Introduction
On the first week of July 2009, a Decree was issued by the Minister of Finance - Number 414 of 2009 - regarding the Rules and Criteria for Small Enterprises (SMEs) Tax Assessment (hereinafter "Decree"). It was published in the Egyptian Gazette on July 2nd, 2009 and made effective as of the following day of its publication. The purpose of the Decree is to lay out a new system and mechanisms that for: (a) assessing SE taxes, and (b) payment. In that sense the Decree should be considered an important step in the direction of improving the investment environment for SMEs which was suffering from the complexity and cost of dealing with the tax authorities. It also puts into application the Government's interest in promoting SMEs as a major pillar in the national economy. The Decree, however, does not fulfil its role entirely and stops short of proving a comprehensive framework for SE taxation as will be described below.
It is also worth noting that the idea of establishing a special framework for SE taxation is not a novelty. In fact it was being discussed as of the mid 1990s, and was referred to in the Small and Medium Enterprises Development Law (Number 141 of 2004) and the Tax Law (number 91 of 2005). The new Decree thus puts into application an idea that had acquired consensus but was never put into effect.
The Core Issue
Briefly put, the Decree establishes new rules for the tax assessment for SEs, and for its payment. In order to do this, the Decree also defines those institutions that will benefit from its provisions, and the procedures they need to follow in order to register with the Tax Authority. Accordingly, in order to appreciate the content of the Decree, it is necessary to look at (a) the definition of institutions subject to its provisions, (b) procedures for registering with the Tax Authority, (c) the rules of assessment, and (d) the rules for payment.
Eligible Projects
The 2004 Small and Medium Enterprises Development Law defined eligible institutions as those whose paid capital does not exceed one million Egyptian pounds and whose workers do not exceed fifty. This definition has, however, been the subject of much criticism since the Law was issued because it relies on criteria that do not reflect the true nature of SMEs, while international norms rely more on criteria related to the size of turnover and profits. For this reason, the new Decree – without contravening the Law – introduces three new criteria for SE definition; size of invested capital, annual turnover, and annual profits. The Decree accordingly divides SMEs into the following three categories:
- Category (A), for projects whose invested capital does not exceed fifty thousand Egyptian Pounds, annual turnover does not exceed two hundred and fifty thousand, and net annual profits do not exceed twenty thousand pounds.
- Category (B), for projects which fulfill one of the three following conditions; their invested capital is between fifty thousand and two hundred and fifty thousand pounds, their annual sales are between two hundred and fifty thousand and one million pounds, or their annual net profits are between twenty thousand and one hundred thousand pounds. But it is important to note that the fulfillment of only one of the three criteria is enough to qualify the project as Category (B).
- Category (C) for projects whose invested capital exceeds two hundred and fifty thousand pounds, or annual turnover exceeds one million, or net annual profits exceed one hundred thousand pounds, again provided any one of the three criteria is applicable.
On the other hand, the Decree has eliminated some projects from the scope of eligibility, even if they otherwise fall under one of the above categories. The excluded projects are:
- Permanent establishments serving businesses located outside of Egypt as defined in article (14) of the Income Tax Law.
- Professional services; lawyers, accountants, etc.
- Persons or companies which are registered in Egypt but non-domiciled therein, in other words, businesses which merely have an address in Egypt but operate from outside.
- Foreign companies agents and branches, irrespective of their size.
- Public authorities and other governmental entities which pay taxes, irrespective of their size.
- Holding companies which meet the above criteria, and these will not be eligible even if they are owners of eligible SEs, in which case the subsidiaries will fall under the scope of the Decree but not the holding entity.
- Related parties as defined by Article (1) of the Income Tax Law.
Registration with the Tax Authority
In order to benefit from the provisions of the Decree, Categories (B) and (C) projects must register with the tax office in their geographical area. Category (A) do not need to register. Registration should normally be prior to the start of the project's fiscal year, but exceptionally projects which are interested in benefiting from the new system immediately may register within two months from the coming into force of the Decree, i.e. prior to September 2
nd, 2009.
Tax Assessment
The tax assessment for various entities differs in the following manner:
- Category (A) projects, if they are personal businesses will be assesses in accordance with regulations to be issued by the Tax Authority, and need not keep accounting books, not apply the Egyptian Accounting Standards, although they need to issue invoices.
