A Guide to Egypt’s VAT Law
On 29 August 2016, the Egyptian Parliament approved the long-debated Value Added Tax Law to abolish and replace the Sales Tax Law no. 11 of 1991 (the “Sales Tax Law”).
The Value-Added Tax Law was issued under no. 67 of 2016 (“VAT Law” or the “Law”) and was published in the Official Gazette on the 7th of September 2016. It has an immediate effect as of 8th of September 2016.
Implementation of VAT Law depends to a great extent on the release of the executive regulations which will clarify the methods of calculation and deduction of the tax.
- Scope of Application
- Two Types
- VAT Taxable Value
- Schedule Tax Taxable Value
- Registration Threshold
- Services Rendered by a Nonresident
- Invoices and Tax Returns
- Tax Deductions
- Exemptions with Reciprocity
- Challenging Procedures
1.Scope of Application
1.1 The Value-Added Tax (“VAT”) is an indirect tax on the domestic consumption of goods and services, except on those that are zero-rated (such as food and essential drugs) or which are otherwise exempted (such as exports).
1.2 The VAT will be levied on all goods and services whether manufactured locally or imported from abroad, at each stage of their supply chain, unless otherwise exempted by a special provision.
1.3 Goods are broadly defined to include all physical local or imported objects whatever their nature, source or purpose including electric power1, while services are defined to include all things which are not classified as goods.2
1.4 The Law provides for the first time for its application on the purchases of goods and the provision of services which are performed through electronic means (i.e. online purchases).3
1.5 According to Article (11) of the Law, taxpayers are required to amend their contracts with their clients and suppliers to reflect the new taxes imposed by the Law. A controversial provision that is waiting for the executive regulations to clarify stipulate its implantation rules.
2. Two Different Types of Taxes
2.1 The Law imposed two types of taxes:
a. Value Added Tax (VAT)
2.2 The value-added tax (or the VAT), which is a fixed rate tax imposed on all taxable goods and services, whether locally produced or imported, for commercial or personal use. The VAT general rate is decided to be 13% for the fiscal year 2016/2017, to be increased to 14% as of the fiscal year 2017/2018. Different rates are however applicable as follows:
- 5% for machinery and equipment used in production of goods or provision of services (except for buses and passenger vehicles).
- 0% for goods and services exported outside Egypt according to the terms and conditions at the executive regulations.
- 0% for goods and services exported outside by free zone projects.
- 0% for goods and services imported by free zone projects for carrying out their licensed business inside the free zone (except passenger cars).4
2.3 Article 3 of the Law provides that the Government will allocate 1% of the collected VAT to social justice programs.5
2.4 The Law exempted a number of 57 goods and services from the VAT including:
- Tea, sugar and milk
- Gas, electricity and water
- Banking services that are legally restricted to banks only.
- Medicines and the active substances used in the manufacture of medicines, whether locally manufactured or imported.
- Health services except plastic surgery and weight loss services other than for medical purposes.
The full list of the exempted goods and services is attached hereto as Exhibit 1.
b. Schedule Tax
2.5 The Schedule Tax is another type of tax which is imposed only once, unless the goods are transformed or changed. Packaging, re-packaging, refining, purifying and milling of goods shall not be considered as transformation.6
2.6 The Schedule Tax is imposed on a number of goods and services besides the VAT. Goods and services which are subject to both VAT Tax and Schedule Tax are considered to be luxury ones such as soft drinks, beers, alcohol products, wine and spirits, perfumes, cosmetics for skin and hair, televisions more than 32”, refrigerators more than 16 feet, air conditioners, golf cars, passenger vehicles, and mobile phone services.
