Amr El-Monayer, deputy finance minister for tax policies, said that the ministry aims to increase tax proceeds to reach 19% of GDP in four years.
He explained that there is a problem in economic analysis, due to the lack of sufficient information, which prompted the ministry to automate revenues agencies in three years, noting that part of the development is finding an economic analysis administration to create flexibility in tax amendments based on the rates of inflation and growth.
He pointed out that tax revenues at the end of the last fiscal year reached 13.6% of GDP, with the expectation of achieving 14.5-14.7% of GDP by the end of June this year.
Increasing tax revenues versus social protection dilemma
He added that the Ministry of Finance operates through a clear and specific tax policy, not including the increase in the tax rate in general, with some adjustments to the mechanisms of calculating tax across a number of economic activities to achieve the desired result.
He pointed out that the ministry does not work alone, but the employees of other government agencies related to revenues apply its policies. Moreover, he noted that the ministry cooperates with the Administrative Control Authority (ACA) to combat administrative corruption, where there have been several changes that reached heads of departments to achieve these goals and increase revenues.
El-Monayer said that the tax rate in the latest report of the International Monetary Fund (IMF) indicates that it is a competitive price compared to world prices.
He explained that, based on the principle of gradual tax, a tax deduction system has been established, which depends on giving a higher discount rate to low-income segments, gradually decreasing according to the nature of the segment.
He pointed out that the Ministry of Finance is issuing guidance instructions during the coming period for the seven or eight activities included in the Value Added Tax Law to simplify tax calculation procedures, adding that the Finance Ministry seeks to add instructions for e-commerce and labour supply.
Moreover, he said that the large number of tax legislation passed over the past year was due to a long period of time without any. This includes the transformation into an added-value tax from sales tax, issuing the law’s executive regulation, the application of a tax deduction system instead of increasing the limit for exemption to give the highest level of tax justice for all segments, and the implementation of tax incentives through the new Investment Law, instead of the exemptions linked to the neediest areas that show high unemployment rates which are usually given to stimulate investors.
He added that the ministry is not working in a traditional manner, but in accordance with international norms, such as the implementation of tax discounts, which, he said, was initially opposed by the community that was used to increasing the benchmark for exemption instead. “We cannot continue doing the same thing over and over again and expect different results,” he stressed.
In July 2017, the government passed a package of social protection worth EGP 85bn, which includes applying the tax discount system which costs the state around EGP 7bn. The system gives 80% tax discount for segments whose income ranges between EGP 7,200 and EGP 30,000.
It also provides 40% discounts for incomes between EGP 30,000 and EGP 45,000, while segments with an income of EGP 45,000 to EGP 200,000 receive a discount of 5%.
Tax incentives expected to impact investment
El-Monayer said that the tax incentives in the Investment Law were given to new investments, not expansions, because new investors take a risk greater than existing ones, noting that expansions were taken advantage of by investors before, even though they faced fewer risks.
He added that companies suspended investment expansions in anticipation of the Investment Law, but “I do not have to give free gifts to anyone,” he commented.
The new Investment Law includes giving tax incentives of 30-50% of the total investment costs through dividing Egypt into two regions, with a cap of 80% of the cost. These incentives are applicable spanning three years from the date of issuing the law.
El-Monayer also said that the tax rate in the special economic zones was 10%, which did not stimulate investment, and was hence increased to 22.5% now.
He added that the projects established by the special economic zones system have been granted a tax incentive of 50% of investment costs, which makes them more competitive and unifies tax treatment.
He added that tax incentives worldwide are less of a priority to investors who focus more on economic and political stability and the fight against corruption, noting that the Egyptian market is naturally encouraging to investments due to the large base of consumers.
With regards to offers to establish free zones, especially after the introduction of the new Investment Law, El-Monayer said that he has yet to receive requests from companies to established free zones.
He explained that the Tax Disputes Law was issued to improve the tax system, based on requests from professionals, businesspersons, and the Federation of Egyptian Industries (FEI), to settle tax disputes. The stamp tax on Egyptian Exchange (EGX) transactions was also approved to ensure tax justice and force all economic activities to be subject to taxes.
He said that the tax on capital gains is fairer than the stamp tax, but there was a problem in implementing it. He pointed out that applying the tax was unsuccessful as there was no clear mechanism for its application and lack of sufficient communication with the tax community.
He added that the ministry is currently working to review the tax on capital gains in general for the companies listed and unlisted both in terms of price, registration, and evaluation mechanisms to issue a better law.
The Supreme Council for Investment issued a decision to postpone the application of capital gains tax on companies listed on the EGX for three years.
He pointed out that the stamp tax is easier to collect, but not fair because the calculation of the tax is based on transactions for profit and loss, which means that the tax itself could be bigger than the profits in case of small transactions.
