26th of September, 2016
Clarification of New VAT Law
By: Lamiaa Youssef
Keywords: Financial Institutions, Banking & Finance, Commercial
Sales Tax has always been VAT and other worthy clarifications about the new VAT Law.
The new VAT Law is not substantially different from the old Sales Tax Law, with changes in the scope and rates, particularly in relation to services.
The President pomulgated Law 67/2016 issuing the Value-Added Tax (the “VAT Law”), which repealed Law 11/1991 issuing the Law for the General Tax on Sales (the “Sales Tax Law”).
The new VAT Law is causing a lot of confusion. It is not clear how different it is from the previous Sales Tax Law and what are its consequences on businesses and consumers. Published analysis of the VAT Law in various sources seem to provide different opinions (and their opposites) as to how the law will apply. We set out below some of the statements going around regarding the law and their clarification. We hope that after you read this, you have a better understanding of the new VAT Law and how it will affect us.
If you just want a very quick update on what’s new in the VAT Law, Click here.
1. The new VAT Law is different than the old Sales Tax Law because the tax is now only calculated on the value added; whereas before it was calculated on the entire product.
Wrong. It is true that, technically, sales tax has a different taxing mechanism than a value added taxing system. However, the old Sales Tax Law was in reality a value added tax system. The repealed Sales Tax Law has always been imposed only on the value that a producer or a merchant adds to a good. The old law, like the new VAT Law, permitted taxpayers from retrieving the tax previously paid on the input materials and equipment used in the manufacturing of the goods. (To make things clear, check this example.) However, the deduction mechanism has now been extended.
In a nutshell, is this good or bad for business? Mostly good.
2. Deduction of taxes on input always existed. Sellers who had to pay a tax on their final product were always allowed to deduct the tax they previously paid for the goods they used in their operations.
Well, yes; but it is now different. Two improvements and two relapses were made in relation to the deduction of previously paid tax.
- For one thing, the old law permitted sellers of goods from deducting the tax on the input they previously paid. However, sellers of services were not permitted to deduct any tax paid on input costs. Under the new law, sellers of both goods and services may deduct previously paid tax. (See example.)
- In addition, sellers of goods were only allowed to deduct tax on input paid in relation to materials and goods used in their operations, but they were not allowed to deduct taxes relating to services that a seller procured for its manufacturing, for example, taxes on transport or storage costs. Now, sellers can deduct both the tax on goods, including raw materials and equipment and on services they contracted for the production of their final goods. (See example.) All positive so far.
- On the negative side, the VAT Law does not permit the deduction of taxes paid on the goods subject to the excise tax. (Some goods and services have been subjected to a specific tax different from the general VAT of 13%. They are listed exhaustively in a schedule attached to the VAT Law. Tax on these goods is referred to as excise tax or schedule tax. Sometimes it is imposed instead of the VAT tax and sometimes it is imposed in addition to the VAT.)
- Also, in order for an exporter to retrieve taxes he previously paid on input goods and services he used in the production of the exported goods or services, the price of the exports must be paid through a registered Egyptian bank. Also, a certified accountant must provide a declaration about the right to deduction, along with the other deduction documents. Based on this, payment offshore cancels the right to retrieve taxes paid on input materials and services.
In a nutshell, is this good or bad for business? Still good; but restrictive for exporters who want to be paid offshore.
3. The old Sales Tax Law taxed both services and goods.
Sort of. The scope of services being made subject to VAT has substantially increased. Under the old Sales Tax Law, all goods were subject to tax, unless exempted. However, all services were not subject to the law, unless they are explicitly taxed. Only 17 categories of services were taxed under the old Sales Tax Law (although one of those categories “operations for the benefit of third parties” was particularly wide).
Under the new VAT Law, the rule is all goods and services are subject to VAT, unless expressly exempted by law. As such, a whole new bunch of service providers, professionals and consultants, such as lawyers and accountants, will now be subject to VAT.
In a nutshell, is this good or bad for business? Bad for most service providers that are not exempted.
4. The tax rates have been decreased in relation to a lot of goods. Prices will go down. Yeah right! For starters, the general tax rate to be imposed on all goods and services, unless those for which a specific tax applies, has increased from 10% to 13%.
