The Egyptian economy has faced a period of instability and fluctuation over the past few years that has significantly impacted the government’s growth plans and projections. Successive devaluations of the Egyptian pound coupled with the pressures faced as a result of external events such as the COVID-19 pandemic and the Russia-Ukraine conflict have put pressure on the Egyptian Tax Authority (ETA) under the auspices of the Ministry of Finance (MoF) to take numerous steps to mitigate economic losses in various sectors and introduce measures to ease the financial burdens that have arisen.
The ETA alongside the MoF have been tasked with adopting measures in the face of the economic crisis, particularly in light of the ongoing devaluation of the Egyptian pound (EGP), which has experienced another significant hit this year following its first drop back in 2016. In view of the above, the ETA is making progress in granting certain sectors tax leniency and exemptions to push them in the direction of economic growth. That said, there are sectors which have yet to be prioritised by the ETA and are struggling to keep up with the tax constraints.
Another hot topic in the Egyptian tax regime concerns double taxation treaties (DTTs) and the controversy surrounding their implementation. DTTs are globally recognised and facilitate international investment without investors being subject to cross-taxation in multiple jurisdictions. That said, the manner in which the ETA facilitates the application of DTTs has raised some concerns over its efficiency, which will be discussed in further detail below.
An additional area of concern in the Egyptian tax regime concerns the manner in which the ETA undertakes and issues its tax assessments and the procedures for investors to appeal the same. In an effort to adopt a more efficient tax appeal process, the ETA has introduced a Tax Appeal Committee (the “Committee”), which is independently and exclusively tasked with handling the same.
Facing the Economic Crisis
As mentioned in the introduction, Egypt has been at the forefront of a significant currency devaluation which has contributed to the economic crisis currently being faced. Following the Egyptian revolution, the Egyptian economy took a sharp, negative turn influenced by reduced tourism and exports. This led the Egyptian government to request loans from international financial organisations. A USD12 billion loan requested from the International Monetary Fund in 2016 was conditioned on the MoF adopting a floating exchange rate policy to replace the decades of reliance on a fixed exchange rate policy influenced by foreign currency reserves. This triggered the beginning of the currency war whereby the Central Bank of Egypt (CBE) floated the exchange rate to be traded at EGP19.62 per USD, shooting from the previous EGP8.88 per USD, a massive 48% increase. The depreciation was coupled with a hike in interest rates by approximately 300 basis points.
Ever since the big 2016 hit, the currency war has been well underway and the CBE has, once again, depreciated the value of the EGP by nearly 17% in March 2023. The USD now stands at EGP30.99, with future depreciations expected imminently as a result of ongoing repercussions of the Russia-Ukraine conflict, the global financial crisis, and the overwhelming aftermath of the COVID-19 pandemic on key sectors in Egypt such as the tourism and exports sectors.
In light of the above uncertainty surrounding the EGP to USD FX rate, the ETA is now considering setting its own USD exchange rate, separate from the flotation regime adopted by the CBE. This aims to facilitate tax calculations for companies with net earnings in USD. Said mechanism entails the collection of taxes in USD instead of EGP for foreign companies conducting business in Egypt as well as local entities with earnings in USD. There are further talks that the above may potentially be implemented in hotels operating in Egypt whereby taxes due by said hotels are to be collected in USD.
It is expected that the above-mentioned will be addressed in the MoF’s much-anticipated five-year tax policy document (the “Five-Year Tax Policy”), aimed at stabilising the tax regime in Egypt in light of the economic crisis. At this stage, it is unclear whether the Five-Year Tax Policy will propose that local entities with USD earnings and foreign entities will be obliged to pay their due taxes in Egypt in USD or whether this will be optional.
As part of the ETA’s attempt to ease economic difficulties in certain sectors in Egypt, various tax cuts and exemptions are in the pipeline. Of significant importance are the expected tax exemptions for all parties involved in the building and operation of nuclear projects, in order to push the nuclear energy sector in the direction of positive growth and assist the projects in operating within their expected timeframe. Draft amendments to the law regulating the Nuclear Power Plants Authority have been preliminarily approved by the Egyptian House of Representatives in October 2022, which would exempt all parties involved (including contractors, subcontractors, equipment suppliers and workers) from taxes, thereby lowering the cost of the projects.
Another incentive which has been on the table for several years is the introduction of tourism free zones which would grant investors tax cuts and exemptions to encourage the restoration of the tourism industry following its sharp decline stemming from the Egyptian Revolution in 2011 and as a result of concurrent events such as the Russian flight crash in the resort town of Sharm El Sheikh in October of 2015, the COVID-19 pandemic and the Russia-Ukraine conflict.