2.7 Below are examples of the goods and services which are subject to both Schedule Tax (according to the variable rates shown) in addition to the VAT in the fixed rate of 14% for 2016:
|Good/Service||Schedule Tax Rate|
|Soft drinks and non-alcohol beers||8%|
|Perfumes and cosmetics||8%|
|Passenger less than 1600 CC||1%|
|Passenger cars up to 2000 CC||15%|
|Local passenger cars above 2000 CC||15%|
|Imported passenger cars above 2000 CC||30%|
|Mobile telecommunication services||8%|
2.8 It is worth mentioning that applying two types of taxes on some goods and services does not usually mean that they are subjected to a higher tax rate than before. In some cases, with adding together new rates for the VAT and the Schedule Tax, the result of the applicable rate is lesser than that previously imposed by the Sales Tax Law.
2.9 For example, under the VAT Law, air conditioners are subject to an aggregate tax rate of 21% (8% Schedule Tax plus 13% VAT Tax) instead of 25% previously imposed by the Sales Tax Law. Also, passenger vehicles with capacity up to 1600cc are down from 15% to 14% (1% Schedule Tax plus 13% VAT Tax for this fiscal year only). Passenger vehicles with capacity from 1601cc to 2000cc are down from 30% to 28% percent (15% Schedule Tax plus 13% VAT Tax for this fiscal year only).
2.10 On the other side, taxes on mobile phone services have increased under the VAT Law to be 21% (8% Schedule Tax plus 13% VAT tax for this fiscal year only) instead of (15%) under the Sales Tax Law.
2.11 There are another number of goods and services which are subject to the Schedule Tax alone, including, among others, cigarettes, oil products, cooking oil, construction and contracting services as well as consultancy services and media production. Below are examples of certain goods and services which are subject to the Schedule Tax only:
|Good/Service||Schedule Tax Rate|
|Tobacco and cigarettes||50% to 200%|
|Gas7||EGP 0.03 to EGP 0.20 per liter|
|Kerosene||EGP 0.36 per liter|
|Fertilizers and agricultural pesticide||%5|
|Consultancy and professional services (excluding vocational services)||10%|
|Construction and building works||5%|
|Air conditioned transportation between governorates by bus and railways||5%|
2.12 All other goods and services, which are not explicitly exempted by the Law and are not subject to the Schedule Tax, are only subject to the application of the VAT Tax.
3. VAT Taxable Value
3.1 The value of the goods or services that should be reported by the taxpayer to the authorities and upon which the VAT rate will be calculated is the actually paid or payable price for the concerned good or service. This value is called the “Taxable Value”.8
3.2 The Taxable Value shall include all incidental fees and expenses payable by the purchaser or the importer, such as the commissions, packaging, transportation and insurance fees.
3.3 For related parties’ transactions,9 the Taxable Value should be the market value on the basis of the arm’s length standard.
3.4 For installment sales, the Taxable Value should include the installment interest exceeding the credit and deduction rate announced by the Egyptian Central Bank on the date of sale.
3.5 The Taxable Value for imported goods shall be the customs duty value, in addition to the customs duty and any other imposed taxes or fees. In all case, the Reported Value for imported goods shall not be less than the fair market value.
3.6 The Taxable Value for goods locally used and resold is 30% of the sale value, without applying the deduction rules provided in Article no. 22 of the VAT law, on the condition that the goods should be used for a period of not less than two years.
4. Schedule Tax Taxable Value
4.2 For imported goods, it will be the based on the customs duty value, in addition to the customs duty, the Schedule Tax and any other imposed taxes or fees.
4.3 For imported services, the Taxable Value will be the price paid or payable in addition to the imposed Schedule Tax.
5. Registration Threshold
5.1 According to the VAT Law, all individuals or entities with annual revenue exceeding EGP 500,000 (the “Registration Threshold”) during the 12 months preceding the enforcement of the Law are required to register with the Tax Authority during 30 days from reaching the Registration Threshold.
5.2 Individuals and entities who reached the Registration Threshold without registration will be considered, by law, as a taxpayer and be subjected to the provision of the Law starting from the date on which it has actually reach the Registration Threshold, without prejudice to the tax evasion penalties provided by the Law.10
5.3 The Law requires the new registered taxpayers as well as all taxpayers who are currently registered with the Tax Authority and will continue to be registered under the VAT Law to adjust their position within three months from the effective date of the Law. 11 The executive regulation of the Law will determine the rules and procedures of such adjustment.
