On 5th of September 2016, the new Value Added Tax (VAT) Law in Egypt has been promulgated and published in the Official Gazette entering into effect on 8th of September 2016. The new Law no. 67 of year 2016 replaces the General Sales Tax (GST) Law no. 11 of year 1991 and any other legal provision contradicting with the new law shall be annulled.
The Minister of Finance shall issue the Executive Regulation of VAT within 30 days from the day it entered into effect which means that the Executive Regulation of the old law will still be enforced until the new one gets issued. The new law grants a grace period of 3 months during which the additional tax will not be imposed in order to help a taxpayer to reconcile his positions under the new law. VAT is an indirect tax the burden of which falls on the ultimate consumer.
What is subject to VAT?
The new law broadens the tax base to include all commodities and services whether local or imported and makes it subject to VAT with respect to those expressly exempted by the Law with the ability to deduct the tax that was paid before on direct and indirect inputs of such commodities and services throughout its production chain. On the other hand, VAT law will be applied on every natural person or a legal entity with an annual turnover equal to or exceeding the new registration threshold (Article 16).
Who is required to register under VAT?
Registrants under GST Law will be automatically deemed registered under VAT as long as their turnover is equal to or exceeds EGP 500,000 with the same registration tax number. For the registrants with a turnover below that threshold the registration will be automatically cancelled unless they request for it within 60 days from the day of enforcement of the new law.
Registrants whose registration will be cancelled must submit a tax return within 30 days from the day of enforcement of the new law of all tax periods before their registration cancellation, and pay their due tax within 6 months from the day of enforcement of the new law; as well as keep their records and books for 5 years starting from the date of cancellation.
Non-registrants under GST Law whose turnover met the registration threshold within 12 months prior to the effective date of VAT must apply for registration at the Egyptian Tax Authority (ETA) within 30 days from the effective date of the law. In case of reaching this threshold after the enactment of the law it will be mandatory to apply within 30 days from the date of reaching such threshold.
Pursuant to Article 16, importers of taxable commodities and services registered under the GST law will be automatically deemed registered under the new law regardless their turnover. Also, importers and manufactures of the commodities and services subject to the Table Tax and who are already registered under the GST law will be deemed automatically registered without consideration of their turnover. Moreover, businesses who are required to register under the new law and did not register on time, will be considered registrants by default with the consequences applicable according to the provisions of the new law (that will constitute an evasion offence in accordance with Article 68).
VAT Rate and Value
In accordance with Article 3 of the new law, the general VAT rate will be 13% for the current fiscal year of 2016 till the end of June 2017 and starting from the fiscal year 2017 it will be increased to 14%. Machinery and equipment which are used to produce a commodity or supply a service will be subject to a 5% VAT rate. Exported commodities and services will be subject to a 0% VAT rate. In addition to the previous, there will be a number of commodities and services included in Table 1 of the VAT Law subject to special rates in which there will be commodities and services subject to the table rate only and other subject to the table rate and the VAT general rate.
In accordance with Article 10, the taxable value to be declared is the amount actually paid by any means of payments including amounts obtained from the purchaser or the service recipient and all the incidental expenses as costs of commissions, packing, transportation and insurance imposed by the seller to the purchaser or the importer.
When do you submit your VAT Return?
Submitting VAT returns will be on a monthly basis within 2 months following the end of each tax period except for April return that must be filed by 15th of June of each year. In case the tax return is not submitted before the deadline, the ETA is entitled to make an assessment by giving the base for this assessment and that will not remove the legal liability of the tax payer. Finally, the tax return must be submitted even if no sales are made.
Pursuant to Article 17 of the new law if a natural or a legal person not resident in Egypt and not registered at the ETA supply a taxable commodity or service subject to VAT to a person not registered in Egypt then this person shall appoint a representative or agent to carry out all the obligations provided by the new law including registration, payment of VAT and/or any other taxes. If the nonresident did not appoint such representative the Egyptian resident will be liable to pay the tax due to the tax authority with the right to reimburse the tax payment from the nonresident person.
Consequences of Non-Compliance
In accordance with Section 3 of the new law, the registrant has the right to appeal the amendments or assessment of the tax return made by the ETA within 30 days from the date of knowledge of such amendments or assessments. The ETA shall decide such appeal through one of its internal committees within 60 days from date of submitting the appeal. If the appeal settled the tax it will be considered as final; if not, the committee will refer the appeal to the appeal committee and notify the registrant within 30 days. In all cases, the registrant has to appeal before the deadline, otherwise, the amendments or assessment will be rendered final. The Appeal committee will be the competent authority regarding all tax disputes arising between registrants and the ETA and the said parties have the right to challenge the decision before the competent court within 60 days from date of knowledge of the decision.
Offences and Penalties
Offenses and Penalties introduced in Section 5 of the Law and divided into contraventions and evasion offenses. Contraventions are deemed to be any breaching of the procedural rules set out in the law or its Executive Regulation e.g. delay in submitting the returns and paying the due tax, provision of wrong statements about the taxable goods or services, change of company statements without notifying the Authority. A fine penalty shall be imposed in such cases not less than EGP 500 and not more than EGP 5,000; in addition to the additional tax due and the table tax (Article 66).
Pursuant to Article 67, evasion penalties have been aggravated to be from 3 to 5 years’ imprisonment and/or a fine not less than EGP 5,000 and not more than EGP 50,000; such penalties will be doubled in case of repetition within 3 years. Another penalty imposed by the new law regarding the chartered accountant certificate which the law requires in case of tax deduction or refund (Article 30); any violation in this regard will entail the accountant to be charged by ceasing him from practicing his profession for a year with a fine not less than EGP 10,000 and not more than EGP 50,000. The above penalties will be doubled in case of repetition within 3 years. The limitation period for the above will be 5 years for contraventions and 6 years for tax evasion.
Businesses have to comply immediately with the new law and that will need to identify clearly the impact of application of VAT on their business regarding liability of collecting the VAT on behalf of the ETA which will be based on a self-assessment to calculate the VAT amount to be paid and deducted. Moreover, businesses need to modify the value of the concluded contracts signed before the starting date of the new law that will fulfill partially or fully after the new law taking effect to reflect the changes in tax rates. Thus, it is important for any businesses to ensure the functionality of compliance process.