The tax on a number of goods has indeed been decreased or canceled; mostly in relation to basic commodities (see this list). However, in a market with weak consumer rights and law enforcement mechanisms, this does not necessarily result in a decrease in prices for such goods.
In addition, the tax on some goods, including telecom and steel, has been increased (see this list).
In a nutshell, is this good or bad for business? Bad.
5. Reverse charge has been applied in other countries. The new VAT Law will now impose it in Egypt as well.
True. But first, what is the reverse charge? Reverse charge is a mechanism that applies in case the supplier of a good or service is a resident outside Egypt and the buyer is resident in Egypt. In such a case, the duty to deduct and deliver the VAT tax will be reverse-charged to the buyer, instead of the seller.
Let’s break this down. Ordinarily, the VAT tax should be charged on the buyer; i.e. the buyer bears the burden from his pocket. However, the duty to deduct the tax and deliver the tax to the tax authorities is, by law, on the seller. If the seller is a resident outside Egypt, he is not addressed by the Egyptian VAT Law and is not under a duty to deliver the tax to the authorities. In this case, the buyer is now under a duty to deliver the tax to the authorities instead.
Is this new? Yes, in relation to services. No, in relation to goods. Previously, the VAT on goods was charged during customs clearance and has always been factored in the price. However, in relation to services, buyers typically paid no VAT. So, what are the consequences? Recipients of services from
abroad will need to factor the new VAT tax in the price of the services they procure. Foreign services will now be more expensive.
In a nutshell, is this good or bad for business? Bad; prices of foreign services will increase.
6. Suppliers must apply the new tax rates starting 8 September 2016. Contracts may be amended.
Yes. There was some confusion as to the date of entry into force of the VAT Law. Some sources said it will apply starting 1 October. However, the law enters into force on 8 September 2016 and thus the new rates apply starting from this date.
Article 11 of the new VAT Law states that the prices quoted in existing contracts that were concluded by suppliers and producers of goods or services and are still valid at the time of issuance of the new VAT Law will be amended in the value of the new tax. The executive regulation should provide the rules relating to how such amendment will be implemented.
7. The penalty for VAT evasion has been increased.
Yes. The criminal penalty for VAT evasion has been increased from a penalty of one month’s jail and/or a fine of EGP1’000 to EGP5’000 to a penalty of imprisonment from 3-5 years and/or a fine ranging from EGP5’000 to EGP50’000. The new VAT Law, like the old Sales Tax Law, provides for specific cases (now 19) where the tax payer will be deemed as evading the law. These cases provide automatic penalty. This means that a judge does not have discretion in these cases to determine the existence or not of evasion. However, criminal intent will still be established.
Press here for copy of new VAT Law in Arabic ››
Guest Contributor
We are happy to have an expert on board with us on this update. This newsletter is jointly issued by the team in Sharkawy & Sarhan Law Firm and esteemed tax advisor, Mr. Abdelhamid Attalla, CPA(USA), CA(Egypt), former GE Tax Director in the Middle East & Africa and former KPMG Senior Tax Partner for Egypt and Middle East/South Asia. Please see Abdelhamid’s bio below.
About Abdelhamid Attalla: Abdelhamid is a qualified US CPA (Texas) and CA (Egypt). Abdelhamid was General Electric’s MEA Tax Director for the period 2009-2016 where he provided support to all of GE’s businesses in the region including Power, Oil & Gas, Aviation, Healthcare, Transport, Lighting and Airline Leasing. Abdelhamid established a team of MEA tax professionals exceeding 20 professionals. Prior to joining GE Abdelhamid was KPMG Senior Tax Partner for Egypt and Middle East/South Asia for the period 1997-2009 where he advised international and regional companies on tax issues in the region and provided support to governments on drafting of tax laws and regulations. Abdelhamid was part of the team that drafted the Egyptian Income Tax Law 91 for 2005 and its executive regulations. Prior to moving back to the Middle East in 1997 Abdelhamid practiced international tax in the US & UK with Arthur Andersen & Price Waterhouse during the period 1986-1997.
