from the withholding tax of CPT, which is required in certain cases under tax treaties, has led the Algerian legislature to introduce the reverse charge mechanism for VAT.

2. A measure connected with the rapid increase in Algeria’s tax treaties

In few years, Algeria has created a real network of tax treaties. There are now tax treaties in force between Algeria and the majority of OECD countries, the most notable exceptions being the United Kingdom and the United States, as well as numerous emerging economies.

Under those treaties, undertakings of the other signatory States are taxable in Algeria under the real profits system, if they have a permanent establishment in Algeria. Otherwise, they are taxable in Algeria if they receive certain items of Algerian source income.

Thus it is generally provided that such undertakings are subject to a withholding tax of CPT, generally at a reduced rate, where they receive fees or royalties (within the meaning of the relevant treaty) from an undertaking established in Algeria. However, the term “royalties” is often defined restrictively, in such a way that many kinds of remuneration for services do not fall within the definition. For example, remunerations for technical and economic studies which are received, say, by French undertakings, would be excluded.

If a French undertaking receives remuneration for studies carried out in Algeria for Algerian undertakings, without having a permanent establishment in that country, it will escape the withholding tax but in principle it will be subject to Algerian VAT if the service provided is used in Algeria.

It is in such a case that article 36 of the Finance Law for 2011 takes full effect, by obliging the client of the concerned French undertaking to apply the reverse charge to the VAT payable by that undertaking.

3. Practical aspects of the reverse charge

To our knowledge, no implementing regulations expanding on the reverse charge mechanism have been published to date. Accordingly, we will set out below the main issues raised by the article 36 of the Finance Law for 2011.

Applicability of the reverse charge

In our view it is clear that undertakings established in Algeria that use foreign service providers which are subject to withholding tax of CPT at 24% are not affected by the reverse charge, because the said withholding covers VAT.

In our opinion the same should apply where the service providers are subject to withholding of CPT at a reduced rate (for example, under the tax treaty between Algeria and France there is a withholding of CPT at a rate of 12% or 5%, depending on the circumstances, in respect of fees and royalties falling within the definition which are paid to a French undertaking).

Furthermore, we think that the reverse charge mechanism for VAT should not apply where the service provider has a permanent establishment in Algeria for treaty purposes or, more broadly, is taxable in Algeria under the real profits system (insofar as the services in question relate to the establishment situated in Algeria, of course).

Application of the reverse charge by the client

Even before the Finance Law for 2011, the tax authority had allowed Algerian clients to carry the VAT paid to foreign service providers to the VAT panel of its own G50 declaration (line E3 B36 "other transactions").

Unless and until the G50 form is amended, we are assuming that this practice will be confirmed by the implementing regulations for the new article 83 of the TTC. 
Clearly, the VAT to which the reverse charge is applied in this way must be paid on filing of the relevant G50 declaration.

The reverse charge and tax agents

The introduction of the reverse charge does not repeal article 63 of the TTC, which relates to tax agents.

Hence the question arises of whether the tax agents system can coexist with the reverse charge mechanism.

In our view, the wording of the new article 83 of the TTC suggests that the reverse charge is generally applicable, such that the tax agents system could be repealed by implication.

Invoicing of VAT by the service provider

We are aware that the tax authority has indicated, in an internal note, that it is in favour of Algerian VAT being invoiced, in local currency, by the foreign service provider.

On that basis the foreign service provider would have to provide the Algerian client with such an invoice, referred to as a "B" invoice and separate from the main invoice, which would provide the basis for payment of VAT to the Algerian Treasury.

The issue of such "B" invoices raises a difficulty of principle in Algeria, since the situation guarantees that the foreign service provider will not have an Algerian VAT identification number.

Recovery of VAT paid under the reverse charge mechanism by the Algerian client

Insofar as the VAT on taxable services meets the basic conditions for recovery by the Algerian client, we do not think the fact that the reverse charge mechanism applies to such VAT will in any way prevent it from being recovered.

VAT exemption and the reverse charge

The Algerian client may be exempt from VAT or may have an exemption in respect of the services in question.

In such a case, the fact that the services are requested from a supplier which is not established in Algeria will not, in our view, prevent the client from relying on the exemption. How does the reverse charge operate in such a case? More specifically, should the transaction be declared on form G50, and if so on which line?

Lastly, given that the exemption generally involves a certificate of exemption, is this required where the reverse charge applies, bearing in mind that this is a situation where the service provider will not be known to the Algerian tax authorities?

Penalties for failure to apply the reverse charge

In cases of failure to apply the reverse charge, incomplete declarations or non-payment of the VAT by the Algerian client, the issue arises as to what consequences this has for the foreign service provider. In such cases, will the service provider be pursued for the VAT and the associated penalties?

Lastly, we should state that in our opinion article 83 of the TTC will apply as from January 1st 2011, to all transactions where the chargeable event (payment, in the case of services) occurs on or after that date.


Portrait of Mourad Nabil Abdessemed
Mourad Nabil Abdessemed
Head of tax department