Draft VAT law under discussion

Egypt/May 2014

Egypt is currently in the process of introducing a VAT legislation which will completely replace its existing General Sales Tax regime that was applicable since 1991. The decision for the introduction of the Egyptian VAT legislation was under consideration for a long time but was postponed repeatedly in the past. The implementation of a VAT system was also included in the recommendations put forward by the International Monetary Fund (“IMF”) as part of a package of economic reforms for the country during their negotiations over a USD4.8 billion loan.

As such, in light of the country’s persisting heavy government deficit and its considerable need for tax revenues, the introduction of a VAT system is expected to take place by the end of 2014. On 9 April 2014, the head of the Egyptian tax authority announced that the draft law is currently under discussion between the tax authority and the business community.

The standard VAT rate has not been officially announced yet, however, it is expected that this will range between 10% and 12% and will be imposed on all goods and services with a few limited exceptions on essential commodities, such as certain edible goods, health, education, and social services. Further, according to the provisions of the draft Law a zero rate will also apply on the following supplies:

• Goods and services that will be exported

• Imported goods that will be used outside Egypt

• Goods and services that will be used for the purposes of repairing equipment imported to Egypt on a temporary basis

• Goods that are intended for the exploitation of international transport means

• Goods and services that will be used for military purposes imported by the Ministry of Defense the Ministry of Interior and by national military agencies

The reverse charge mechanism will also be implemented whereby the Egyptian recipient of a service will be responsible to withhold and remit the relevant tax in relation to the taxable transactions with non-residents.

The implementation of a full-fledged VAT system is expected to increase substantially the country’s tax revenues and assist in the reduction of the budget sector deficit. The Egyptian Government aims to gradually reduce the budget deficit from 14 percent of GDP which was recorded in June 2013, to around 8 percent of GDP within the next two to three years. Further, according to the IMF, the resources generated will be used to boost social spending and infrastructure investment and the envisaged deficit reduction will help alleviate the public debt burden and free up financing to support social spending and private sector growth.

Katerina A Charalambous