Abdelhamid holds a Bachelor of Commerce from Cairo University (1981). Abdelhamid obtained a Master of Accounting from Texas A&I University-Kingsville (1984) and Master of Taxation from the American University-Washington D.C. Abdelhamid is a member of the American Institute of CPAs and the Egyptian Society of Accountants and Auditors. Abdelhamid is also a member of the Society of Trust & Estate Practitioners and the UK Association of Taxation Technicians. Abdelhamid is a member of the Board of Directors of IFA GCC branch. Abdelhamid participates as a panelist in various international tax conferences on issues relating to international tax issues relating to the MEA.
If you just want a very quick update on what’s new in the VAT Law, Click here.
1. The new VAT Law is different than the old Sales Tax Law because the tax is now only calculated on the value added; whereas before it was calculated on the entire product.
Wrong. It is true that, technically, sales tax has a different taxing mechanism than a value added taxing system. However, the old Sales Tax Law was in reality a value added tax system. The repealed Sales Tax Law has always been imposed only on the value that a producer or a merchant adds to a good. The old law, like the new VAT Law, permitted taxpayers from retrieving the tax previously paid on the input materials and equipment used in the manufacturing of the goods. (To make things clear, check this example.) However, the deduction mechanism has now been extended.
In a nutshell, is this good or bad for business? Mostly good.
2. Deduction of taxes on input always existed. Sellers who had to pay a tax on their final product were always allowed to deduct the tax they previously paid for the goods they used in their operations.
Well, yes; but it is now different. Two improvements and two relapses were made in relation to the deduction of previously paid tax.
- For one thing, the old law permitted sellers of goods from deducting the tax on the input they previously paid. However, sellers of services were not permitted to deduct any tax paid on input costs. Under the new law, sellers of both goods and services may deduct previously paid tax. (See example.)
- In addition, sellers of goods were only allowed to deduct tax on input paid in relation to materials and goods used in their operations, but they were not allowed to deduct taxes relating to services that a seller procured for its manufacturing, for example, taxes on transport or storage costs. Now, sellers can deduct both the tax on goods, including raw materials and equipment and on services they contracted for the production of their final goods. (See example.) All positive so far.
- On the negative side, the VAT Law does not permit the deduction of taxes paid on the goods subject to the excise tax. (Some goods and services have been subjected to a specific tax different from the general VAT of 13%. They are listed exhaustively in a schedule attached to the VAT Law. Tax on these goods is referred to as excise tax or schedule tax. Sometimes it is imposed instead of the VAT tax and sometimes it is imposed in addition to the VAT.)
- Also, in order for an exporter to retrieve taxes he previously paid on input goods and services he used in the production of the exported goods or services, the price of the exports must be paid through a registered Egyptian bank. Also, a certified accountant must provide a declaration about the right to deduction, along with the other deduction documents. Based on this, payment offshore cancels the right to retrieve taxes paid on input materials and services.
In a nutshell, is this good or bad for business? Still good; but restrictive for exporters who want to be paid offshore.
3. The old Sales Tax Law taxed both services and goods.
Sort of. The scope of services being made subject to VAT has substantially increased. Under the old Sales Tax Law, all goods were subject to tax, unless exempted. However, all services were not subject to the law, unless they are explicitly taxed. Only 17 categories of services were taxed under the old Sales Tax Law (although one of those categories “operations for the benefit of third parties” was particularly wide).
Under the new VAT Law, the rule is all goods and services are subject to VAT, unless expressly exempted by law. As such, a whole new bunch of service providers, professionals and consultants, such as lawyers and accountants, will now be subject to VAT.
In a nutshell, is this good or bad for business? Bad for most service providers that are not exempted.
4. The tax rates have been decreased in relation to a lot of goods. Prices will go down. Yeah right! For starters, the general tax rate to be imposed on all goods and services, unless those for which a specific tax applies, has increased from 10% to 13%.
The tax on a number of goods has indeed been decreased or canceled; mostly in relation to basic commodities (see this list). However, in a market with weak consumer rights and law enforcement mechanisms, this does not necessarily result in a decrease in prices for such goods.
In addition, the tax on some goods, including telecom and steel, has been increased (see this list).
In a nutshell, is this good or bad for business? Bad.