5.4 Individuals and entities who were registered in the Tax Authority under the Sales Tax Law but did not reach the Registration Threshold under the VAT Law shall be automatically deregistered from the Tax Authority, unless they request to continue their registration during 60 days from the effective date of the Law. However, those which are deregistered shall submit their tax return reporting their revenues during the last tax period during 30 days from the effective date of the Law and shall keep their records for a period of five years following the date of its deregistration.12
5.5 All importers and distributors of a taxable good or service are required to be registered with the Tax Authority regardless they reached the Registration Threshold or not. Also, the same obligation is imposed, for the first time by the VAT Law, on all exporters of a taxable good or service, regardless their volume of business. 13
6. Services rendered by a nonresident
1.1 The Law requires, for the first time, all non-resident and non-registered persons who sell taxable goods or provide taxable services to a non-registered person who resides in Egypt and do not have permanent establishment in Egypt, to appoint a representative or agent in Egypt to be responsible for paying the VAT and the Schedule Tax. The resident person otherwise will be responsible for paying the due taxes without prejudice to its right to recourse against the non-resident to collect the paid taxes.14
7. Invoices and Tax Returns
7.1 The VAT Law obliges taxpayers to issue tax invoices against all selling of taxable goods or provision of taxable services. Such invoices shall include the name of the purchaser and its registration number in case it was registered with the Tax Authority. The Executive Regulation of the Law shall determine the content of the invoice and the necessary procedures for its issuance and examination.15
7.2 In order to promote the issuance of invoices, the Minister of Finance will issue an incentive system, after the approval of the Cabinet, to encourage individuals and entities to deal with tax invoices. The incentives shall provide for not more than (1%) of the annual tax proceeds. The expected incentives system together with the executive regulation of the Law shall determine the sectors, rules and conditions for its implementation.16
7.3 Taxpayers are required to hold accurate records for all their transactions. These records could be manual or electronic. Taxpayers shall keep such records and copies of the invoices for five years following the end of the fiscal year during which the transactions were registered therein.17
7.4 The VAT law adopts the same monthly reporting system used to apply under the Sales Tax Law. Each taxpayer should submit its tax report within two months following the termination of the relevant month and shall pay its tax proceeds at the same date of submitting the tax return. Tax return for the month of April should be paid during the day fifteenth of June.18
7.5 If the Tax Authority discovered that the Taxable Value is different than the one reported by the taxpayer, it can amend the tax return accordingly. The Tax Authority has the right to amend the submitted tax return during five years starting from the termination of the period specified for submitting tax reports. The taxpayer can challenge such amendment according to the procedures stipulated in the Law.
7.6 An additional delay tax of 1.5% will be imposed on unpaid VAT or Schedule Tax.17
8. Tax Deductions
8.1 When calculating the VAT, the following should be deducted from the tax due on the sales value:19
- Tax paid or accounted for returned sales.
- Tax charged on inputs including the tax charged to the goods and services sold by the taxpayer through all distribution phases according to the conditions and situations that will be provided by the executive regulations relating to the VAT Law.
8.2 These deductions will not apply on:
- The Schedule Tax.
- Input tax included as part of the cost items.20
- Exempted goods and services.
8.3 The executive regulation of the Law shall explain in more details how to calculate and apply the deduction of taxes.
9. Exemptions with Reciprocity
9.1 Goods and services imported by members of a foreign diplomatic mission will be exempted from the VAT and the Schedule Tax on the condition of reciprocity. Also goods imported or purchased for foreign embassies and consulates for the official use except food staff, alcohol and tobacco.21
9.2 One car for the personal use of the diplomat and 5 cars for the official use of the embassy or two for the official use of the consulate shall also be exempted. Such numbers could be increased by agreement with the Minister of Foreign Affairs.
9.3 Imported furniture and house equipment as well as one used car shall be exempted for foreign employees working at the foreign embassies and consulate provided that importation is carried out within 6 month from the date the employee’s arrival to Egypt.