El-Monayer explained that there is a period of three years to prepare the tax community to apply the tax on the capital gains for the companies listed on the EGX, where they are working now on training the employees of the Egyptian Tax Authority (ETA) and automating transactions between the authority and Misr for Central Clearing, Depository, and Registry (MCSD).
He said that the ministry is currently issuing executive instructions to apply the stamp duty on acquisitions and mergers that take place outside the cabin, which are within 33%, and to differentiate between sellers and buyers.
He added that the ministry, during the past period, introduced a committee of tax legislation to review all laws, regulations, and executive instructions before they are issued, besides working on the filtration of previous legislation.
El-Monayer said that the legislation issued during the previous period was the main reason for achieving the targeted tax amount in the general budget for the last fiscal year, as well as the interest in changing the culture of employees of the ETA through periodic training and giving diplomas for the first time in the tax field.
He added that the ministry has worked during the last period to create confidence within the tax community through holding ongoing meetings with professionals and major accounting offices to poll opinions before any legislation or executive instructions are issued in a way that ensures successful implementation.
He noted that the growth rates of tax revenue in both crafts and real estate transactions are high, as the ETA focuses on facing specific types of tax evasion.
The fight against tax evasion and double taxation
With regard to Egypt’s presence in the Economic Cooperation Organisation, El-Monayer said that Egypt’s membership will not be easy “unless we are capable of implementation, as many other countries apply for membership,” he stressed.
He added that Egypt’s accession to the convention guarantees a full review of a large number of agreements that prevent double taxation signed with 60 countries.
He pointed out that the convention is in the process of final review, in preparation for sending to the House of Representatives for approval, which targets reviewing over 30 signed tax agreements.
He said that part of the international tax applies the system of pricing transactions through Egypt’s participation in a global database and the establishment of a pricing unit t the ministry will link examiners with the department of senior investors within weeks.
El-Monayer added that one of the means to fight tax evasion is tackling certain types of transactions outside Egypt which involve multinational companies repatriating profits of Egypt from abroad, which is known as neutral pricing.
Explaining the mechanism, he gave an example of an Egyptian company that deals with a sister company, buying raw materials from the latter, and thus causing the price and cost to increase in Egypt, while their profits abroad increase due to the lower tax they pay there.
El-Monayer said that the database includes profits of companies on the global level for the same companies—or similar ones in the same sectors—and compares them to the profits made in Egypt.
He pointed out that international companies should submit studies to the ETA with these transactions and convince the authority of these bases of calculation, and then the ETA will decide to accept or reject these studies.
On the application of harmful tax planning, which indicates that the ETA has the right to review all acquisitions and mergers to ensure that they were not intended to avoid or evade the tax, El-Monayer said that the standards of erosion of tax known as base erosion and profit shifting (BEPS) include thee main points: coherence, substance, and transparency, in the sense of ensuring that the company founded abroad was not intended for the purpose of tax evasion, but came due to association with the real industrial and commercial activity of the company. He explained that part of it includes transparency in the exchange of information.
Tax laws reforms
Regarding the Unified Tax Law currently being prepared, El-Monayer said the law aims to facilitate procedures and standardise them with revenues, such as Income Tax, Value Added Tax, and Real Estate Tax, which also contributed to enhancing Egypt’s ranking in international reports.
El-Monayer added that they are now working to unify all departments and central administrations as a first phase of giving tax independence, setting standards for the performance of the ETA through the establishment of a system of incentives, and restructuring the accounting and evaluation system.
He said that the global trend involves setting a separate tax law for the tax account and another law that includes tax procedures, whereas the current Income Tax Law includes about two-thirds of procedures.
El-Monayer added that part of the review of the Income Tax Law is to prepare a law for unified procedures but not in the current period.
Regarding the Customs Law, El-Monayer said that the first draft of the law was completed and sent to the International Tax Authority (ITA) to review it. He noted that the law facilitates procedures and tightens controls on smuggling, along with placing a system for temporary clearance that matches international norms.
He added that customs are not aimed at collecting revenues in light of the application of free trade agreements and exemptions, but to work on countering customs evasion and protecting national industry and security.
In relation to real estate tax, El-Monayer said that revenues paid increased by 78% compared to last year, through setting priorities for the higher yielding areas and facilitating procedures for tax collection by dedicating areas in the North Coast for collection, instead of having to go to the office 200 kilometres away.
El-Monayer also highlighted a plan for inventory and evaluation during 2018, which will begin in areas such as the Fifth Settlement, Sixth of October City, Hurghada, and major compounds.
He pointed out that the real estate tax and the tax on real estate transactions have been linked. The government is also working on establishing a unified national identification number for all companies for all commercial transactions linked to the tax registration number to control the community and unify its IDs.