5. Reverse charge has been applied in other countries. The new VAT Law will now impose it in Egypt as well.
True. But first, what is the reverse charge? Reverse charge is a mechanism that applies in case the supplier of a good or service is a resident outside Egypt and the buyer is resident in Egypt. In such a case, the duty to deduct and deliver the VAT tax will be reverse-charged to the buyer, instead of the seller.
Let’s break this down. Ordinarily, the VAT tax should be charged on the buyer; i.e. the buyer bears the burden from his pocket. However, the duty to deduct the tax and deliver the tax to the tax authorities is, by law, on the seller. If the seller is a resident outside Egypt, he is not addressed by the Egyptian VAT Law and is not under a duty to deliver the tax to the authorities. In this case, the buyer is now under a duty to deliver the tax to the authorities instead.
Is this new? Yes, in relation to services. No, in relation to goods. Previously, the VAT on goods was charged during customs clearance and has always been factored in the price. However, in relation to services, buyers typically paid no VAT. So, what are the consequences? Recipients of services from
abroad will need to factor the new VAT tax in the price of the services they procure. Foreign services will now be more expensive.
In a nutshell, is this good or bad for business? Bad; prices of foreign services will increase.
6. Suppliers must apply the new tax rates starting 8 September 2016. Contracts may be amended.
Yes. There was some confusion as to the date of entry into force of the VAT Law. Some sources said it will apply starting 1 October. However, the law enters into force on 8 September 2016 and thus the new rates apply starting from this date.
Article 11 of the new VAT Law states that the prices quoted in existing contracts that were concluded by suppliers and producers of goods or services and are still valid at the time of issuance of the new VAT Law will be amended in the value of the new tax. The executive regulation should provide the rules relating to how such amendment will be implemented.
7. The penalty for VAT evasion has been increased.
Yes. The criminal penalty for VAT evasion has been increased from a penalty of one month’s jail and/or a fine of EGP1’000 to EGP5’000 to a penalty of imprisonment from 3-5 years and/or a fine ranging from EGP5’000 to EGP50’000. The new VAT Law, like the old Sales Tax Law, provides for specific cases (now 19) where the tax payer will be deemed as evading the law. These cases provide automatic penalty. This means that a judge does not have discretion in these cases to determine the existence or not of evasion. However, criminal intent will still be established.
Press here for copy of new VAT Law in Arabic ››
Guest Contributor
We are happy to have an expert on board with us on this update. This newsletter is jointly issued by the team in Sharkawy & Sarhan Law Firm and esteemed tax advisor, Mr. Abdelhamid Attalla, CPA(USA), CA(Egypt), former GE Tax Director in the Middle East & Africa and former KPMG Senior Tax Partner for Egypt and Middle East/South Asia. Please see Abdelhamid’s bio below.
About Abdelhamid Attalla: Abdelhamid is a qualified US CPA (Texas) and CA (Egypt). Abdelhamid was General Electric’s MEA Tax Director for the period 2009-2016 where he provided support to all of GE’s businesses in the region including Power, Oil & Gas, Aviation, Healthcare, Transport, Lighting and Airline Leasing. Abdelhamid established a team of MEA tax professionals exceeding 20 professionals. Prior to joining GE Abdelhamid was KPMG Senior Tax Partner for Egypt and Middle East/South Asia for the period 1997-2009 where he advised international and regional companies on tax issues in the region and provided support to governments on drafting of tax laws and regulations. Abdelhamid was part of the team that drafted the Egyptian Income Tax Law 91 for 2005 and its executive regulations. Prior to moving back to the Middle East in 1997 Abdelhamid practiced international tax in the US & UK with Arthur Andersen & Price Waterhouse during the period 1986-1997.
Abdelhamid holds a Bachelor of Commerce from Cairo University (1981). Abdelhamid obtained a Master of Accounting from Texas A&I University-Kingsville (1984) and Master of Taxation from the American University-Washington D.C. Abdelhamid is a member of the American Institute of CPAs and the Egyptian Society of Accountants and Auditors. Abdelhamid is also a member of the Society of Trust & Estate Practitioners and the UK Association of Taxation Technicians. Abdelhamid is a member of the Board of Directors of IFA GCC branch. Abdelhamid participates as a panelist in various international tax conferences on issues relating to international tax issues relating to the MEA.
