Egypt has set its sights on a new tax revenue source as part of its attempts to cut the budget deficit and widen the umbrella of the formal economy, namely e-commerce and social media advertisements.
While a comprehensive tax policy for digital commerce has not been settled upon, several government officials tell Mada Masr that a new tax is actively being considered. What remains to be seen now is how the specifics of regulation will play out.
Taxing digital commerce has faced several policy hurdles on the international level as conventional tax types, such as corporate income tax, prove untenable. While nothing has been settled regarding this point in Egypt or internationally, Egypt’s national e-commerce strategy mirrors projections by a source from the Organization for Economic Cooperation and Development (OECD) — the intergovernmental economic organisation of which Egypt is a member — both of which suggest that there will be a turn toward a value-added tax (VAT) on e-commerce and social media ads.
Bringing additional economic transactions under the VAT will only drive the revenue collected from the tax even higher than its posted figure for the current fiscal year 2018/19 budget, which sits at 41.6 percent of total tax collection. This figure far exceeds the amount from corporate income taxes, which sit at 21.8 percent of total tax collection in the current fiscal year’s budget. It is also over double the OECD member country average for VAT collection out of total tax collection, which was estimated at 19.5 percent in 2013.
Unlike regressive consumption taxes, such as VAT, which disproportionately tax lower economic brackets, the corporate income tax places the tax burden on corporations. Egypt’s drive to bring unregulated digital economic activity under tax authority may double down on this tax burden even further.
Recent media attention on taxing digital commerce started in December 2017, when MP Ali al-Kayal floated the idea of subjecting online trading transactions to the laws regulating income taxes, VAT, stamp tax and customs, and that online advertisements also be subjected to VAT.
Additionally, taxes on social media ad revenues are explicitly the subject of Article 70 of the Law on Regulating the Press and Media and the Supreme Media Regulatory Council (SMRC), which Parliament passed on Monday. The article charges the SMRC with the authority to establish “regulations for collecting taxes on ads on websites, blogs and social media accounts.” Parliament amendment parts of the law ahead of its passage on Monday in line with the State Council’s notes on the legislation, but these did not include the clause on social media taxes.
The article, however, does not move much beyond the council’s general oversight role.
“The law offers general rules. The implementation [of tax collection on social media ads] will be defined by the executive regulations of the law,” MP Osama Heikal, the head of Parliament’s Media, Culture and Antiquities Committee, tells Mada Masr.
Parliament’s Communications and Information Technology Committee (CITC) also has a plan for a package of laws for electronic regulation, including an Electronic Regulation of Trade Transactions Law, which will tackle the question of whether to impose fees on buying and selling online, CITC head Nidal al-Saeed tells Mada Masr.
The Finance Ministry is also discussing the idea with experts, a spokesperson speaking on condition of anonymity confirms to Mada Masr.
Not all types of taxes are at Egypt’s disposal in its effort to achieve its policy goals through potential legislation, however. Notably, corporate income taxes, which would place the tax burden on corporations, are subject to international tax regulations, which require the physical presence of a business in a given territory for the business to be subject to a national tax jurisdiction, a difficulty given that many e-commerce and social media advertising firms work transnationally.
The OECD Inclusive Framework on Base Erosion and Profit Shifting (BEPS) — tactics that the OECD defines as tax avoidance strategies that exploit gaps and mismatches in tax rules to artificially shift profits to low or no-tax locations — is working on finding a solution to tax implementation difficulties, OECD Center for Tax Policy and Administration Director Pascal Saint-Amans tells Mada Masr.
To get around the physical presence requirement tied to corporate incomes tax, some of the 36 member countries that make up the OECD are considering implementing a system that can be seen as taxes on turnover, according to Saint-Amans.
Turnover tax is a tax that accounts for all stages of production and distribution, similar to VAT, except that it applies to gross revenue, a fact that Saint-Amans admits may be a problem.
According to the OECD’s Center for Tax Policy and Administration Communications Assistant Hazel Healy, digital tax issues were discussed last week at a closed-door meeting of the Task Force on the Digital Economy, a subgroup of the OECD’s Inclusive Framework. Healy tells Mada Masr that “this weekend, OECD Secretary-General will be submitting his report on tax to the G20 Finance Ministers, which will contain an update on BEPS.”
