Parliament recently approved the value-added tax (VAT) law—one of the most significant, long-awaited tax reforms; however, the reform process itself is still not complete.
Taxes in Egypt have been subject to successive fast changes in the past years, after a stability period from 2005 until 2011. The present government says that it has an integrated view for tax reform that it is seeking to implement. However, the reforms that have been carried out until now seem associated with the urgent demands of the International Monetary Fund (IMF) more than with an integrated view.
Moreover, the parliament has approved, in a hurry, a law on tax disputes, which would supposedly contribute to eliminating thousands of tax disputes pending before the judiciary.
However, the future of two important tax reforms remains unknown: adopting special rules for the taxes of small- and medium-sized enterprises (SMEs) and the tax procedures law that aims to unify the procedures and limit the range of assessments done by tax commissioners.
The general budget of this fiscal year aims to collect EGP 433bn in taxes—EGP 11bn more than the target of the fiscal year 2015-2016, which was EGP 422bn.
Deputy minister of finance for tax policies, Amr El-Mounir, said that unifying the tax procedures is part of the reform system. It began with VAT through the unification of the procedures of appealing and forming committees in a manner consistent with the Income Tax Law.
He also said that the concept of unifying the procedures of the Income Tax Law and Sales Tax Law has been used to make legislation on the unified taxes procedures, such as what is applied in international systems. He added that the concept of unifying legal processes of the Income and Sales Tax Laws was abused to enact a legislation that is similar to processes used internationally.
He added that a large number of the tax law articles are procedural. Instead of repeating them, they are seeking to issue them as a single legislation in a way that contributes to alleviating burdens on financiers with regard to tax returns, appeals, and registration. In addition, they are seeking to enable conducting these procedures through an integrated electronic system.
He stated also that the unified procedures law will include articles addressing penalties and a chapter on the administration of taxes and its goals. Moreover, it will include workers’ incentives and a rewards system.
El-Mounir noted that the unified procedures law will be taken into consideration in the next period and will be presented to the parliament at the right time. He expressed his hope to issue it in the current fiscal year.
He noted also that the tax law itself is being simplified to include the articles related to the tax basis, the way of calculating it, and its value.
The first session of parliament came to an end in early September. It has decided to resume its sessions next month. The present fiscal year will come to an end next June. During this period, the parliament will have to discuss laws that may be more important, including the budget of the next fiscal year starting in April.
The government has given priority to the reforms that it says will directly reflect on the tax proceeds. It is expecting to switch to VAT to increase the tax proceeds by about EGP 20bn in the remaining period of the fiscal year, while the tax disputes law will lead to collecting dues worth EGP 60bn.
El-Mounir said that the Ministry of Finance will seek in the coming months to launch a simple tax system for SMEs either through issuing legislation or instructions.
He added that the aim is to simplify the procedures and integrate the informal economy into the system.
He also said that the businesses will be divided into two segments: micro projects that will gradually pay according to their turnover—as long as they abide by simple, organised accounts—and larger projects registering in the VAT. The latter will be taxed according to specific segments and turnover percentages, which have not been determined yet.
A memo by the Egyptian Center for Economic Studies (ECES) said that completing the Egyptian tax system requires radical and comprehensive changes starting from planning tax policies and settling new bases for tax litigation.
ECES says that this requires the creation of tax plans for the unofficial sector and collection of taxes from those who are employed, which requires integrating with parallel plans to reform the cash system used by Egyptian society.
Furthermore, it requires strengthening the billing system to limit sales out of the system and preparing the tax administrative bodies for these reforms.
In addition to the tax procedures law, ECES says that there is an urgent need to establish specialised courts for the issuance of taxes, especially after the Supreme Constitutional Court ruled that the regular courts have no jurisdiction over the disputes of sales tax, like the international experiences in that regard.
Moreover, ECES called for amending the tax policy towards SMEs so as to develop a system of tax treatment of distinctive activities for a specific period as an alternative to the relative tax on income or profits according to rules set by the Egyptian Tax Authority, as a tax cut on SMEs would encourage them to join the formal system.
