The tax reform is one of the most important economic reforms; therefore the government assigned special priority to the project through the appointment of a deputy finance minister for tax policies.
The government also approved the passage of tax legislation, including the application of the Value Added Tax (VAT) Law and the Law to End Tax Disputes, in recent months.
This is in addition to drafting amendments to the Income Tax Law, in order to postpone applying the tax on capital gains for three years, after the Supreme Council for Investment approved the postponement decision and added tax incentives to the Investment Law, which were approved by the cabinet.
Daily News Egypt interviewed the deputy finance minister for tax policies, Amr El-Mounir, to find out more about the government’s vision on tax reform in 2017.
What are the main tax reforms during 2017?
The Ministry of Finance is currently working on a number of amendments to the Income Tax Law to postpone the tax on the stock exchange for three years, in light of the Supreme Council for Investment’s decisions.
The ministry is also working on drafting tax incentives for the new investment draft law and plans to include it in the Income Tax Law. This comes beside the completion of drafting tax discount rates appropriate for lower-income groups, in order to protect these segments of society from economic reform decisions.
The ministry is currently in the stage of determining the financial impact, according to different scenarios for the discount rates to be applied to all people—employees and non-employees.
What is your point of view concerning the House of Representatives’ approval on tax exemption up to EGP 24,000?
The ministry will meet with the House of Representatives in the coming days to discuss its decision to raise the limit of tax exemption to EGP 24,000 and to find out if this decision will be applied to employees only, marking an increase from EGP 13,500 to EGP 24,000, or whether it will include non-employees, which would mark an increase of EGP 17,500, from EGP 6,500 to EGP 24,000.
We agree with the House of Representatives to reduce the financial burden on lower-income groups and we will consider other alternatives to tax exemptions, such as tax rebate or credits, which will be applied to segments of society according to their incomes.
The House of Representatives approved in its meeting to raise the tax exemption limit for individuals to EGP 24,000 compared to EGP 13,500, the current exemption value.
What about the issuance of executive regulations of the VAT Law?
It is planned to issue the executive regulations on the VAT Law during the first half of February.
Is the Ministry of Finance currently discussing other tax reforms?
The ministry is targeting to establish a unified law for tax measures that seeks the equality of proceedings among income, value-added, and real estate taxes, while these tax laws should include processors in accordance with international norms.
We are working to complete a new customs law that fights smuggling, promotes and protects the national industry, and tightens sanctions.
What is new in the activation of the neutral pricing system, especially since foreign companies have a big interest in applying it?
The ministry will work to activate the neutral price system and it is already participating in a database for the first time to apply the neutral pricing system on people that are currently in the database, and we began to list transactions made between people in the previous years.
He added that the activation of the neutral pricing system would lead financiers to reveal all their business operations through a tax return so that they do not attract penalties and fines as a result of non-disclosure.
The neutral pricing system is known as the price agreed upon among non-connected parties that practice similar business activities under the terms and conditions of the open market.
There are multiple ways to calculate the neutral pricing, including the free comparative pricing method, which determines the price of a commodity or service among the related parties according to the price of the same commodity or service agreed between a company and unrelated persons.
Also, this method depends on the comparison between a commodity and another similar service, taking into account the legal conditions, market conditions, and specific conditions of the process.
While the second method is the total cost plus the profit margin: according to this method, the price of the commodity or service among the parties related to the total cost of the item or service plus a percentage—as a profit margin—for the benefit of the selling company or the company that provides the service. The profit margin is determined according to the profit margin earned by the financier in their transaction, which is completed with independent third parties, or by the profit margins obtained by an independent party in other similar transactions.
The third way is the resale price: according to this method, the price of the commodity or service among the parties is determined according to the resale price to a third party after deducting a reasonable profit margin percentage. The profit margin is specified according to the profit margin obtained by the same seller through their transactions with independent third parties. The profit margin can also be specified based on the profit margin earned by independent financiers in similar transactions.
Is the public tax authority able to apply the neutral price correctly?
Of course, we held a training course during the current month on the implementation mechanism in cooperation with the Organisation for Economic Co-operation and Development (OECD) to educate the authority’s young people qualified to work in this area, and we will continue to hold these courses at frequent intervals.
Do companies suffer from public tax authority delays in completing their tax accountability during the clearance process?
In order to enhance the efficiency of the tax system, we will unify the companies under clearance to complete the examination of these files and its fiscal/tax accountability in a short period.
What about the freelance sector that recorded a high percentage of tax evasion?
We are working on establishing a central unit for freelancers within the public tax authority, in order to ensure the collection of the tax fairly. Self-employed people and freelancers are not committed to tax payment and their tax evasion percentage is high.
Is it possible to achieve tax targets of EGP 433bn this year?
Of course, and we hope to achieve tax targets amounting to EGP 433bn by the end of June, which is equivalent to 13% of the GDP. Collection indicators are good so far, and we have achieved tax assessment by nearly 100% during the first half of the fiscal year. We have large amounts of unsettled adjustments with many authorities, including the Egyptian General Petroleum Corporation (EGPC).
1200 files are being transferred from the shareholding companies to the senior financiers’ centre to complete their examination and pay the due taxes, in order to increase the toll.
In spite of a decline in tax revenues due to the delay in the application of VAT, we managed to achieve these values during December.
Does the Ministry of Finance intend to activate the supreme council of taxes, especially as it is stated in the law?
The Supreme Council for Taxes’ activation is to be conducted through a presidential decree; we should put the tax system back to the right legislative and executive track in preparation of forming the Supreme Council for Taxes.
What about the integration of the unofficial economy into the formal system?
We are studying supply contracts for units of electronic connection between the authority and a number of commercial activities, in which buying and selling processes will be registered directly in the public tax authority. If the probation succeeds, it will be applied on the level of the republic.
The merger of the informal economy is a simplified system for small and medium-sized enterprises (SMEs), and activation of cashless transactions through the National Council for Payments to promote the culture of dealing via a billing system.
What about increasing tax revenues on real estate transactions, especially as its value is estimated at EGP 500m only?
We formed a central unit for real estate inventory to count these transactions, and we already started in pilot areas, such as Nasr City and Maadi, with computerised programmes to activate and increase their rates.
The tax rate is 2.5% without any reduction on the total value of the transaction of the built-up real estate area. This is also imposed on lands for building real estate, except for villages, regardless of whether or not any buildings have been erected on it.
Inheritance properties are exempted from this tax, as well as providing in-kind property as a share in the capital of joint companies, provided they do not dispose the corresponding shares in a period of five years.