9.4 Goods imported for personal use by a foreign person with a special position could be exempted by a decision from the Minister of Finance after agreement with the Minister of Foreign Affairs.
10. Challenging Procedures
10.1 According to Article 48 of the Law, the Tax Authority will not undertake deemed tax assessments for the VAT, the Schedule tax or to amend a tax return submitted by a taxpayer unless there is supporting information and documentation, and this shall be within a period of five years starting from the tax return deadline according to the Law. This period will be extended to six years in case of tax evasion.
10.2 Deemed tax assessments and amendments of tax returns shall be notified to the taxpayer by registered mail or any other electronic mean acceptable according to the Electronic Signature Law.22
10.3 The Taxpayer shall have 30 days from being aware of such deemed assessment or amendment to submit a challenge. The challenge starts with submitting a statement of claims to the competent tax office. The tax office should handle such dispute through the internal committees to be formed by virtue of a decision from the chairman of the Tax Authority.
10.4 In case the dispute was not settled during 60 days from submitting the challenge, the dispute will be referred to the challenge committee (“Challenge Committee”). Such Committee is a permanent committee to be formed by a decision from the Minister of Finance and shall be headed by a chairman to be appointed from outside the Tax Authority’s employees. Two of the members shall be from inside the Tax Authority and two other members with special experience to be determined by the syndicate of commercial professionals.23
10.5 The Challenge Committee shall be affiliated directly to the Minister of Finance and shall have the competence to settle all disputes between taxpayers and the Tax Authority relating to the VAT Law.24
11.1 Tax evasion penalties have been increased to be 3 to 5 years imprisonment and a fine ranging from EGP 5,000 to 50,000 or both penalties. The abovementioned penalties should be duplicated in a case of reoccurrence of the tax evasions crimes during three years.
11.2 The Law provides for the confiscation of all tools and transportation means used in evading taxes, except ships and aircrafts unless they are made or rented with the knowledge of its owner to be used for such purpose.25
11.3 The Law provides for the first time that tax evasion crime shall be considered as a dishonesty crime.26
11.4 Considering the strong penalties imposed by the VAT Law, it is important to mention that the Law has also increased the cases of tax evasion to include, among others, the following:
a) failing to abide by the rules and procedures ensuring the regularity of invoices and records;
b) issuing false invoices for others that do not reflect true transactions;
c) possessing smuggled goods for trading purposes;
d) failing to submit final tax report and paying its proceeds during 6 months from the deregistration from the Tax Authority.
e) possessing the Schedule Tax goods determined by the Minister of Finance that should have banderole posters thereon, without such banderole stickers; and
f) selling the Schedule Tax goods which its tax base is calculated according to the consumer price with higher prices without paying the taxes due after such increasing.
g) Tax evasion claims can only be initiated upon a request of the Minister of Finance who has also the authority to resolve these disputes amicably, if the due taxes are paid along with a penalty.
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Goods and Services Exempted from VAT
- Baby milk and dairy products.
- Baby formula.
- Tea, sugar and coffee.
- Grain mills products, except super flour and imported self-rising flour.
- Pasta, except pasta with semolina.
- Frozen or fresh poultry and livestock.
- Meat processed products.
- Frozen or fresh fish and seafood.
- Processed and smoked renga fish, except caviar and other smoked fish.
- Agricultural products in its raw nature, except tobacco seedlings.
- Honey, molasses, halva, tahini (sesame paste).
- Locally manufactured fruits and vegetables except potatoes and juices and its concentrates.
- Legumes, grains, salt and manufactured spices.
- Foods manufactured or sold to the end consumer from restaurants or non-tourist shops which fulfilling the requirements to be determined by a decision from the Minister.
- Water purifying, desalting, or distribution except the packed water.
- Crude oil.
- Natural gas and butane gas.
- Natural materials including the products of mines and quarries as per their natural condition.
- Crude gold and silver
- Electricity production, transmission, selling or distribution.
- Residues and wastes of food industries and wastes of papers
- Foods prepared for animals, birds and fishes (forage) except those used for feeding cats, dogs and ornamental fishes.