The centre commented on the adoption of the VAT, saying that there is a need to complete the electronic link between various government agencies in order to adjust the tax community and exploit technological advances in the inventory of the tax-paying community and adjust market operations and various business transactions.
El-Mounir said that the development of a tax administration depends on the human element and splicing technology and electronic payment, databases, and other related work environment factors. They are currently conducting a comprehensive survey of tax headquarters.
He added that the Finance Ministry intends to develop databases by reviewing a number of programmes that have been in place since 2010. He noted that there are a number of programmes that have been stalled; however, there are intentions to re-use and develop them and to add more in the coming period.
He said the training would be at the head of the ministry’s priorities for the development of the tax system in the future. He pointed out that there are now a number of proposed training programmes in the field of the VAT law and other trainings on risk management in coordination with the International Monetary Fund, the World Bank, and the Organization for Economic Co-operation.
Taxes have been one of the most sensitive files that have seen many amendments during the past few years. Those amendments included lifting taxes on income from 20% to 25% in 2012. A 5% tax was imposed on citizens making over EGP 1m per year—which was expected to last for three years but was cancelled after one year. A capital gains tax was also imposed before it was waived amid pressure from capital market investors.
The government also issued last year tax adjustments on the income tax rate, unifying it at 22.5%, and abolished the wealth tax. The government also brought back the capital gains taxes before being forced by pressure to defer it until May 2017.
Moreover, the government also imposed taxes on cash dividends.
These rapid changes have made the stability of the tax system one of the most prominent for investors’ and analysts’ demands to attract foreign investment over the past years.
Different vision on the informal sector
Service line leader for tax accounting and risk advisory services at Ernst & Young Cairo, Hossam Nasr, said that justice in the tax system will merge the informal sector with the formal one. He added that there should not be special treatment fir those lying outside the system.
He pointed out that tax incentives are not a requirement to merge the informal and formal sectors together. He urged for other incentives related to licences, electricity, water, and pensions.
Nasr said that the development of a tax administration and regulations are the main requirements to repair the system by training young talent to take up managerial positions.
He added that the Egyptian Tax Authority needs effective leadership and advanced policies to keep pace with what is happening in the local and global markets.
Yasser Maharem, secretary general of the Egyptian Taxation Society, said that development of the tax system must be carried out over a number of procedures, including administrative restructuring of the Egyptian Tax Authority, reorganisation of examination committees, and development of unified systems for accounting and auditing.
He noted that by May 2018, the last tax relief file will come to end, based on law No 91 of 2005, which granted a three year deadline and the exemption of 10 years from the date of commencement of activity.
Maharem called for the establishment of a department concerned with monitoring the quality of configuring files to ensure that there is no exaggeration in the estimates. He also called for the unification of the headquarters of the internal appeal committees within one building.
He proposed the establishment of a complaint office to investigate problems reported by citizens and investors about the taxes, as well as another office to educate investors and companies.
In a different context, he said that the SME law should have been discussed in conjunction with that of the VAT, along with drawing simplified bases to ensure their accountability in a fair way by preparing statements of their annual purchases and sales.
He pointed out that the government’s direction to enact legislation for tax reconciliation requires a tax administration with a power to decide the files presented to it.
Khaled Balbaa, tax supervisory partner at Hazem Hassan Public Accountants & Consultants, said that the reform of the system must not be looked at as penning laws, but as a path to set investment and financial targets.
He pointed out that the application of the law differs from its content, sighting evidence from the general tax law on income, which provides for a sample examination, but in reality, full examination takes place.
He added that the tax administration is currently turned into a legislative administration rather than an executive one, especially in screening and accounting operations for the capital gains.
Moreover, he noted a number of difficulties in the field of international agreements and commissions of opinion with respect to a neutral pre-price.
He said that a number of foreign investors are interested in knowing the compatibility of the neutral price in tax studies with the tax laws applicable in Egypt. Furthermore, he called for resolving tax disputes regardless of the outcome to avoid burdening investors with additional funds in the coming years.