The VAT Act (Law no. 67 of 2016) was published in the Official Gazette on September 7 and entered into force on September 8, applying a general 13% VAT rate, effective immediately, for the fiscal year ending on June 30 2017. The rate will then rise to 14% from July 1 2017, the start of Egypt’s next financial year.
“VAT will impact on corporations in a wide range and the impact will differ according to the relevant industry for each corporation. Some corporations currently out of the GST scope will be under the VAT scope so these would be obliged to register from day one for VAT purposes,” Giuseppe Campolo, international tax and M&A director at Deloitte in Cairo, told International Tax Review.
All businesses operating in Egypt with an annual turnover of EGP 500,000 ($56,000) or more must register for VAT purposes. Businesses below the VAT threshold are not required to register, but can opt to do so by submitting a request within 30 days of the law’s effective date. “The importers will remain registered regardless of their turnover, as well as the producers and importers of commodities or services listed in the law (Schedule No 1),” said law firm PwC in a September alert on the VAT regime.
The Ministry of Finance has confirmed that there will be a three-month transition period for moving to VAT, where it will not impose any penalties on businesses penalties or charge any additional tax for errors or omissions.
Egypt has had to introduce a VAT regime for a number of reasons. The GST regime and the 10% rate led to “compounding taxation on manufacturing” and deterred outsourcing, said Avalara EMEA, a tax compliance software provider. Furthermore, the move was necessary to ensure Egypt matches its system to the VAT regimes in Turkey and China and the goods and services tax to be effective in India next year to ensure it becomes a global manufacturer, Avalara said.
The International Monetary Fund also made the reform conditional on further loans to Egypt, Avalara added. The switch to VAT aims to encourage foreign investment, eliminate deficiencies that were evident in the GST, broaden the tax base to more services and shift the tax burden from job-creating companies to consumer spending, according to practitioners and analysts.
Implications for non-residents
Non-resident companies rendering services in Egypt are subject to the VAT regime.
In cases where a non-resident (both natural and legal) does not have a permanent establishment in Egypt, or is not registered for VAT purposes with the Egypt Tax Authority (ETA), the foreign entity is required to appoint a representative or an agent in Egypt to fulfil all the VAT obligations. This includes registration, VAT payments, and any additional taxes or fees chargeable under the Act. It should be noted, however, that the appointment of an Egyptian representative is only required if the foreign entity is providing services to an Egyptian person (both natural and legal) that is not registered in Egypt, according to a tax alert published by EY.
“If a non-resident person, not registered with the ETA renders a service to a VAT registrant not necessary for their activity, to a governmental entity or a general authority or an economic authority: Then the service recipient should account and remit the VAT due to the ETA within 30 days from the date of sale in case the non-resident party does not appoint a tax representative or agent on his behalf,” EY said.
It should be noted that the Egyptian resident entity is responsible for checking whether the foreign company has assigned a VAT representative in Egypt, “otherwise the resident will be liable to pay the tax due without prejudice to his right to go back to the non-resident person,” PwC said in a tax alert. “The VAT registrant who paid the VAT due on the services received from a non-resident person is entitled to deduct this input tax if all conditions and rules stated in Article no. 22 of the law are fulfilled,” EY added.
Penalties and sanctions
As with all tax laws, those not meeting their VAT obligations in Egypt will be subject to penalties and sanctions.
The ETA will charge an additional payment of 1.5% “of the unpaid VAT and the Table tax amount including the tax resulting from amending the tax return,” EY said. The charge will be due each month or part of month starting from tax payment deadline until the date of payment.
If a taxpayer is found to have evaded VAT, they could be subject to a prison sentence of three to five years, made to pay a penalty payment of between EGP 1,000 and EGP 10,000 and be required to pay the outstanding VAT, and any additional tax.
“The law requires among the documents submitted for tax deduction or refund a certificate from a Chartered Accountant confirming that the VAT registrant is entitled for tax deduction or refund. The VAT law includes specific penalties if the Chartered Accountant breaches the law in this regard,” EY said.
If an accountant is found guilty of facilitating tax evasion, they may be required to stop practising for one year and pay a penalty between EGP 10,000 and EGP 50,000.
