Egypt has long been preparing for the transition to a digital economy, in line with its Vision 2030 plans and national digital transformation strategy. The spread of the Covid-19 pandemic has accelerated its plans, forcing a new reality on a market that has grown accustomed to online purchasing.
Egyptian online companies currently pay nine per cent tax on their profits, while companies that sell their products in the traditional way pay between 20 and 23 per cent in tax.
Last week, the Finance Ministry decided to levy a value-added tax (VAT) on companies operating in the Internet economy, starting with 14 per cent VAT on deliveries made via online purchases.
The ministry issued Decree 285/2021 as an amendment to Decree 82/2017 to “achieve fair competition and tax justice”, in the words of head of the Egyptian Tax Authority (ETA) Reda Abdel-Kader.
The new law primarily addresses companies and online applications that sprung up during the pandemic without being registered with the ETA, Abdel-Kader said. The pandemic had obliged the state to order the closure of restaurants and coffee shops to curb its spread, while still allowing them to function and to deliver online.
According to the law, food is exempted from tax in restaurants and non-tourist shops, except for some categories stipulated in Decree 82/2017. Outlets that provide food through websites and that are not registered with the ETA are now obliged to register for VAT if they have an annual turnover of over LE500,000, Abdel-Kader stated.
He said that unregistered companies must register with the ETA if the volume of their transactions reaches the registration limit. Regarding delivery services, he said that these counted as taxable revenue, and all tax-registered companies must collect tax on such services and declare them to the ETA in their monthly returns.
Yehia Abu Taleb, a professor of finance at Ain Shams University in Cairo, agreed with Abdel-Kader that the decision was “a first step towards achieving tax justice”.
Countries the world over are taking measures to impose equal taxes on digital and traditional companies, he said, adding that the decision was taken individually by the ETA and was not connected to recent moves by the G7 group of countries concerning the digital economy.
The G7, consisting of the UK, Canada, France, Germany, Italy, Japan, and the US, announced plans to impose a global tax of at least 15 per cent on the profits of multinational companies such as Amazon, Apple, Facebook, and Google earlier this month.
EU Economy Commissioner Paolo Gentiloni said the consultation on levying 15 per cent tax on online companies “marks an important step towards our ultimate goal of ensuring the fair taxation of the digital economy. Achieving this goal is even more important in the current context. Covid-19 has caused an unprecedented economic shock, and as we work to build a sustainable recovery, it is vital that all companies make a sufficient contribution to this effort.”
Irish Finance Minister Paschal Donohoe, whose country levies a 12.5 per cent corporation tax, tweeted that “it is in everyone’s interest to achieve a sustainable, ambitious, and equitable agreement on the international tax architecture,” noting that “any agreement will have to meet the needs of small and large countries, developed and developing” alike.
Amr Al-Mounir, a former Egyptian deputy finance minister and international tax expert, said taxing digital companies would change the global tax system in the coming years. The current G7 consultations had given birth to a preliminary agreement that had yet to materialise, he explained. Before its final ratification, each country would need to give its opinion on the tax rate and implementation mechanisms.
He said that taxing the digital economy had to be conducted on an international basis and it would be futile for individual countries to take unilateral steps in this regard. Digital taxation was a historic step, especially as a result of the changing face of the traditional economy, he added.
It was vital for tax systems to keep up with technological advances, especially as there are now some two billion websites and applications for e-trade worldwide, Al-Mounir said.
As the debate continues on how the new system will work, the prevailing trend has been to impose a minimum tax on online companies, some of which have made enormous profits during the pandemic, he said, noting that the time has come for these companies to pay their fair share of tax.
But the new system needs to be supplemented with the right legislation, and workers at the various tax authorities have to be trained on the new structure, Al-Mounir said.
One of the obstacles facing the new system, if it goes into effect globally, is double taxation, with corporates possibly finding themselves paying tax in two different countries. Al-Mounir said countries should conduct studies to work out a successful mechanism.
Egypt should also consult with experts to strike a balance between attracting investments to its web economy and earning its fair share of taxes.
Digital corporate taxation will bring in billions of dollars to governments and will benefit them in repairing the economic damage of Covid-19, said Fathi Nada, a financial analyst.
The G7’s decision to tax multinationals represented a core transformation in how the group regards the right of developing countries to receive a fair share of tax from multinationals operating on their territories, Nada said.
Until this decision, the country of origin represented a “safe haven” for these companies, where they could be charged no or minimum taxes.
During their recent summit meeting, the finance ministers of the G7 agreed on fighting tax evasion through new procedures. “The largest and most profitable multinationals will be required to pay tax in the countries where they operate and not just where they have their headquarters,” a statement said.
“The rules would apply to global firms with at least a 10 per cent profit margin and would see 20 per cent of any profit above the 10 per cent margin reallocated and then subjected to tax in the countries they operate in.”
Nada said that the reaction of the multinationals had been relatively positive. An Amazon spokesperson quoted by Reuters said that “we believe an OECD-led process that creates a multilateral solution will help bring stability to the international tax system. The agreement by the G7 marks a welcome step forward in the effort to achieve this goal,” referring to the Organisation for Economic Cooperation and Development.
Reuters reported that a Google spokesperson had also said that “we strongly support the work being done to update international tax rules. We hope countries continue to work together to ensure a balanced and durable agreement will be finalised soon.”
The timing of the decision was appropriate, Nada said, adding that governments have long been faced with the challenge of imposing taxes on multinationals. This challenge has grown with the flourishing of companies like Amazon, Google, and Facebook.
He added that such companies were able to open branches in countries with low tax rates and announce their profits there, meaning that they pay the local rate of tax even if their profits are generated in other countries.
The G7 is attempting to prevent this by forcing multinationals to pay taxes in the countries where they sell their products and services and by setting a minimum tax rate.
*A version of this article appears in print in the 17 June, 2021 edition of Al-Ahram Weekly