Egypt has enacted a 13 percent value added tax under Act No. 67 of 2016 (the “Egyptian VAT Act”), with effect from September 9, 2016, subject to a three-month transition period. Previously, Egypt levied a general sales tax rather than a VAT.
Radical Change as Precondition to World Bank Loans
This radical change in Egyptian taxation was introduced in response a key demand by the World Bank, as a condition for the first US$1 billion tranche of a US$3 billion loan, to help Egypt's failing economy and supply much needed liquidity to its cash-strapped government. The IMF has also agreed to lend US$12 billion to Egypt over three years.
Given the World Bank’s insistence on a series of tough, neo-liberal economic reforms and the government’s immediate need for cash, the inclusion of a three-month transition period may be connected with the speed with which the tax has been imposed. The Egyptian VAT Act provides that during this period, no penalties will be imposed for failure to comply with the new tax. Furthermore, regulations to implement key aspects of the Egyptian VAT Act have not yet been issued and are due by October 8, 2016. Until then, the general sales tax regulations continue to apply, provided they do not conflict with VAT law.
VAT was introduced in France in 1948, and has since been introduced in over 160 countries, worldwide, as it has proved to be an extremely cost effective revenue raiser. Therefore, it is unsurprising that Egypt is following this trend. No doubt, the government hopes that this tax will facilitate the exclusion of excluded segments of society within the country’s tax base and increase tax compliance. Egyptian VAT is also expected to reduce the country’s budget deficit by up to 3 percent, while reducing GDP and increasing inflation by 1 percent, each.
Key Features of the New VAT Regime
By Joanna Norland, Technical Editor, Bloomberg BNA, with contributions from Jon Trevelyan and Lee Hadnum, Editors at Bloomberg BNA.
For more information about VAT, access the Bloomberg BNA VAT Navigator.
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