New Tax Accounting Treatment for Small Enterprises
The New Decree by the Minister of Finance Simplifies the Process
Background
The Minister of Finance recently issued Decree No. 54 of 2012 (published in the Egyptian Gazette, Issue No. 31 (bis), on February 8th, 2012) dealing with the tax accounting of small enterprises.
The new Decree provides small enterprises a simplified system for dealing with the tax authorities in order to simplify their work in general, reduce their costs, and encourage small investors to enter the formal market, all of which reflects the State’s interest in promoting small and medium enterprises, being the best way to increase productivity and reduce unemployment.
It is worth noting that the new Decree does not come in a legal vacuum, as there is already a legislative framework for small and medium enterprises, the corner stone of which is the Small Enterprises Development Law No. 141 of 2004, and the various laws dealing with the Social Fund for Development. It is important to note that the new Decree replaces a previously issued one (No. 414 of 2009) which dealt with the same subject.
Who Benefits From the New System?
The only beneficiaries of the new system are small enterprises, defined in the Decree as “… every juristic person or individual establishment which undertakes an economic activity, whether productive, service oriented, or commercial, and whose paid up capital does not exceed one million Egyptian Pounds, and the number of employees does not exceed fifty …”.
Accordingly, three conditions must be met in order for an enterprise to benefit from the new treatment:
a) That it is a juristic person or an individual establishment, thus any activity that has no commercial registry would be ineligible,
b) That its activity is economic, in the sense that it is for profit, thus any activity that is charitable or not-for-profit would also be ineligible,
c) That its paid up capital is not above one million Egyptian Pounds, and
d) That the number of employees therein is not more than fifty.
But it is also important to note that the following are not eligible to the new system:
a) Related Parties as stated in Article (1) of the Income Tax Law No.91 of 2005
b) Persons and establishments that are not resident.
c) Permanent Establishments as defined in Article (4) of the Income Tax Law.
d) Establishments undertaking professional activities.
e) Agents and branches of foreign companies.
f) Public authorities and governmental entities
The New Tax Accounting
The new Decree distinguishes between small enterprises which take the form of a joint stock company, a company limited by shares, or limited liability company, an other establishments, as well as between those with an annual turnover of less than one million Egyptian Pounds and those with a turnover of between one and two million Pounds, and finally those with a higher turnover, all as follows:
• Establishments which do not take the form of a joint stock company, a company limited by shares, or a limited liability company, and whose annual turnover is less than one million Pounds, will have their net profit determined in accordance with executive rules to be issued by the head of the Egyptian Tax Authority after the approval of the Minister of Finance, i.e. in accordance with rules that have not been issued yet. However, it is worth noting that these establishments may decide to continue to be taxed in the basis of the records and books they hold and the documentation approved by the Authority. In other words, the new system is elective because they can choose to apply the traditional system.
• Establishments which have an annual turnover of between one and two million Pounds, or which take the form of a joint stock company, a company limited by shares, or a limited liability company and whose annual turnover is not more than two million Pounds, will have their net profit determined on the basis of their income statements prepared on the accrual basis.
• And finally establishments whose annual turnover exceeds two million Pounds – whatever their legal form – will have their net profit determined in accordance with the provisions of the Income Tax Law.
In all cases, the small enterprise is obliged to issue invoices against any services, undertakings or goods sold.
The Tax Treatment
The new Decree has stated the following rules for taxation of eligible small enterprises:
• Small enterprises are obliged to submit their tax statements on the forms prepared for this purpose, although it is not clear whether these are forms that already exist or whether they shall be prepared especially for this purpose.
• Small enterprises whose annual turnover does not exceed two million Pounds – whatever their legal form – may choose not to apply the Egyptian Accounting Standards.
• The system called “supervision by sample” referred to in Article (94) of the Income Tax Law does not apply to small enterprises.
The Tax Authority
The new Decree states that the competent tax authority shall keep a special registry for eligible small enterprises which will include for each enterprise, its name, legal form, type of activity, as well as names and details of partners therein.
Comment
The new Decree comes at an opportune time to correct the drawbacks of the previous decree dealing with the same subject, issued in 2009. It is, in all cases, an important piece of legislation because it will simplify small enterprises’ tax accounting and treatment, which is one of the key goals for the Ministry of Finance and other State organs, in light of the effect it could have on the encouragement of further small enterprises and industries, the reduction in unemployment, increase in investment and potential impact on combating poverty. Hence it is a positive step in the effort to enlarge the formal economy.
However, the major drawback of the Decree is that it is not ambitious enough, in the sense that it should have included more activities and enterprises, including those with an annual turnover higher than two million Pounds (perhaps five million), it should not have distinguished between establishments on the basis of their legal form, and more importantly, it should have established a different tax treatment, which could require a change of law, but which would have constituted a real breakthrough in the business environment in Egypt.
But it remains a positive Decree and in the right direction, although further steps
should be taken in order to encourage small and medium enterprises in Egypt.
