A month ago, President Abdel Fattah Al-Sisi issued the VAT Law with a general rate of 13% on goods and services for fiscal year (FY) 2016/2017 and 14% for FY 2017/2018. There are certain exceptions to the rate, as the machinery and equipment used in the production of a commodity or in providing a service is subject to 5%. This, however, does not apply on buses and passenger cars.
Cars are among the goods that are subject to the VAT of 13% and the table tax. Cars used in transporting people on golf courses are subject to a tax rate of 10%, while passenger cars with an engine capacity of up to 1,600cc are subject to 1%. Cars with an engine capacity of 1,600cc to 2,000cc, and locally assembled cars of more than 2,000cc will be subject to the table tax at a rate of 15% of the value. Imported passenger cars with an engine capacity of more than 2,000cc will be subject to a 30% tax rate.
The law stipulates that a certificate signed by a registered accountant is needed to refund the tax or reduce it on cars.
The law also states that the seller is committed to issuing a taxable invoice when selling a good or providing a service subject to the tax. The invoice must include the name of the buyer and registration number, if applicable, while the executive regulations will determine the data included in the invoices, according to the law.
A seminar titled “The implications of the value-added tax (VAT) on the automotive sector” was recently held by Daily News Egypt to highlight concerns and questions among those working in the sector regarding the tax’s recent application in Egypt.
Representatives from Egypt’s tax authority and the automotive sector explained the intricacies of VAT’s application as well as their involvement in the development of the VAT Law’s executive regulations.
The Tax Authority explained that, among other goods, cars are the luckiest when it comes to the law’s application, because only trucks and microbuses were impacted, in addition to spare parts. As a result, the authority demanded that companies present the real prices of the automobiles in the market.
Those who attended the seminar include Egyptian Tax Authority head Abdel Moneim Matar, Central Administration of Tax Operations head Mohamed Shawky, Central Department for Tax Research head Salah Youssef, Central Administration for Cases Department head Ibrahim Abdel Haleem, Central Department for Registrars Aid head Mohamed Matar, Research Sector head Mohamed Diab, Egyptian Tax Authority media centre head Nashaat Ibrahim, Mercedes Benz Egypt financial director Mohsen Idris, legal accountant Mahmoud Abdel Samad, Bavarian Auto Group representative and legal accountant Mahmoud Said, BMW financial representative Magdy Morsy, head of the non-direct tax department in PricewaterhouseCoopers–Egypt for financial consultations Khalid Abo El Yazid.
The seminar was chaired by Al-Borsa’s vice editor-in-chief Hussein Abd Rabo. Al-Borsa’s Mohamed Aboul Fotouh and Ahmed Amer also took part in the seminar.
Below is an edited transcript of the conversation that took place between Al-Borsa representatives and representatives from the automotive sector regarding VAT’s implementation.
What is the impact of the VAT Law on the automotive sector? What are the problems the law is facing in its implementation?
Matar: First, I would like to thank Al-Borsa for sponsoring such an event and for giving us the chance to communicate with the sector in order to create a better understanding of the VAT mechanisms and how it will be implemented.
I would like to note that the VAT has not impacted cars in the categories between 1,600cc and 2,000cc, except in terms of the method used to calculate the tax.
There are two parts to the VAT: the first is a table tax calculated according to the category of the car, and the second is a value-added tax of 13%.
The VAT has increased the value owed on some cars, including trucks and microbuses, as well as spare parts, by 3%, which increases the value to 13% following a 10% sales tax.
Cars were the luckiest goods in terms of the VAT’s application, especially during the transitional period of the law’s application.
The categories ranging between 1,600cc to 2,000cc and more were subject to tax rates of 15%, 30%, and 45%. Their subjection to taxes changed. Previously, we had a fixed tax from the value of local or imported products. Now, with the application of the law, this tax is broken down into two parts: a table tax and a 13% VAT.
The aim of this is to set a unified price for the VAT’s application. The reason why cars were subject to the table tax is because the taxes they were subject to were already higher than 13%. In this case, it is treated as customs fees, which means that when a commodity is imported, customs fees are applied to them. This is the foundation on which the tax is calculated.