Against the backdrop of international tax regulations, Egypt has also set its eyes on the VAT to regulate digital economic transactions.
“Egypt currently does not have a specific policy or treatment of taxation on e-commerce. With rapid developments in the global market in e-commerce and Egypt’s growing e-commerce market, the government should study and adopt such a policy and put in place a simplified online mechanism for value-added tax collection related to e-commerce,” according to Egypt’s national e-commerce strategy, prepared in collaboration with the United Nations Conference on Trade and Development (UNCTAD) and published by the Ministry of Information and Communications Technology in March 2018.
While some countries face barriers where foreign suppliers cannot register for VAT in markets where their consumers reside, Egypt introduced for the first time the “reverse charge mechanism” as part of the VAT law, which was passed in 2016. Multinational accounting corporation PricewaterhouseCoopers describes this policy as one in which “transactions involving non-residents providing services/royalties to Egyptian resident entities have become subject to VAT in Egypt.”
The issue of implementation is not entirely put to bed by introducing a VAT. As a VAT imposes a levy at each stage of production, tax collection for online transactions would be hampered by the need to monitor transactions online.
From a technical perspective, an exact number of online sales cannot be determined unless the website discloses it, software engineer Shady Sharaf tells Mada Masr. Without such a disclosure, you can only get an estimate of how many people visit the website. Similarly, an estimate of how much a website spends on ads can be obtained, but this will not be exact, according to Sharaf.
“The best way to tackle these problems is through the normal tax process, with companies providing their records and the government applying taxes based on the provided figures,” Sharaf says.
The concept of taxing e-commerce can be problematic when considering it from a social justice perspective. Economist Mohamed Sultan sees the idea to impose a 14 percent VAT on e-commerce and social media as pro-business state bias that works to the detriment of consumers. If compared to the 0.125 percent stamp tax on stock market transactions, for instance, there is “a drastic injustice” in such a tax policy, according to Sultan, as it puts pressure on consumers more than on financial transactions.
“The dilemma of taxation is to design tax policy which is [conducive] to growth while ensuring that a fair contribution is paid by taxpayers,” Saint-Amans says.
Egypt does not currently have a large e-commerce market, so potential e-commerce taxation would concern a limited number of companies in Egypt.
Online trading represents 2 percent of total trade in Egypt, e-commerce platform Jumia CEO Hesham Safwat told Reuters last November. Less than 18 percent of major Egypt-based companies sell products and services online, and only 3 percent of small companies do, according to the UNCTAD. Jumia, a Nigerian company which entered Egypt in 2012, currently has a market share of 48 percent. The other major market player is Souq.com, an Emirati company which entered Egypt in 2011 and which was purchased by Amazon in March 2017.
Safwat estimated that total value of e-commerce transactions in Egypt came in at $2.5 billion in 2016.
Regulating e-commerce, however, can be examined within the context of a strategy that sees the sector growing. In December 2017, Egypt launched a strategy to double the number of businesses that sell online products and services by 2020.
The taxation narrative is a part of Egypt’s policies that aim at cutting its budget deficit, a key factor in the International Monetary Fund agreement Egypt signed in 2016 for the provision of a US$12 billion loan.
According to the IMF’s third review, published on July 12, Egypt has made progress in meeting the terms of the agreement. “Macroeconomic conditions have continued to improve during 2017/18, with external and fiscal deficits narrowing, inflation and unemployment declining, and growth accelerating,” the IMF report reads.
The government expects the budget deficit for fiscal year 2017/18 to stand at 9.8 percent of GDP, and targets a budget deficit of 8.4 percent of GDP in FY 2018/2019. The government intends to cut public debt to 80 percent of GDP by 2020, down from 107-108 percent in FY 2016/2017, the Finance Ministry said in a statement in May. In its latest review, the IMF stated that “the government debt ratio is projected to decline markedly in response to fiscal consolidation and high nominal GDP growth.”