ETA

Egypt vs GCC

VAT Proposals

Egyptian Tax Reform

In July 2004, a new cabinet took office with a mandate to reform

aiming to increase employment through investment.

A high priority was placed on amending the tax laws and customs

tariffs.

The major elements of the tax reform can be stated as follows:

•An appropriate tax policy and legislative framework;

•Clear and simple legislation and procedures

•A single integrated tax administration; and a strong focus on

taxpayer segmentation.

Legislative framework

• In 2005, enactment of a new income tax law closer to

international practice.

• In 2006, the stamp duty tax was subject to a comprehensive

overhaul.

• In 2008, a new real estate tax law was enacted introducing

a single reduced tax rate.

• In 2009, introducing a simplified tax regime for SMEs.

• The remaining outstanding legislative reform is the

transformation of the current sales tax to a full fledged VAT.

Current sales tax Structure

• Sales tax was first introduced to Egypt in 1991.

• Law no. 11 of 1991 and its executive regulations govern the

application of the Egyptian sales tax.

• The following are subject to sales tax:

- All non-exempt domestic goods;

- Goods imported only for commercial purposes;

- specific services stipulated in the law.

• Some goods are subject to an excise tax based on physical

units (e.g. per kilo or per ton).

Current sales tax Structure (Cont’d)

• No credit available for inputs of services.

• Non-residents are not subject to tax

Tax Rates

• Standard tax rate 10%

• Reduced tax rate 5% on essential goods

• Maximum tax rate is 25% on some luxury goods

• Exports are zero rated

Deficiencies of the current legislation

• The audit & invoice trail is poorer than under a VAT

especially for services

• Revenue is not secured at the easiest stage - Importation

WHY VAT?

1.Elimination of double taxation (cascading ) through:

Dissemination of tax credit on services and purchased inputs including machinery and equipment necessary for the activity (carrying business), whether for sales or production.

2.Simplification of rate structure

Unification of tax rates into one rate to simplify and facilitate tax calculation.

3.Reducing cost of collection

Raising the tax threshold leads to the exclusion of small taxpayers which minimizes compliance costs of the tax administration

WHY VAT?

4. Promoting taxpayers’ compliance

Encouraging self assessment to create a culture of

voluntarily compliance

5. Broadening the tax base

6. Achieving tax equalization between registered taxpayers

and non-registrants

Increasing the tax rate by 2% on sales of goods and

services by taxable persons to non-registered

persons, except for sales made by retailers to the

final consumer

7. An efficient VAT system provides the basis for efficient tax

administration & addresses the shadow economy

WHY VAT? (Cont’d)

8- Increasing Tax Revenue

• In order to meet the objective of reducing the overall budget deficit to about 3% of GDP,

• The following table shows the projected tax revenue in Egypt under the current tax legislations from 2008 up to 2015:

2014/15

Projected

2013/14

Projected

2012/13

Projected

2011/12

Projected

2010/11

Projected

2009/10

Projected

2008/09

(% of GDP)

14.5 14.6 14.8 14.7 14.9 13.8 15.7 Tax

Revenue

Main features of Egypt’s proposed VAT Law

• Broaden the tax base to include all goods and services

except for those explicitly exempted by the law.

• Credit available for inputs including:

1 - goods;

2 - services;

3 - capital goods (e.g. machinery & equipment).

• Unify and raise the tax threshold

• One standard tax rate; initial proposal 6%

Main features of Egypt’s proposed VAT Law (Cont’d)

- The definition of the taxable person includes non-residents .

- The service recipient withholds and remits the tax in relation to taxable transactions with non-residents (Reverse charge mechanism)

- Importers’ liability to tax is extended to cover all goods regardless of importation purposes.

- The tax authority is entitled to register taxable persons whose turnovers exceed the tax threshold in case they don’t voluntarily comply with the tax law .

- Possibility to carry forward tax credit to the following tax periods.

Gulf countries council (GCC ) sets to introduce VAT system by the

end of 2013.

Factors that led GCC to introduce VAT :

1- Problems associated with distribution of wealth in the GCC

2- increase the level of productivity

3- encourage the competitive advantage among GCC countries

Examples

- Oman plans to begin implementation at the end of 2011

- Bahrain is ready for implementation

- Saudi Arabia; implementation starts within one to two years from now

Main features of the proposed GCC VAT

Main features of the proposed GCC VAT (cont’d)

• A unified administrative structure that allows for some degree of flexibility with regard to each country’s legislation and procedures

• A starting point setting VAT rates at the lowest possible value (e.g. 3%) with a possibility of progression up to 5%

• An extensive tax base including:

1- SME’s & large companies

2- Hospitals & schools

3- Agriculture/farming

4- Real estate sector

5- Oil & gas projects

6- Public Sector Entities yielding economic outputs

• Expanding refunds & zero rates to cover SME’s & private housing.

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