Are ads and e-commerce subject to VAT ?

Cairo – Eco – Fady Labib : The Egyptia Center for Economic Studies commented on the issue of studying the government, represented by the Ministry of Finance, a mechanism to submit electronic advertisements that Egyptian companies broadcast through Google or via social media for value added tax by 14% , The Egyptian Center for Economic Studies added : ...

While the new millennium witnessed the emergence of companies such as Google, Facebook, Amazon and other companies operating in the digital economy, the tax rules did not witness a similar development  .

The State has thus become unable to impose a fair tax on the activities and products of these companies, which leads to :

a negative impact on the tax revenues of the State,and Violation of the rules of fair competition between companies engaged in conventional and digital activities .

The main challenge with respect to VAT is the emergence of a new type of goods and intangible assets that are not subject to customs control, such as the purchase of an electronic book or antivirus software through the Internet. Traditional tax rules require the buyer to calculate the value-added tax on services and intangible assets and pay them to the Tax Authority.

 However, this system has proven to be a failure in most countries of the world. What prompts a buyer to voluntarily pay the tax ?

The Organization for Economic Co-operation and Development (OECD) proposes that the State - Egypt in this case - request the seller to register with the Tax Authority and to calculate and supply the tax. Amazon, for example, would tax Egyptian purchases of electronic books and supply them to the Egyptian Tax Authority. But this requires providing incentives and facilities to such companies to do this service, including :

Accelerate customs clearance procedures for any tangible goods that may be traded by these companies .

Simplifying collection, registration and tax return 

procedures, all to be completed electronically .

Exempt these companies from providing all required data in the tax invoice to local

suppliers .

Enabling the seller to appoint a broker to collect and supply the tax if he so desires .

 

As for income tax, the current tax rules were designed specifically for traditional economic activities, requiring that the company be a brick and mortar entity so that its profits could be taxed. In legal terms, it requires that the company operate through a "permanent establishment" or a "fixed place". Accordingly, the Egyptian Tax Authority cannot tax the profits resulting from the Egyptians' use of Facebook or Google because these companies do not

operate through a permanent establishment in

Egypt .

The law has excluded supply, delivery, storage and aggregation of information from the concept of permanent establishment as they are preparatory and supporting activities. Though they are as such in the view of traditional economic activities, that is no longer the case. For example, retailing through the Internet is primarily dependent on storage, for example, by Amazon establishing a store in Egypt through which electronic purchase orders are distributed. 

The aggregation and analysis of information has become a stand-alone economic 

activity and a science studied in colleges.

 Accordingly, Law 91 of 2005 must be amended so these activities are considered as permanent establishment as recommended by the Organization for Economic Co-  operation and Development OECD .

Some companies operating in the digital economy resort to avoiding the concept of a permanent establishment by operating in another country through a commission agent – such as Uber in Egypt - exploiting a legal provision that the agent is not considered a permanent establishment unless he is entitled to conclude contracts in the name of the company. 

Here, the company resorts to the authorization of the agent to carry out all its work except signing the contracts, which are sent to be signed by the company's headquarters abroad, thus depriving the State of the ability to impose a tax on the profits of the company.

 So, the Law must be amended so that the agent is considered a permanent establishment even if it does not have the authority to conclude 

contracts .

According to government statements, the government is also seeking to place sales on the websites to VAT, and seeks to cooperate with major companies to help the Tax Authority to subject electronic sales tax, and this is provided for in the law on VAT, "the sources said that Taxation of e-commerce will raise tax revenues after the use of a large number of companies and individuals social networking sites as a means to promote their goods and services as well as the tendency of many traders to websites to sell their products.