Egypt Ushers in VAT for World Bank, IMF Loans

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

  • Egyptian VAT generally applies to local and imported goods and services, at all stages in the supply chain. The standard rate is 13 percent for the fiscal tax year ending June 30, 2017, and will increase to 14 percent as of July 1, 2017. A reduced 5 percent rate will apply to certain machinery and equipment. Exported goods and services are subject to a zero rate, as are goods and services produced in free zones or cities and free market projects outside Egypt.
  • A ‘Table Tax’ that applies to a number of goods and services listed in Table 1 of the VAT law. The Table Tax applies in lieu of the VAT for supplies such as professional and consulting services, tobacco, and construction contracts. Other supplies are subject to both the Table Tax and VAT, for example, communication services through mobile networks, certain televisions and refrigerators, cars, and fizzy drinks.
  • There are 56 exemptions, including banking services, medicine, medical, health and education services, certain real estate supplies, and certain staples such as tea, sugar and milk.
  • Taxable persons must register for VAT if their gross sales of taxable and exempted goods and services equal or exceed the registration threshold of EGP500,000 within 12 months of the effective date of the VAT Act (September 8, 2016). If taxable persons exceed this threshold within a 12-month period after the enactment of the VAT law, they must register for VAT within 30 days of reaching the threshold. Businesses already registered under the general sales tax regime are automatically registered, if their annual turnover exceeds the registration threshold. Importers registered under the sales tax regime are considered registered for VAT purposes irrespective of their turnover, as are manufacturers and importers of goods and services subject to the Table Tax. Businesses with turnovers below the registration threshold can voluntarily register. Registered persons must generally file monthly VAT returns within two months of the end of the tax accounting month. Payment is due with the return.
  • Nonresident, unregistered persons with no Egyptian permanent establishment supplying taxable goods or services in Egypt to unregistered persons must appoint a fiscal representative to carry out their VAT obligations. Registered recipients of supplies by these persons are obliged to apply reverse charge rules.
  • After the transition period, a system of penalties will apply to late VAT payment and late submission of returns. In addition, tax evasion carries penalties of up to three years’ imprisonment and fines of between EGP5000 and EGP50,000.

By Joanna Norland, Technical Editor, Bloomberg BNA, with contributions from Jon Trevelyan and Lee Hadnum, Editors at Bloomberg BNA.

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