The table tax on an importer or industrial producer will be calculated through the table tax of the 8% category. This will be added to the car’s value, and is considered the foundation on which the 13% are calculated from. Therefore, only the calculation method has changed, but not the financial burden on the costumer or car buyer.
Tax deduction will be fully applied on all direct or indirect service inputs.
Direct deduction is related to all previous payments on the commodity. However, there are other services, such as freight, operating with third parties and others, provided during the manufacturing process. The tax was not deducted from all the provided services, but the VAT Law now allows including them in the tax’s calculation.
How will the VAT affect local manufacturing?
In light of the Sales Tax Act, imported passenger cars were subject to a 15-45% tax, according to their engine capacity (cc).
The VAT Law subjected all goods and services to one tax category, which is 13% during the current fiscal year (FY), and 14% during the next fiscal year. The legislation made sure to maintain the tax revenue from passenger cars, and therefore, subjected the difference in the tax rate to the table tax ranging from 1-13%. Hence, imported passenger cars are not significantly impacted by the VAT Law.
The price and tax categories applied to the prices of locally manufactured cars are the same as the ones applied to the prices of imported cars, according to the cars’ engine capacity.
The locally manufactured product will be luckier than the imported one, due to expanding the base for tax deductions under the VAT Law. Companies will be able to deduct the tax from services provided to them—something that was not allowed under the Sales Tax Law. The costs of services are not low because most of these companies were renting production lines from other companies. The Sales Tax Law did not allow companies to include these costs in the tax’s calculation, so now the costs will decrease. The VAT Law will positively impact locally manufactured cars and encourage the Egyptian industry.
What about passenger cars and vehicles transporting goods?
Abo El Yazid: Imported passenger cars and goods-transporting vehicles will be included in a higher category than under the Sales Tax Law. This FY, the difference will be 3%, while next year it will stand at 4%. Hence, prices will be influenced by the change in rates. The prices of locally manufactured products will be impacted by the same increase in the tax rate as the ones that are imported.
By expanding the tax deduction base on inputs under the VAT Law, costs will decrease.
Does the VAT Law provide cars with a competitive advantage?
Matar: Cars are considered the luckiest among commodities when considering the application of the law. The head of the Central Department for Tax Research [Youssef] can explain this in detail.
Youssef: If there was a stock of cars that is subject to the Sales Tax Law, for instance the 30% category, and the VAT Law was then applied, and the stock’s sales tax was already paid, the sales tax will first be calculated at 30%. The reason behind this is that the cars are subject to the table tax and the VAT. Thus, the table tax is part of the VAT base. That’s why we should know the sales tax value. The sales tax on a car that costs EGP 200,000 is equivalent to EGP 200,000 multiplied by 30%—this is how the sales tax is calculated.
In the transitional provisions, table or sales taxes are deducted from the VAT’s value. For example, if the sales tax in this case is EGP 30,000, and the table tax—which is calculated through value, customs, development, and other fees—is EGP 15,000, this value will be settled from the paid sales tax. After that, the VAT will be calculated at 13% and deducted from the credit balance. Therefore, the merchant will not bear any additional costs in this case. There are practical examples of how to apply the tax.
We have a copy of the executive regulations of the VAT Law. How correct is it?
Youssef: We have issued several copies of the draft VAT Law, as well as copies of the executive regulations, and I believe that the deployed copies are not final, and are still being edited.
Some entities in the automotive sector had a problem with calculating the tax, and an error occurred during its application with customs.
Youssef: The sales tax has been annulled, and thus, the VAT became the accepted tax for any development fee, like customs. The fee became part of the table tax, and we held working sessions for those dealing with the Customs Authority to make them aware of the tax’s application.
Matar: The problem is that the tax’s application at customs was temporary, because in the Development Fee Law, the sales tax was part of the development fee. This stirred controversy and made the customs regulators question whether they should calculate the sales tax after or before adding the development fee.
This problem was resolved in the VAT Law, which stated “all taxes and fees are paid in the customs process”.
Youssef: Customs made another mistake by imposing a 1% table tax on cars equipped for disabled people, considering them 1,600cc cars. However, these cars are exempt from taxes in the VAT Law.