Clarification of New VAT Law
26th of September, 2016
By: Lamiaa Youssef
Keywords: Financial Institutions, Banking & Finance, Commercial
Sales Tax has always been VAT and other worthy clarifications about the new VAT Law.
The new VAT Law is not substantially different from the old Sales Tax Law, with changes in the scope and rates, particularly in relation to services.
The President pomulgated Law 67/2016 issuing the Value-Added Tax (the “VAT Law”), which repealed Law 11/1991 issuing the Law for the General Tax on Sales (the “Sales Tax Law”).
The new VAT Law is causing a lot of confusion. It is not clear how different it is from the previous Sales Tax Law and what are its consequences on businesses and consumers. Published analysis of the VAT Law in various sources seem to provide different opinions (and their opposites) as to how the law will apply. We set out below some of the statements going around regarding the law and their clarification. We hope that after you read this, you have a better understanding of the new VAT Law and how it will affect us.
If you just want a very quick update on what’s new in the VAT Law, Click here.
1. The new VAT Law is different than the old Sales Tax Law because the tax is now only calculated on the value added; whereas before it was calculated on the entire product.
Wrong. It is true that, technically, sales tax has a different taxing mechanism than a value added taxing system. However, the old Sales Tax Law was in reality a value added tax system. The repealed Sales Tax Law has always been imposed only on the value that a producer or a merchant adds to a good. The old law, like the new VAT Law, permitted taxpayers from retrieving the tax previously paid on the input materials and equipment used in the manufacturing of the goods. (To make things clear, check this example.) However, the deduction mechanism has now been extended.
In a nutshell, is this good or bad for business? Mostly good.
2. Deduction of taxes on input always existed. Sellers who had to pay a tax on their final product were always allowed to deduct the tax they previously paid for the goods they used in their operations.
Well, yes; but it is now different. Two improvements and two relapses were made in relation to the deduction of previously paid tax.
- For one thing, the old law permitted sellers of goods from deducting the tax on the input they previously paid. However, sellers of services were not permitted to deduct any tax paid on input costs. Under the new law, sellers of both goods and services may deduct previously paid tax. (See example.)
- In addition, sellers of goods were only allowed to deduct tax on input paid in relation to materials and goods used in their operations, but they were not allowed to deduct taxes relating to services that a seller procured for its manufacturing, for example, taxes on transport or storage costs. Now, sellers can deduct both the tax on goods, including raw materials and equipment and on services they contracted for the production of their final goods. (See example.) All positive so far.
- On the negative side, the VAT Law does not permit the deduction of taxes paid on the goods subject to the excise tax. (Some goods and services have been subjected to a specific tax different from the general VAT of 13%. They are listed exhaustively in a schedule attached to the VAT Law. Tax on these goods is referred to as excise tax or schedule tax. Sometimes it is imposed instead of the VAT tax and sometimes it is imposed in addition to the VAT.)
- Also, in order for an exporter to retrieve taxes he previously paid on input goods and services he used in the production of the exported goods or services, the price of the exports must be paid through a registered Egyptian bank. Also, a certified accountant must provide a declaration about the right to deduction, along with the other deduction documents. Based on this, payment offshore cancels the right to retrieve taxes paid on input materials and services.
In a nutshell, is this good or bad for business? Still good; but restrictive for exporters who want to be paid offshore.
3. The old Sales Tax Law taxed both services and goods.
Sort of. The scope of services being made subject to VAT has substantially increased. Under the old Sales Tax Law, all goods were subject to tax, unless exempted. However, all services were not subject to the law, unless they are explicitly taxed. Only 17 categories of services were taxed under the old Sales Tax Law (although one of those categories “operations for the benefit of third parties” was particularly wide).
Under the new VAT Law, the rule is all goods and services are subject to VAT, unless expressly exempted by law. As such, a whole new bunch of service providers, professionals and consultants, such as lawyers and accountants, will now be subject to VAT.
In a nutshell, is this good or bad for business? Bad for most service providers that are not exempted.
4. The tax rates have been decreased in relation to a lot of goods. Prices will go down. Yeah right! For starters, the general tax rate to be imposed on all goods and services, unless those for which a specific tax applies, has increased from 10% to 13%.