The New Decree by the Minister of Finance Simplifies the Process
Background
The Minister of Finance recently issued Decree No. 54 of 2012 (published in the Egyptian Gazette, Issue No. 31 (bis), on February 8th, 2012) dealing with the tax accounting of small enterprises.
The new Decree provides small enterprises a simplified system for dealing with the tax authorities in order to simplify their work in general, reduce their costs, and encourage small investors to enter the formal market, all of which reflects the State’s interest in promoting small and medium enterprises, being the best way to increase productivity and reduce unemployment.
It is worth noting that the new Decree does not come in a legal vacuum, as there is already a legislative framework for small and medium enterprises, the corner stone of which is the Small Enterprises Development Law No. 141 of 2004, and the various laws dealing with the Social Fund for Development. It is important to note that the new Decree replaces a previously issued one (No. 414 of 2009) which dealt with the same subject.
Who Benefits From the New System?
The only beneficiaries of the new system are small enterprises, defined in the Decree as “… every juristic person or individual establishment which undertakes an economic activity, whether productive, service oriented, or commercial, and whose paid up capital does not exceed one million Egyptian Pounds, and the number of employees does not exceed fifty …”.
Accordingly, three conditions must be met in order for an enterprise to benefit from the new treatment:
a) That it is a juristic person or an individual establishment, thus any activity that has no commercial registry would be ineligible,
b) That its activity is economic, in the sense that it is for profit, thus any activity that is charitable or not-for-profit would also be ineligible,
c) That its paid up capital is not above one million Egyptian Pounds, and
d) That the number of employees therein is not more than fifty.
But it is also important to note that the following are not eligible to the new system:
a) Related Parties as stated in Article (1) of the Income Tax Law No.91 of 2005
b) Persons and establishments that are not resident.
c) Permanent Establishments as defined in Article (4) of the Income Tax Law.
d) Establishments undertaking professional activities.
e) Agents and branches of foreign companies.
f) Public authorities and governmental entities
The New Tax Accounting
The new Decree distinguishes between small enterprises which take the form of a joint stock company, a company limited by shares, or limited liability company, an other establishments, as well as between those with an annual turnover of less than one million Egyptian Pounds and those with a turnover of between one and two million Pounds, and finally those with a higher turnover, all as follows:
• Establishments which do not take the form of a joint stock company, a company limited by shares, or a limited liability company, and whose annual turnover is less than one million Pounds, will have their net profit determined in accordance with executive rules to be issued by the head of the Egyptian Tax Authority after the approval of the Minister of Finance, i.e. in accordance with rules that have not been issued yet. However, it is worth noting that these establishments may decide to continue to be taxed in the basis of the records and books they hold and the documentation approved by the Authority. In other words, the new system is elective because they can choose to apply the traditional system.
• Establishments which have an annual turnover of between one and two million Pounds, or which take the form of a joint stock company, a company limited by shares, or a limited liability company and whose annual turnover is not more than two million Pounds, will have their net profit determined on the basis of their income statements prepared on the accrual basis.
• And finally establishments whose annual turnover exceeds two million Pounds – whatever their legal form – will have their net profit determined in accordance with the provisions of the Income Tax Law.
In all cases, the small enterprise is obliged to issue invoices against any services, undertakings or goods sold.
The Tax Treatment
The new Decree has stated the following rules for taxation of eligible small enterprises:
• Small enterprises are obliged to submit their tax statements on the forms prepared for this purpose, although it is not clear whether these are forms that already exist or whether they shall be prepared especially for this purpose.
• Small enterprises whose annual turnover does not exceed two million Pounds – whatever their legal form – may choose not to apply the Egyptian Accounting Standards.
• The system called “supervision by sample” referred to in Article (94) of the Income Tax Law does not apply to small enterprises.
The Tax Authority
The new Decree states that the competent tax authority shall keep a special registry for eligible small enterprises which will include for each enterprise, its name, legal form, type of activity, as well as names and details of partners therein.
Comment
The new Decree comes at an opportune time to correct the drawbacks of the previous decree dealing with the same subject, issued in 2009. It is, in all cases, an important piece of legislation because it will simplify small enterprises’ tax accounting and treatment, which is one of the key goals for the Ministry of Finance and other State organs, in light of the effect it could have on the encouragement of further small enterprises and industries, the reduction in unemployment, increase in investment and potential impact on combating poverty. Hence it is a positive step in the effort to enlarge the formal economy.
However, the major drawback of the Decree is that it is not ambitious enough, in the sense that it should have included more activities and enterprises, including those with an annual turnover higher than two million Pounds (perhaps five million), it should not have distinguished between establishments on the basis of their legal form, and more importantly, it should have established a different tax treatment, which could require a change of law, but which would have constituted a real breakthrough in the business environment in Egypt.
But it remains a positive Decree and in the right direction, although further steps
should be taken in order to encourage small and medium enterprises in Egypt.