But I think these cars are still subject to the table tax, although all the goods exempted by the law do not have to pay the table tax and VAT.
Are inventory and commodity stocks subject to the development fee or not? Some companies did not calculate the development fee as part of the table tax.
Matar: The owner of the inventory has a coupon of the old stocks, which includes the stocks’ value and the tax. It also shows whether the tax was paid in customs, and whether the development fee was calculated or not.
For example, if the tax was worth EGP 10,000, and then customs addressed the company that owns the inventory and asked them to pay a certain value, the settlement will be calculated based on what was actually paid, and no new tax will be imposed.
Shawky: The company that owns the inventory in this case will remain registered under the VAT Law.
The question is whether the value of the taxes on cars increased, and the answer is no—it just turned into a table tax.
The sixth article of the released copy of the law was clear in that regard, and the settlement will be made on a net credit balance of the sales tax.
The tax is a credit tax, which means that during auditing the balance provided is deducted from the sales tax, and therefore no amounts are paid until the end of the credit balance.
The company’s balance is fixed in the Customs Authority. Upon its depletion, there will be a table tax that is applied only to car producers, but the situation is different for manufacturers and traders. There is no difference between the table tax and the VAT for the manufacturer, and the price will only shift from a table tax to a VAT in the case of sale.
However, if a trader buys a car with a 30% sales tax, it is divided into a 15% table tax and 13% VAT. This means that the tax fell to approximately 29% with a deduction on inputs.
Matar: I would like to launch an initiative through Daily News Egypt addressing the companies—if you have a problem in the settlement of the credit balance, you must head to the examination or research sector at the Customs Authority in order to calculate your balance properly.
Please explain the deduction of the tax on indirect inputs. Some customs advisers said that the purchase of computer equipment is deducted from the VAT. Is that correct?
Matar: Indirect inputs are linked to commodities.
Shawky: For production centres, all their pay-offs that are subject to VAT fall within the deduction.
Production services centres are allowed to deduct inputs and production marketing, as well as marketing service, administrative, and financial centres. As long as they contain direct or indirect added value, they are deductible. However, this is under the condition that the VAT is excluded from the cost of the commodity.
Tax returns submitted by companies are a link between the Customs Authority and the company. At the end of each FY, the sales and purchases of the company are documented in full, but if the tax is included in the input in the table of purchases, the deduction does not take place.
Youssef: In order to help the dealers, we will develop a clear definition of the indirect inputs in the executive regulations, and determine whether they are general and administrative expenses or marketing and distribution expenses.
How would you apply the VAT Law on the goods exempt from taxes according to the international agreements?
Matar: The VAT Law was clear, as it stipulates that “no changes shall be applied to the exemptions provided under the agreements concluded between the Egyptian government and foreign countries, international, or regional organisations, and petroleum and mining agreements”.
Would the COMESA agreement be subject to the VAT Law?
Shawky: Yes, COMESA agreements will be subject to the VAT Law.
What about automotive loan companies and the interests of instalment sales?
Shawky: There are two activities exempt from the VAT Law. Under Article 33, which deals with banking transactions, the automotive loans are not subject to the VAT.
Article 31 of the Central Bank Law stipulates that the banking business is exempt from taxes. In applying the provisions of Article 31, bank business shall mean any activity comprising, basically and habitually, the acceptance of deposits, the obtainment of finance, and the investment of these funds in providing finance and credit facilities and contributing to the capital of companies, and all that is considered by banking tradition as bank business.
Any establishment not registered according to the provisions of this law shall be prohibited from using the term “bank” or any other expression similar to it in any language, whether in its special name, commercial title, or publicity. This means that private companies are not subject to this law, therefore they should register under the VAT.
Article 36 of the Central Bank Law exempts non-banking financial services under the supervision of the Egyptian Financial Supervisory Authority (EFSA) from taxes, according to Law No. 10 of 2009 on the organisation and supervision of financial and unspecialised markets and instruments.
According to Article 2 of the law: “EFSA shall be responsible for the supervision and regulation of non-banking financial markets and instruments including capital market, future and derivatives exchanges, insurance activities, mortgage finance, financial lease, factoring, and securitisation.”
