With support from the IMF, since December 2022 Egypt has been engaged in a policy reform to address economic imbalances. During the fiscal policy discussions, the Egyptian authorities proposed a set of structural tax reforms (Plan) to increase tax revenues by 3% of GDP by 30 June 2027.

In terms of tax policy, the Plan significantly extends and enhances the Egyptian tax authority’s (ETA) remit to monitor and ensure taxpayer compliance.

What has been done so far?

Throughout 2023, a series of tax changes were introduced as part of the reform. On the policy side, Income Tax Law 91/2005 (ITL) underwent its most extensive amendment in a decade. Policy changes included the following:

• Downward revision of the thin capitalisation ratio to reduce taxpayers’ dependence on debt financing. 
• Disallowance of expenses not supported by e-invoices to encourage taxpayers to shift to the e-invoice system. 
• Increase of personal income tax exemptions to counter inflation. 
• Elimination of tax exemptions to state-owned enterprises to create a level playing field. 
• Abolition of WHT exemption on interest payments to non-residents to reduce tax planning structures. 
• Introduction of reporting deadlines for non-residents’ sales of non-listed Egyptian securities to ensure timely tax reporting and collection.

On the administration side, the ETA continued its extensive automation project, including by: 

• obliging more taxpayers to join the e-invoicing system for B2B transactions; 
• introducing a simplified registration regime to collect VAT on non-residents’ e-commerce services to Egypt-based customers; 
• obliging more taxpayers to join the e-receipt system for B2C transactions; and 
• obliging more taxpayers to join the payroll automation system to boost tax compliance and unify the ITL’s application on wages and salaries.

What more to expect?

With regard to upcoming tax changes, the authorities highlighted a range of short- and medium-term measures. How long it will take to enact these measures will depend on coordination between the Ministry of Finance (MoF) and the relevant stakeholders, including taxpayers and, more importantly, other governmental authorities.

The following measures are expected within one to three years: 

• An entirely new income tax law (New ITL). In addition to modernising the ITL by introducing the latest tax concepts (e.g., hybrid mismatches, corresponding adjustments, and mutual agreement procedures), the New ITL will simplify the existing text to ensure more certainty and close interpretive loopholes. The IMF is assisting the MoF draft the New ITL with this in mind. We await a draft of the New ITL to assess potential tax policy changes. 
• Legislation (part of the New ITL or separate) to introduce a qualified domestic minimum top-up tax (QDMTT). This could significantly impact free-zone-based entities that fall within the Pillar 2 scope. However, a QDMTT is unlikely to be applicable for FY 2024. In any case, no public information is available yet on Pillar 2-compliant tax incentives to be implemented by the authorities. Also, in view of the impact of Pillar 2 on free zones, the authorities have committed to the IMF to: (a) limit the establishment of new free zones; and (b) carry out a detailed assessment of the financial and economic performance of existing tax-exempt free zones to ascertain tax expenditure. 
• Signing of multilateral conventions on the subject-to-tax-rule and on Pillar 1 when opened for signing. 
• Legislation to renew the mandate of tax dispute settlement committees to reduce tax litigation in courts with unexpected and likely unfavourable outcomes for taxpayers.
• Legislation to consolidate the rules on schedule tax, stamp duty, and the state development fee. 
• Signing of the Convention on Mutual Administrative Assistance in Tax Matters and active exchange of information for tax purposes. Earlier in the year, after completing the Global Forum’s peer review of Egypt, the authorities committed to introducing legislation creating: (a) a specialised information exchange unit, and (b) a dedicated record for beneficial owners of legal entities with operations in Egypt. 

With all these planned changes, the authorities are making a clear effort to widen the tax base and mobilise domestic revenues. And the ETA’s practices are in line with these efforts, as seen in the following areas:

• Transfer pricing (TP): The ETA is increasingly carrying out TP assessments on multinationals. The process is straightforward: when an ETA auditor denies – on a deemed basis – 25% of the related-party costs, it refers the file to the TP unit for a detailed assessment. 
• Cross-border transactions and double taxation treaty relief: The ETA increasingly conditions treaty reliefs on proof of economic substance and beneficial ownership on the part of income recipients, and sometimes adopts strict interpretations of double tax treaty provisions (e.g., regarding capital gains, branch remittance, corresponding adjustments, and WHT on services).

Conclusion

Given the target set with the IMF, the MoF and the ETA are undergoing an intense process to update the applicable tax policies and tax administration. Many of the planned changes will significantly impact market players; it will thus be crucial that they conduct a pre-emptive assessment and pre-pare accordingly.