- Newsprint and printing and writing papers.
- Notebooks, booklets, books, academic lectures printed, newspapers and magazines.
- Postal and fiscal stamps.
- Selling and renting transactions of vacant lands, agricultural lands, buildings and residential and non-residential flats.
- Commemorative coins and the circulated cash monies and coins.
- High seas vessels having the following HS code:
Serial HS Code 1 10 10 01 89 2 10 20 01 89 3 10 30 01 89 4 10 90 01 89 5 30 00 02 89
- Civil aircraft and their engines, spare parts as well as the services provided to these aircrafts within the customs zone.
- Seats with wheels and their spare parts, and the artificial members of the body, hearing aids, dialysis machines and children incubation.
- Banking services that are legally restricted to banks only.
- Sale and purchase of currencies at banks and foreign exchange companies.
- Services of banking postal savings fund.
- Non-banking financial services which are subject to the supervision and control of the Egyptian Financial Supervisory Authority (EFSA).
- Insurance and re-insurance services.
- Educational, training and scientific research’ services.
- Healthcare services except weight loss services and plastic surgeries for non-medical purposes.
- Land transportation services of persons including taxies except tourist and conditioner transportation between governorates and the rental of personal cars.
- Internal non-tourist transportation of persons and air transportation.
- Services of establishing and maintaining places of worship and the services provided thereby.
- Free services that are disseminating through radio and TV or through any other means.
- Land internet services (shall be exempted only for one year from the effective date of the VAT Law).
- Library services provided by general libraries or those affiliated to all types of educational establishments or research or cultural centers.
- Museum services determined by a decision from the Minister.
- Plastic/fine arts, all kinds of copyrights and acts of literary and technical publishing.
- Services of news agencies.
- Cultivating services of lands and crops as well as supplying of agricultural manpower.
- Subscriptions fees of syndicates, sports authorities supervised by the Ministry of Sports and Youth as well as social and national associations.
- Processing, transportation and burial services of dead.
- Cars specialized for disabled persons.
- Wastes resulting from the circulation of rubbish.
- Devices and software specialized for blind persons.
- (a) Local medicines and their effective components.
(b) Imported medicines and their effective components.
- Educational services carried out by international schools, academies, faculties or universities which use special curriculums.
- Advertising services.
- It is important to note however that the electricity production, transmission, selling or distribution is exempted from the VAT Tax. ↩
- Article (1) of the VAT Law. ↩
- Article (5) of the VAT Law. ↩
- Article (6) of the VAT Law. ↩
- Article (3) of the VAT Law. ↩
- Article (36) of the VAT Law. ↩
- No changes are affecting the current effective prices of the gasoline. ↩
- Article (10) of the VAT Law. ↩
- Related party is defined under the VAT Law as any person which its relationship with another party affects the determination of the tax base. Related parties shall include husband and wife, the ascendants and descendants, the employer and its employees, the joint stock company and the owner of more than (50%) of its capital shares or voting rights whether directly or indirectly, as well as any other two or more companies in which another person holds (50%) of the capital shares or voting rights in both of them. ↩
- Article (16) of the VAT Law. ↩
- Article (7) of the issued articles of the VAT Law. ↩
- Article (5) of the issued articles of the VAT Law. ↩
- Article (16) of the VAT Law. ↩
- Article (17) of the VAT Law. ↩
- Article (12) of the VAT Law. ↩
- Article (74) of the VAT Law. ↩
- Article (13) of the VAT Law. ↩ ↩
- Article (14) of the VAT Law. ↩
- Article (22) of the VAT Law. ↩
- The input tax is the direct or indirect tax which was previously charged by the taxpayer when purchasing or importing goods (including equipment and devices) or services which are relating to taxable goods or services. ↩
- Article (23) of the VAT Law. ↩
- Article (56) of the VAT Law. ↩
- Article (57) of the VAT Law. ↩
- Article (58) of the VAT Law. ↩
- Article (67) of the VAT Law. ↩
- Last paragraph of Article (67) of the VAT Law. ↩