- Category (A) projects, if they are companies, must keep one ledger for their income and expenditure and hold supporting documents, but do not need to apply the Egyptian Accounting Standards.
- Category (B) projects must follow a monetary basis for preparing their financial statements,( i.e. inscribe each year with its expenses and incomes), must keep simplified books, and need to apply the Egyptian Accounting Standards.
- Finally Category (C) projects determine their net profits on the basis of the Egyptian Accounting Standards, keep regular books, and must keep supporting documents.
For all the above categories, if the project fails to keep supporting documents, then it may request the assistance of persons from the tax office – at no extra cost – to register their undocumented expenses.
Tax Payment
The new Decree deals with the assessment and payment of taxes, but does not affect the tax rate applicable to all commercial activities in Egypt. SE projects may however pay 60% of the last tax paid for the previous year or of the current year's assessment (if the project has not yet paid taxes or made a loss in the previous year) under account, payable in three installments at the end of June, September and December, with the settlement made upon submission of the tax returns. It is also worth noting that all provisions pertaining to tax evasion and criminal sanctions attached thereto in the Income Tax Law are applicable in SMEs.
Conclusion
The new Decree represents an important advancement in the whole methodology of SM Es tax treatment, itself a positive development in the investment environment. The Decree, however, suffers from not providing a sufficient breakthrough in the existing system, perhaps due to the fact that it is – by virtue of being a decree – of a lower hierarchical place to both the Income Tax Law and the SMEs Law, and accordingly not capable of going beyond already existing rules.
This much needed breakthrough would have been achieved by:
- Redefining small and medium enterprises without reference at all to capital or number of employees.
- Allocating specific tax offices to deal with SMEs
- Allowing professional services to benefit from SME treatment.
- Revisiting the tax rate imposed on small and micro enterprises.
- Tying the tax payment with social security payments so that the SMEs benefit from further simplification and reduction in red tape, which is necessary in order to reduce the level of informality in the market.
On the whole the new Decree represents a good start, but one which must be followed by further and more radical measures in order to encourage formalization.
Introduction
On the first week of July 2009, a Decree was issued by the Minister of Finance - Number 414 of 2009 - regarding the Rules and Criteria for Small Enterprises (SMEs) Tax Assessment (hereinafter "Decree"). It was published in the Egyptian Gazette on July 2nd, 2009 and made effective as of the following day of its publication. The purpose of the Decree is to lay out a new system and mechanisms that for: (a) assessing SE taxes, and (b) payment. In that sense the Decree should be considered an important step in the direction of improving the investment environment for SMEs which was suffering from the complexity and cost of dealing with the tax authorities. It also puts into application the Government's interest in promoting SMEs as a major pillar in the national economy. The Decree, however, does not fulfil its role entirely and stops short of proving a comprehensive framework for SE taxation as will be described below.
It is also worth noting that the idea of establishing a special framework for SE taxation is not a novelty. In fact it was being discussed as of the mid 1990s, and was referred to in the Small and Medium Enterprises Development Law (Number 141 of 2004) and the Tax Law (number 91 of 2005). The new Decree thus puts into application an idea that had acquired consensus but was never put into effect.
The Core Issue
Briefly put, the Decree establishes new rules for the tax assessment for SEs, and for its payment. In order to do this, the Decree also defines those institutions that will benefit from its provisions, and the procedures they need to follow in order to register with the Tax Authority. Accordingly, in order to appreciate the content of the Decree, it is necessary to look at (a) the definition of institutions subject to its provisions, (b) procedures for registering with the Tax Authority, (c) the rules of assessment, and (d) the rules for payment.
Eligible Projects
The 2004 Small and Medium Enterprises Development Law defined eligible institutions as those whose paid capital does not exceed one million Egyptian pounds and whose workers do not exceed fifty. This definition has, however, been the subject of much criticism since the Law was issued because it relies on criteria that do not reflect the true nature of SMEs, while international norms rely more on criteria related to the size of turnover and profits. For this reason, the new Decree – without contravening the Law – introduces three new criteria for SE definition; size of invested capital, annual turnover, and annual profits. The Decree accordingly divides SMEs into the following three categories:
- Category (A), for projects whose invested capital does not exceed fifty thousand Egyptian Pounds, annual turnover does not exceed two hundred and fifty thousand, and net annual profits do not exceed twenty thousand pounds.
