MENA – OECD Workshop on National Investment Reform Agenda -- Egypt

1. MENA – OECD Workshop on National Investment Reform Agenda -- Egypt “Tax Design Aiming to Encourage Foreign Direct Investment” Ashraf Al Arabi, Senior Advisor to the Minister of Finance on Tax Policies

2. Income Tax Reform Principles of Egypt’s Current Tax Design • Simplification: low rates applied to a very broad tax base, lead to fewer economic distortions, greater certainty for the taxpayer, as well as lower administrative and compliance costs. • Fairness: vertical equity and horizontal equity, (people of similar situation should pay similar amounts of tax). • Removal of tax obstacles to growth: simple regime aiming to stop companies from distorting their decisions to take advantage of special tax provisions than from simply improving efficiency and meeting customers needs.

3. Investment Incentives Impacted by the New Income Tax Law • All types of tax exemptions for Inland Investment Projects and industrial companies with 50 employees. • However, there is a grand fathering rule. • Inland Investment Projects – approved before June 10, 2005 – start activities before June 9, 2008, shall enjoy 5, 10, or 20 year tax exemption period.

4. The New Income Tax Regime • Promulgated a full self-assessmenttax regime with risk based audit process. • New tax rate is 20%. This rate is applicable to all commercial and industrial activities. However, Oil Exploration and Production companies are taxed at 40.55%.

5. The New Income Tax Regime Depreciation as an Investment Incentives • Accelerated Depreciation for all new or used assets purchased at a rate of 30%. • Individual • 5% SL = buildings, installations, etc. • 10% SL = intangible assets • Group “Pooling System” • 50% DB = computers, info-systems, software, etc. • 25% DB = all other business assets

6. The New Income Tax Regime Depreciation (“pooling” system) & Capital gains • Book value business assets opening balance + Additions - Subtractions Depreciation base group Depreciation (25%) Book value business assets closing balance • Gains are Taxable as business profit if realized on business assets • SL method: sales price -/- book value • DB method: indirect in depreciation base (ultimately expressed as negative depreciation base at liquidation)

7. The New Income Tax Regime --International Characteristics Residence (1) • Individuals • Residence – criteria • Permanent residence • >183 days in any 12-month period • Egyptian nationals paid by Treasury

8. The New Income Tax Regime --International Characteristics (Cont’d) Residence (2) • Corporate persons • Residence – criteria • Incorporation under Egyptian law • Place of effective management • >50% public-owned company

9. The New Income Tax Regime -- International Characteristics, (Cont’d) Permanent Establishment (“PE”) • The new Tax Law has clearly defined what is a permanent establishment (“PE”). • Fixed place • Geographical • Time • Place of business • Place through which business activities are carried on • Promulgated a “Place of effective management” concept.

10. The New Income Tax Regime --International Characteristics (Cont’d) “Thin Capitalization” rules • Promulgated a “Thin Capitalization” rule. • Debt-to-equity ratio = 4:1 • Interest on excessive part not deductible • Transitional period (Article 7 of PD): 8:1 (2005), 7:1 (2006), 6:1 (2007) and 5:1 (2008)

11. The New Income Tax Regime -- International Characteristics (Cont’d) “ Transfer Pricing ” (“TP”) • Introduced “ Transfer Pricing ” (“TP”) concept. • Related persons • “unusual” conditions in financial and commercial relations • Indirect correction of business profit (through “arm’s length price”) • Comparable uncontrolled price • Resale-minus price • Cost-plus price • Any other justifiable price

12. The New Income Tax Regime -- International Characteristics (Cont’d) Other Taxable Transactions • Foreign Tax Credit is available for an offset against and up to the domestic tax. • Foreign losses are not deductible of the domestic tax purposes. • Provided exemption from tax on royalties payable against industrial know-how. No exemption is provided to use of a trade mark and Technical Service Agreements. • Fees for foreign services are subject to a tax at 20%. • Interest payable to a non-resident recipient is subject to 20% tax rate subject to a treaty relieve.

13. The New Income Tax Regime Taxable Base • Taxable Base = Profit according to the Egyptian Accounting Standards • Exceptions: • Long-term contracts • Interest deductibility • Depreciation • Reserves • Bad debts

14. Tax Reform Agenda of Egypt Sales Tax Reform • Going to a full-fledged VAT. • Unification of Tax Rates. • Generalization of Tax Credit. • Unification and increasing the registration threshold. • The rationalization of excises. • Treatment of M & SE under the registration threshold.

15. Tax Reform Agenda of Egypt Stamp Duties Reform “Introducing a simple stamp duties regime” • Abolishing all fiscal stamps. • Limiting the imposition of the proportional stamp duties to a very limited number of activates and drastically reducing its impact on the Insurance companies activates and banks’ transactions.

16. Tax Reform Agenda of Egypt Property Tax Reform • Waving away all tax exemption and city zones. • Improve property tax revenue that is currently underutilized revenue source (by at least 300% in the fist year of implementation) . • Change the tax rate from currently 46% to a more realistically rate of 10%. • Improving the frequency of the revaluing of properties every 5 years instead of the current system of 10 years. • Improving the valuation procedures.

17. Egypt’s Revenue Administration Modernization Strategy • The vision and strategy for tax administration reform compromising of: • An adequate tax policy framework; • Clear and simple legislation and procedures; • A full regime of self-assessment; • Function-based organization structures and modern business processes; • The integration of domestic tax administrations (one single organization for both Income Tax and Sales Tax); • Taxpayer segmentation, beginning with the large taxpayers.

18. Large Taxpayers Office (“LTO”) Objectives • A special organization within the Egyptian tax administration; • Aiming to mitigating most risks related to large taxpayers; • Improving control over revenue; and • lead to effective tax administration.

19. Thank You