As long as the automotive loans will be financed from outside the banking sector or by companies not subject to the supervision of EFSA, they would be subject to the VAT.
Would the sales incentives offered by the companies be subject to the VAT Law?
Shawky: The commercial deductions are clearly mentioned in the law.
Matar: If the commercial deductions are added to the invoice, they would be acceptable.
But these discounts are not included in the invoice.
Matar: The consumer should benefit from the deductions. If the customer does not benefit from them, then they are not considered deductions, because the company can collect it and benefit from the cost deduction.
What taxes will be applied on used cars?
Matar: In the case of selling a used car, a 13% tax will be applied on the difference between the price of buying and selling.
Shawky: If the car is used in a certain commercial activity, which is subject to taxes and fees, the company has the right to restore the 13% tax, but the vehicle would not be allowed to be sold for five years.
Let’s take a look at a specific example: we have a stock of 100 cars, of which four cars were used by company managers for three or four months. What taxes will be applied if those stock cars were to be sold?
Matar: The tax is applied on the car’s recorded invoice price, and we noticed that a number of car dealers issue invoices with prices below the actual prices.
For example, if a car is worth EGP 180,000, the car dealer will issue an invoice of EGP 150,000 and give the customer a receipt of EGP 30,000.
The Consumer Protection Agency has received some complaints regarding this issue, and it has been dealing with these cases through the Tax Evasion Control Department.
Shawky: We have a complaint about a car of which the market price registers EGP 480,000, while its invoice only records EGP 250,000.
Matar: In this case, we should adjust submitted invoices—a procedure that is completely legal.
Shawky: I think that the company made a mistake, because it believes that this eases the burden of instalment interests on the customer. I ask the companies to join hands with one another and announce the accurate selling prices in the market. This procedure will protect the market and also benefit the Tax Authority.
Companies in the automotive market have maintenance contracts with their customers. Will the value-added tax be deducted from these contracts?
Matar: If the maintenance warranty is included in the car’s invoice, it will be deducted from the total VAT. However, if the maintenance warranty is sealed on a different contract, it will not be deducted from the total VAT, but will be subject to the general VAT rate.
Companies and importers in the automotive sector are facing problems with the price of the US dollar. How will these problems be addressed during an auditing inspection?
Matar: This issue is more related to the Income Tax Law. The cost of obtaining foreign currency is calculated based on the difference in the currency’s price. I am currently seeking to find a solution for this dilemma with the Central Bank of Egypt, because in order for the Tax Authority to recognise the differences, we need to have bills.
We are currently studying the inclusion of the currency obtainment cost as part of the expenses that do not have to be proven through documents. The allowed amount of such expenses lies at 7%. In the VAT Law, there is no problem.
How will this mechanism be applied?
Matar: There is a joint committee between the Ministry of Finance and the Central Bank of Egypt, to which we suggested this procedure.
During the discussion, you said that the executive regulations of the law should be issued within 30 days. The articles of the law stipulate that the minister of finance should issue the law’s executive regulations within 30 days from the date it was published in the official newspaper. It also states that until these regulations are set, the law will continue to be implemented according to current regulations and decisions, unless they are conflicting with the law.
What I really wonder about is if the executive regulations prevent the application of the law or establish conditions that are not part of the law? The answer is no, and therefore, the law is valid and should be applied.
I believe that rushing the issuance of the executive regulations may not be useful because it would lead to not taking important points into account. Taking time to draft the executive regulations guarantees their transparency and clarity, and does not require that further instructions be issued later on. Thus, taking our time is better than rushing the process.
I will take the major points raised by the representatives of the automotive sector in this symposium into consideration when drafting the executive regulations of the law. I will be sure to include positive solutions in the executive regulations to reduce disagreements and conflicts.
Will the law be applied on the exported services?
Abu Al Yazid: There must be a clear and explicit definition of “exported services” in the executive regulations of the VAT Law.
How is the auditor certificate applied?
Matar: The certificate must be issued by a legal accountant when deducting or refunding the tax. The certificate and its exact form will be set in the executive regulations.
Will car services like Uber and Careem be subject to the VAT?
Matar: These services will be subject to the general tax rate of 13%.