CAIRO: The end of the current tax season is near. Companies and their auditors are rushing to meet the deadline of Mar. 31 for finalizing their financial statements in accordance with the Companies Law. These statements will form the foundation for the tax returns that must be filed by April 30, unless an extension of up to two months is requested 15 days prior to the deadline.
Khaled Hegazy, partner at audit firm Dr. A. M. Hegazy & Co. which is affiliated with Horwath International, says that the new tax regime is a particular challenge for small businesses that have never prepared proper financial statements. Hegazy explains that these businesses have historically been discouraged from filing their taxes due to competitive pressures. In other words, it is difficult for one business to incur the cost of taxes when the majority of its competitors do not pay their dues to the government.
The new tax law will benefit businesses by reducing the corporate tax rate from as high as 42 percent under the old system to 20 percent. It concurrently applies harsher penalties, one of which is a jail sentence, for tax fraud. If these penalties are not applied strictly to all companies, it will serve to discourage compliance with the new law and harm businesses that properly file their taxes.
For this reason, Hegazy says that both the carrot of reduced taxes and the stick of harsh penalties need to be applied indiscriminately by the tax authority and that this will serve to entice small businesses into the formal sector of the economy.
The new tax law has also been a challenge to medium and large companies. Abdel Hamid Attala, senior tax partner at KPMG Hazem Hassan, says that the tax treatment for certain matters remains unclear. These include the treatment of fringe benefits to employees, such as the purchase of a company car by an employee to which the company contributes a portion of the cost, and income from foreign investments owned by Egyptian companies. The latter relates to tax treaties, Egypt has signed tax treaties with 45 countries, and Attala says that detailed provisions for the application of such treaties need to be incorporated into domestic law.
Nevertheless, Attala says that the tax authority has been extremely responsive to his firm s queries, frequently addressing issues within three to four days. Hegazy agrees with Attala s assessment for simple matters, but adds that the resolution of complex issues has been drawn out with constant requests for further information from the tax authority. Hegazy cites as an example that one issue has been unresolved for two months.
In addition to reducing the tax rate, the new system moves from one based on suspicion to one based on trust. Under the old regime, tax authorities audited all returns and regularly disputed reported figures and made arbitrary adjustments. This encouraged businesses to understate their revenues, for example, in anticipation of a forced reduction in deductible expenses in proportion to revenues by the tax authorities. Minister of Finance Youssef Boutros-Ghali has urged businesses to honestly report their income and has promised that the tax authority, in return, will only audit a random sample of tax files, with adjustments made only in accordance with the law.
Ultimately, the trust that Boutros-Ghali has appealed for through his aggressive public relations campaign will depend on the behavior of the staff of the tax authority. While Attala and Hegazy admit that the tax authority is more accessible than it used to be, their impression based on their dealings with the authority is that its staff are still resistant to change their attitude.
Businesses, for their part, had ardently resisted the limitation of deductible expenses without supporting documentation to 7 percent of total expenses. Under the previous law, undocumented expenses were allowed to reach 4 percent of revenues. While this may be a minor issue for large businesses, Hegazy explains that it can substantially affect medium-sized companies that incur a number of expenses without any supporting documentation. His advice to companies is to simply ask employees to provide receipts for all expenses they incur. One of his clients even changed its approach in order to increase its documented expenses, renting cars for its staff in lieu of taxis, which provide no receipts.
With regard to the auditing firms, an unqualified declaration of accuracy to be signed by an official of the company and by its auditor was included in the new tax forms issued last month. This declaration has been a major point of contention between Boutros-Ghali and auditors, with accounting firms insisting that their audits are based on only a sample of documents provided to them by their clients and demanding that this fact be reflected in the declaration.
In a change of stance, Boutros-Ghali issued a circular last week which limits the accountability of auditors to the sample documents that they review. Attala says that this circular will have no effect on the current tax season, since the declaration is already included on the printed tax forms. Hegazy, however, believes that the latest circular will allow auditors to qualify the declaration in a report attached to the tax return.
Both auditors say that their clients are on track to file their financial statements and tax returns by the respective deadlines. They also agree that the new tax regime is a substantial improvement, a sentiment shared by most businesses and tax professionals. But they are waiting cautiously to see whether Boutros-Ghali s fervent message of trust and partnership will be manifested in the actions of the tax authority.
And notwithstanding the success or failure of the new regime, the overhaul relates only to income taxes while other forms of taxes, including property, sales and stamp taxes, are also in need of modification. Boutros-Ghali said last month that legislation is being drafted to reduce the tax rate on property from 46 percent to 10 percent. Minister of Investment Mahmoud Mohieddin added in a press release last week that the government intends to reduce property registration fees from 3 percent of the value of the property to a maximum of LE 2,000.
On the insurance front, the government is expected to couple liberalization of the sector with a reduction in the stamp tax on insurance premiums from 26 percent to 13 percent. With regard to sales taxes, Attala explains that the system of value-added taxes, which allows companies to offset their revenues against procurement costs when calculating their sales taxes, currently only applies to goods and it needs to be extended to services.