In April 2018, the Egyptian government approved the establishment of a tourism free zone in Nuweiba, a town in the Sinai Peninsula. The Nuweiba free zone would grant tax exemptions and other privileges for the import and export markets and aims to facilitate the sale of local products including handicrafts and environmentally conscious products to tourists in the area in foreign currency. The free zone was expected to commence operations within two years; however, there has been no recent update on its expected operation and it is unclear whether there has been any progress on this front.
Notwithstanding the above, a key sector which has not been on the MoF’s radar has been the automotive sector. While some imported vehicles are fully exempt from customs tax, automotive components imported for local manufacturing are subject to a 5–7% customs duty and a 3% development fee, which is burdening the automotive sector in Egypt and has contributed to a spike in prices of vehicles in recent years (coupled with the impact of the currency devaluation discussed above).
The above is expected to change following the introduction of the Supreme Council for Vehicle Manufacturing (SCVM), chaired by the Prime Minister and including representatives from various governmental authorities and key market players. The SCVM will be in charge of setting the policies for the automotive industry, and at the top of its agenda is the Automotive Industry Development Programme, which aims to:
Implementation of DTTs
DTTs have become increasingly relied upon in the Egyptian market in light of growing foreign investment. Foreign entities with no permanent establishment in Egypt may be entitled to certain tax exemptions or reduced tax rates depending on their tax residency and whether their country of tax residence has a ratified DTT with Egypt; and provided the conditions set forth in the DTT are met. The DTT system offers investors and entities the opportunity to undertake services, activities and investments on a global level without the added financial and procedural pressure of being subject to double taxation in both their country of tax residence and the country in which they are undertaking any services or investments (ie, Egypt in this case).
That said, the lengthy and often complicated procedures adopted by the ETA to benefit from a DTT application burden investors and entities wishing to undertake activities in Egypt. The ETA’s International Treaty Department (the “Department”) is the competent department tasked with assessing the application of DTTs on a case-by-case basis. In this regard, entities wishing to rely on a DTT must submit a formal request to the Department, explaining precisely their reliance on the applicable DTT, and submit the relevant supporting documentation evidencing the same. In practice, the review process of the Department is lengthy and may take up to 6 or 7 months to complete. Additionally, the Department often requests that the relevant entity submits follow-up requests and clarifications, and may further request that a formal meeting be convened to discuss the application of the DTT. In some instances, the Department further requests that the entity wishing to rely on the DTT pay the due tax ahead of submitting their request and, if the Department concludes that the DTT is applicable, said tax will be reimbursed in the form of tax credit (which will be discussed in the next section).
In order to facilitate an increase in foreign investment and to counter the challenges being faced as a result of the economic crisis, the ETA will need to reconsider its DTT mechanism and adopt a simple and expedient system for foreign investors to use. It may even be worth considering a shift to digitalising the DTT application process, in line with the ETA’s growing interest and enforcement of a fully digitalised tax system in Egypt.
Tax Assessments in Egypt
Another procedural problem previously faced by taxpayers in Egypt concerned the manner in which the ETA issued its tax assessments and the considerably high tax assessments issued therefrom. To dispute or challenge said tax assessments, investors were required to submit formal appeal requests to the ETA, which often led to significantly lengthy procedures before the ETA.
To improve the efficiency and timeframe of the tax assessment appeal process, the ETA established the Committee, a special committee tasked with handling and processing tax disputes and appeals submitted by investors.
Since its establishment in 2018, the Committee has successfully completed appeals submitted by approximately 600 investors. In view of the ongoing efforts of the ETA to digitalise the tax regime and close all tax dispute files ahead of the complete shift to digitalisation, the ETA has urged investors to submit their tax appeals to the Committee and further offered subsidised payment mechanisms with the aim of completing the same at the earliest point in time.
While the Egyptian tax system has developed significantly in recent years with the development of the digitalised tax system and the introduction of various tax incentives, there remain crucial aspects of the tax regime which require progress. In the face of the economic crisis, sectors such as the automotive industry (as discussed above) need tax incentives to boost local production. In order to encourage foreign investment and facilitate an easier tax process for foreign entities to undertake business in Egypt, the manner in which the ETA assesses DTT application needs to be reconsidered. That said, the ETA has taken a step forward in making its procedures more efficient for investors by introducing the Committee to take charge of the tax appeal process.
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