The tax on a number of goods has indeed been decreased or canceled; mostly in relation to basic commodities (see this list). However, in a market with weak consumer rights and law enforcement mechanisms, this does not necessarily result in a decrease in prices for such goods.
In addition, the tax on some goods, including telecom and steel, has been increased (see this list).
In a nutshell, is this good or bad for business? Bad.
5. Reverse charge has been applied in other countries. The new VAT Law will now impose it in Egypt as well.
True. But first, what is the reverse charge? Reverse charge is a mechanism that applies in case the supplier of a good or service is a resident outside Egypt and the buyer is resident in Egypt. In such a case, the duty to deduct and deliver the VAT tax will be reverse-charged to the buyer, instead of the seller.
Let’s break this down. Ordinarily, the VAT tax should be charged on the buyer; i.e. the buyer bears the burden from his pocket. However, the duty to deduct the tax and deliver the tax to the tax authorities is, by law, on the seller. If the seller is a resident outside Egypt, he is not addressed by the Egyptian VAT Law and is not under a duty to deliver the tax to the authorities. In this case, the buyer is now under a duty to deliver the tax to the authorities instead.
Is this new? Yes, in relation to services. No, in relation to goods. Previously, the VAT on goods was charged during customs clearance and has always been factored in the price. However, in relation to services, buyers typically paid no VAT. So, what are the consequences? Recipients of services from
abroad will need to factor the new VAT tax in the price of the services they procure. Foreign services will now be more expensive.
In a nutshell, is this good or bad for business? Bad; prices of foreign services will increase.
6. Suppliers must apply the new tax rates starting 8 September 2016. Contracts may be amended.
Yes. There was some confusion as to the date of entry into force of the VAT Law. Some sources said it will apply starting 1 October. However, the law enters into force on 8 September 2016 and thus the new rates apply starting from this date.
Article 11 of the new VAT Law states that the prices quoted in existing contracts that were concluded by suppliers and producers of goods or services and are still valid at the time of issuance of the new VAT Law will be amended in the value of the new tax. The executive regulation should provide the rules relating to how such amendment will be implemented.
7. The penalty for VAT evasion has been increased.
Yes. The criminal penalty for VAT evasion has been increased from a penalty of one month’s jail and/or a fine of EGP1’000 to EGP5’000 to a penalty of imprisonment from 3-5 years and/or a fine ranging from EGP5’000 to EGP50’000. The new VAT Law, like the old Sales Tax Law, provides for specific cases (now 19) where the tax payer will be deemed as evading the law. These cases provide automatic penalty. This means that a judge does not have discretion in these cases to determine the existence or not of evasion. However, criminal intent will still be established.
Press here for copy of new VAT Law in Arabic ››
Guest Contributor
We are happy to have an expert on board with us on this update. This newsletter is jointly issued by the team in Sharkawy & Sarhan Law Firm and esteemed tax advisor, Mr. Abdelhamid Attalla, CPA(USA), CA(Egypt), former GE Tax Director in the Middle East & Africa and former KPMG Senior Tax Partner for Egypt and Middle East/South Asia. Please see Abdelhamid’s bio below.
About Abdelhamid Attalla: Abdelhamid is a qualified US CPA (Texas) and CA (Egypt). Abdelhamid was General Electric’s MEA Tax Director for the period 2009-2016 where he provided support to all of GE’s businesses in the region including Power, Oil & Gas, Aviation, Healthcare, Transport, Lighting and Airline Leasing. Abdelhamid established a team of MEA tax professionals exceeding 20 professionals. Prior to joining GE Abdelhamid was KPMG Senior Tax Partner for Egypt and Middle East/South Asia for the period 1997-2009 where he advised international and regional companies on tax issues in the region and provided support to governments on drafting of tax laws and regulations. Abdelhamid was part of the team that drafted the Egyptian Income Tax Law 91 for 2005 and its executive regulations. Prior to moving back to the Middle East in 1997 Abdelhamid practiced international tax in the US & UK with Arthur Andersen & Price Waterhouse during the period 1986-1997.