- Category (B), for projects which fulfill one of the three following conditions; their invested capital is between fifty thousand and two hundred and fifty thousand pounds, their annual sales are between two hundred and fifty thousand and one million pounds, or their annual net profits are between twenty thousand and one hundred thousand pounds. But it is important to note that the fulfillment of only one of the three criteria is enough to qualify the project as Category (B).
- Category (C) for projects whose invested capital exceeds two hundred and fifty thousand pounds, or annual turnover exceeds one million, or net annual profits exceed one hundred thousand pounds, again provided any one of the three criteria is applicable.
On the other hand, the Decree has eliminated some projects from the scope of eligibility, even if they otherwise fall under one of the above categories. The excluded projects are:
- Permanent establishments serving businesses located outside of Egypt as defined in article (14) of the Income Tax Law.
- Professional services; lawyers, accountants, etc.
- Persons or companies which are registered in Egypt but non-domiciled therein, in other words, businesses which merely have an address in Egypt but operate from outside.
- Foreign companies agents and branches, irrespective of their size.
- Public authorities and other governmental entities which pay taxes, irrespective of their size.
- Holding companies which meet the above criteria, and these will not be eligible even if they are owners of eligible SEs, in which case the subsidiaries will fall under the scope of the Decree but not the holding entity.
- Related parties as defined by Article (1) of the Income Tax Law.
Registration with the Tax Authority
In order to benefit from the provisions of the Decree, Categories (B) and (C) projects must register with the tax office in their geographical area. Category (A) do not need to register. Registration should normally be prior to the start of the project's fiscal year, but exceptionally projects which are interested in benefiting from the new system immediately may register within two months from the coming into force of the Decree, i.e. prior to September 2
nd, 2009.
Tax Assessment
The tax assessment for various entities differs in the following manner:
- Category (A) projects, if they are personal businesses will be assesses in accordance with regulations to be issued by the Tax Authority, and need not keep accounting books, not apply the Egyptian Accounting Standards, although they need to issue invoices.
- Category (A) projects, if they are companies, must keep one ledger for their income and expenditure and hold supporting documents, but do not need to apply the Egyptian Accounting Standards.
- Category (B) projects must follow a monetary basis for preparing their financial statements,( i.e. inscribe each year with its expenses and incomes), must keep simplified books, and need to apply the Egyptian Accounting Standards.
- Finally Category (C) projects determine their net profits on the basis of the Egyptian Accounting Standards, keep regular books, and must keep supporting documents.
For all the above categories, if the project fails to keep supporting documents, then it may request the assistance of persons from the tax office – at no extra cost – to register their undocumented expenses.
Tax Payment
The new Decree deals with the assessment and payment of taxes, but does not affect the tax rate applicable to all commercial activities in Egypt. SE projects may however pay 60% of the last tax paid for the previous year or of the current year's assessment (if the project has not yet paid taxes or made a loss in the previous year) under account, payable in three installments at the end of June, September and December, with the settlement made upon submission of the tax returns. It is also worth noting that all provisions pertaining to tax evasion and criminal sanctions attached thereto in the Income Tax Law are applicable in SMEs.
Conclusion
The new Decree represents an important advancement in the whole methodology of SM Es tax treatment, itself a positive development in the investment environment. The Decree, however, suffers from not providing a sufficient breakthrough in the existing system, perhaps due to the fact that it is – by virtue of being a decree – of a lower hierarchical place to both the Income Tax Law and the SMEs Law, and accordingly not capable of going beyond already existing rules.
This much needed breakthrough would have been achieved by:
- Redefining small and medium enterprises without reference at all to capital or number of employees.
- Allocating specific tax offices to deal with SMEs
- Allowing professional services to benefit from SME treatment.
- Revisiting the tax rate imposed on small and micro enterprises.
- Tying the tax payment with social security payments so that the SMEs benefit from further simplification and reduction in red tape, which is necessary in order to reduce the level of informality in the market.
On the whole the new Decree represents a good start, but one which must be followed by further and more radical measures in order to encourage formalization.