MENA OECD Workshop on National Investment Reform Agenda Egypt

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MENA OECD Workshop on National Investment
Reform Agenda -- Egypt

• Tax Design Aiming to Encourage Foreign Direct
  Investment
• Ashraf Al Arabi,
• Senior Advisor to the Minister of Finance on Tax
  Policies

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Income Tax Reform

• Principles of Egypts Current Tax Design
• Simplification low rates applied to a very broad
  tax base, lead to fewer economic distortions,
  greater certainty for the taxpayer, as well as
  lower administrative and compliance costs.
• Fairness vertical equity and horizontal equity,
  (people of similar situation should pay similar
  amounts of tax).
• Removal of tax obstacles to growth simple regime
  aiming to stop companies from distorting their
  decisions to take advantage of special tax
  provisions than from simply improving efficiency
  and meeting customers needs.

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Investment Incentives Impacted by the New Income
Tax Law

• All types of tax exemptions for Inland
  Investment Projects and industrial companies with
  50 employees.
• However, there is a grand fathering rule.
• Inland Investment Projects approved before June
  10, 2005 start activities before June 9, 2008,
  shall enjoy 5, 10, or 20 year tax exemption
  period.

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The New Income Tax Regime

• Promulgated a full self-assessment tax regime
  with risk based audit process.
• New tax rate is 20. This rate is applicable to
  all commercial and industrial activities.
  However, Oil Exploration and Production companies
  are taxed at 40.55.

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The New Income Tax Regime

• Depreciation as an Investment Incentives
• Accelerated Depreciation for all new or used
  assets purchased at a rate of 30.
• Individual
• 5 SL buildings, installations, etc.
• 10 SL intangible assets
• Group Pooling System
• 50 DB computers, info-systems, software, etc.
• 25 DB all other business assets

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The New Income Tax Regime

• Depreciation (pooling system) Capital gains
• Book value business assets opening balance
• Additions
• - Subtractions
• Depreciation base group
• Depreciation (25)
• Book value business assets closing balance
• Gains are Taxable as business profit if realized
  on business assets
• SL method sales price -/- book value
• DB method indirect in depreciation base
  (ultimately expressed as negative depreciation
  base at liquidation)

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The New Income Tax Regime -- International
Characteristics

• Residence (1)
• Individuals
• Residence criteria
• Permanent residence
• gt183 days in any 12-month period
• Egyptian nationals paid by Treasury

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The New Income Tax Regime --International
Characteristics (Contd)

• Residence (2)
• Corporate persons
• Residence criteria
• Incorporation under Egyptian law
• Place of effective management
• gt50 public-owned company

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The New Income Tax Regime -- International
Characteristics, (Contd)

• Permanent Establishment (PE)
• The new Tax Law has clearly defined what is a
  permanent establishment (PE).
• Fixed place
• Geographical
• Time
• Place of business
• Place through which business activities are
  carried on
• Promulgated a Place of effective management
  concept.

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The New Income Tax Regime --International
Characteristics (Contd)

• Thin Capitalization rules
• Promulgated a Thin Capitalization rule.
• Debt-to-equity ratio 41
• Interest on excessive part not deductible
• Transitional period (Article 7 of PD)
• 81 (2005), 71 (2006), 61 (2007) and 51
  (2008)

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The New Income Tax Regime -- International
Characteristics (Contd)

• Transfer Pricing (TP)
• Introduced Transfer Pricing (TP) concept.
• Related persons
• unusual conditions in financial and commercial
  relations
• Indirect correction of business profit (through
  arms length price)
• Comparable uncontrolled price
• Resale-minus price
• Cost-plus price
• Any other justifiable price

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The New Income Tax Regime -- International
Characteristics (Contd)

• Other Taxable Transactions
• Foreign Tax Credit is available for an offset
  against and up to the domestic tax.
• Foreign losses are not deductible of the domestic
  tax purposes.
• Provided exemption from tax on royalties payable
  against industrial know-how. No exemption is
  provided to use of a trade mark and Technical
  Service Agreements.
• Fees for foreign services are subject to a tax at
  20.
• Interest payable to a non-resident recipient is
  subject to 20 tax rate subject to a treaty
  relieve.

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The New Income Tax Regime

• Taxable Base
• Taxable Base Profit according to the Egyptian
  Accounting Standards
• Exceptions
• Long-term contracts
• Interest deductibility
• Depreciation
• Reserves
• Bad debts

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Tax Reform Agenda of Egypt

• Sales Tax Reform
• Going to a full-fledged VAT.
• Unification of Tax Rates.
• Generalization of Tax Credit.
• Unification and increasing the registration
  threshold.
• The rationalization of excises.
• Treatment of M SE under the registration
  threshold.

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Tax Reform Agenda of Egypt

• Stamp Duties Reform
• Introducing a simple stamp duties regime
• Abolishing all fiscal stamps.
• Limiting the imposition of the proportional stamp
  duties to a very limited number of activates and
  drastically reducing its impact on the Insurance
  companies activates and banks transactions.

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Tax Reform Agenda of Egypt

• Property Tax Reform
• Waving away all tax exemption and city zones.
• Improve property tax revenue that is currently
  underutilized revenue source (by at least 300 in
  the fist year of implementation) .
• Change the tax rate from currently 46 to a more
  realistically rate of 10.
• Improving the frequency of the revaluing of
  properties every 5 years instead of the current
  system of 10 years.
• Improving the valuation procedures.

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Egypts Revenue Administration Modernization
Strategy

• The vision and strategy for tax administration
  reform compromising of
• An adequate tax policy framework
• Clear and simple legislation and procedures
• A full regime of self-assessment
• Function-based organization structures and modern
  business processes
• The integration of domestic tax administrations
  (one single organization for both Income Tax and
  Sales Tax)
• Taxpayer segmentation, beginning with the large
  taxpayers.

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Large Taxpayers Office (LTO)

• Objectives
• A special organization within the Egyptian tax
  administration
• Aiming to mitigating most risks related to large
  taxpayers
• Improving control over revenue and
• lead to effective tax administration.

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• Thank You