Abdelhamid holds a Bachelor of Commerce from Cairo University (1981). Abdelhamid obtained a Master of Accounting from Texas A&I University-Kingsville (1984) and Master of Taxation from the American University-Washington D.C. Abdelhamid is a member of the American Institute of CPAs and the Egyptian Society of Accountants and Auditors. Abdelhamid is also a member of the Society of Trust & Estate Practitioners and the UK Association of Taxation Technicians. Abdelhamid is a member of the Board of Directors of IFA GCC branch. Abdelhamid participates as a panelist in various international tax conferences on issues relating to international tax issues relating to the MEA.
If you just want a very quick update on what’s new in the VAT Law, Click here.
1. The new VAT Law is different than the old Sales Tax Law because the tax is now only calculated on the value added; whereas before it was calculated on the entire product.
Wrong. It is true that, technically, sales tax has a different taxing mechanism than a value added taxing system. However, the old Sales Tax Law was in reality a value added tax system. The repealed Sales Tax Law has always been imposed only on the value that a producer or a merchant adds to a good. The old law, like the new VAT Law, permitted taxpayers from retrieving the tax previously paid on the input materials and equipment used in the manufacturing of the goods. (To make things clear, check this example.) However, the deduction mechanism has now been extended.
In a nutshell, is this good or bad for business? Mostly good.
2. Deduction of taxes on input always existed. Sellers who had to pay a tax on their final product were always allowed to deduct the tax they previously paid for the goods they used in their operations.
Well, yes; but it is now different. Two improvements and two relapses were made in relation to the deduction of previously paid tax.
- For one thing, the old law permitted sellers of goods from deducting the tax on the input they previously paid. However, sellers of services were not permitted to deduct any tax paid on input costs. Under the new law, sellers of both goods and services may deduct previously paid tax. (See example.)
- In addition, sellers of goods were only allowed to deduct tax on input paid in relation to materials and goods used in their operations, but they were not allowed to deduct taxes relating to services that a seller procured for its manufacturing, for example, taxes on transport or storage costs. Now, sellers can deduct both the tax on goods, including raw materials and equipment and on services they contracted for the production of their final goods. (See example.) All positive so far.
- On the negative side, the VAT Law does not permit the deduction of taxes paid on the goods subject to the excise tax. (Some goods and services have been subjected to a specific tax different from the general VAT of 13%. They are listed exhaustively in a schedule attached to the VAT Law. Tax on these goods is referred to as excise tax or schedule tax. Sometimes it is imposed instead of the VAT tax and sometimes it is imposed in addition to the VAT.)
- Also, in order for an exporter to retrieve taxes he previously paid on input goods and services he used in the production of the exported goods or services, the price of the exports must be paid through a registered Egyptian bank. Also, a certified accountant must provide a declaration about the right to deduction, along with the other deduction documents. Based on this, payment offshore cancels the right to retrieve taxes paid on input materials and services.
In a nutshell, is this good or bad for business? Still good; but restrictive for exporters who want to be paid offshore.
3. The old Sales Tax Law taxed both services and goods.
Sort of. The scope of services being made subject to VAT has substantially increased. Under the old Sales Tax Law, all goods were subject to tax, unless exempted. However, all services were not subject to the law, unless they are explicitly taxed. Only 17 categories of services were taxed under the old Sales Tax Law (although one of those categories “operations for the benefit of third parties” was particularly wide).
Under the new VAT Law, the rule is all goods and services are subject to VAT, unless expressly exempted by law. As such, a whole new bunch of service providers, professionals and consultants, such as lawyers and accountants, will now be subject to VAT.
In a nutshell, is this good or bad for business? Bad for most service providers that are not exempted.
4. The tax rates have been decreased in relation to a lot of goods. Prices will go down. Yeah right! For starters, the general tax rate to be imposed on all goods and services, unless those for which a specific tax applies, has increased from 10% to 13%.
The tax on a number of goods has indeed been decreased or canceled; mostly in relation to basic commodities (see this list). However, in a market with weak consumer rights and law enforcement mechanisms, this does not necessarily result in a decrease in prices for such goods.
In addition, the tax on some goods, including telecom and steel, has been increased (see this list).
In a nutshell, is this good or bad for business? Bad.
5. Reverse charge has been applied in other countries. The new VAT Law will now impose it in Egypt as well.
True. But first, what is the reverse charge? Reverse charge is a mechanism that applies in case the supplier of a good or service is a resident outside Egypt and the buyer is resident in Egypt. In such a case, the duty to deduct and deliver the VAT tax will be reverse-charged to the buyer, instead of the seller.
Let’s break this down. Ordinarily, the VAT tax should be charged on the buyer; i.e. the buyer bears the burden from his pocket. However, the duty to deduct the tax and deliver the tax to the tax authorities is, by law, on the seller. If the seller is a resident outside Egypt, he is not addressed by the Egyptian VAT Law and is not under a duty to deliver the tax to the authorities. In this case, the buyer is now under a duty to deliver the tax to the authorities instead.
Is this new? Yes, in relation to services. No, in relation to goods. Previously, the VAT on goods was charged during customs clearance and has always been factored in the price. However, in relation to services, buyers typically paid no VAT. So, what are the consequences? Recipients of services from
abroad will need to factor the new VAT tax in the price of the services they procure. Foreign services will now be more expensive.
In a nutshell, is this good or bad for business? Bad; prices of foreign services will increase.
6. Suppliers must apply the new tax rates starting 8 September 2016. Contracts may be amended.
Yes. There was some confusion as to the date of entry into force of the VAT Law. Some sources said it will apply starting 1 October. However, the law enters into force on 8 September 2016 and thus the new rates apply starting from this date.
Article 11 of the new VAT Law states that the prices quoted in existing contracts that were concluded by suppliers and producers of goods or services and are still valid at the time of issuance of the new VAT Law will be amended in the value of the new tax. The executive regulation should provide the rules relating to how such amendment will be implemented.
7. The penalty for VAT evasion has been increased.
Yes. The criminal penalty for VAT evasion has been increased from a penalty of one month’s jail and/or a fine of EGP1’000 to EGP5’000 to a penalty of imprisonment from 3-5 years and/or a fine ranging from EGP5’000 to EGP50’000. The new VAT Law, like the old Sales Tax Law, provides for specific cases (now 19) where the tax payer will be deemed as evading the law. These cases provide automatic penalty. This means that a judge does not have discretion in these cases to determine the existence or not of evasion. However, criminal intent will still be established.
Press here for copy of new VAT Law in Arabic ››
Guest Contributor
We are happy to have an expert on board with us on this update. This newsletter is jointly issued by the team in Sharkawy & Sarhan Law Firm and esteemed tax advisor, Mr. Abdelhamid Attalla, CPA(USA), CA(Egypt), former GE Tax Director in the Middle East & Africa and former KPMG Senior Tax Partner for Egypt and Middle East/South Asia. Please see Abdelhamid’s bio below.
About Abdelhamid Attalla: Abdelhamid is a qualified US CPA (Texas) and CA (Egypt). Abdelhamid was General Electric’s MEA Tax Director for the period 2009-2016 where he provided support to all of GE’s businesses in the region including Power, Oil & Gas, Aviation, Healthcare, Transport, Lighting and Airline Leasing. Abdelhamid established a team of MEA tax professionals exceeding 20 professionals. Prior to joining GE Abdelhamid was KPMG Senior Tax Partner for Egypt and Middle East/South Asia for the period 1997-2009 where he advised international and regional companies on tax issues in the region and provided support to governments on drafting of tax laws and regulations. Abdelhamid was part of the team that drafted the Egyptian Income Tax Law 91 for 2005 and its executive regulations. Prior to moving back to the Middle East in 1997 Abdelhamid practiced international tax in the US & UK with Arthur Andersen & Price Waterhouse during the period 1986-1997.
Abdelhamid holds a Bachelor of Commerce from Cairo University (1981). Abdelhamid obtained a Master of Accounting from Texas A&I University-Kingsville (1984) and Master of Taxation from the American University-Washington D.C. Abdelhamid is a member of the American Institute of CPAs and the Egyptian Society of Accountants and Auditors. Abdelhamid is also a member of the Society of Trust & Estate Practitioners and the UK Association of Taxation Technicians. Abdelhamid is a member of the Board of Directors of IFA GCC branch. Abdelhamid participates as a panelist in various international tax conferences on issues relating to international tax issues relating to the MEA.
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