Putting the books in order
With the deadline for filing income tax returns looming concerns abound over the application of the new tax law, reports Sherine Nasr
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With the new law, last-minute rush to the Income Tax Authority will hopefully become history
For more than a year now the government has been preparing the public for what has been widely trailed as a new era in tax collection. Transparency, confidence and flexibility will, it says, be the basis of the new tax regime.
An advertising campaign, featuring the owner of a fabric shop, was launched to show the public just how simple things now are at the Income Tax Authority.
"Your interest first," is the slogan of a campaign that is clearly aimed at instilling a relationship of trust between the tax payer and the tax authority as it seeks to implement the new income tax law, issued in 2004 and ratified by the People's Assembly a year later.
Minister of Finance Youssef Boutros Ghali, the person ultimately in charge of collecting taxes, has already held dozens of meetings in an attempt to reassure business associations and workers' syndicates that the government is committed to adopting a new approach to tax gathering, and will from henceforth assume that tax payers are innocent of any infringements until it is proven otherwise.
The much publicised good will on part of the government is about to be put to test: the deadline for individual tax payers to file their returns ends on 31 March, while the deadline for joint-venture companies comes a month later.
Although the Tax Authority has been accepting returns since January it appears as if tax payers have waited until the last moment.
"Tax payers seem to have difficulty in breaking long standing habits," says head of the Income Tax Authority Hosni Gad. The last minute rush, as six million tax payers seek to file their returns, will, he adds, place an enormous strain on the authority.
Although the new income tax law was warmly received by businessmen when it was unveiled, the publication of the executive regulations of the law before the end of 2005 acted to dampen the initial enthusiasm.
Tax expert Mohamed Hussein believes some of the executive regulations contradict a law that was widely hailed for reducing basic rates of tax paid on salaries and raising tax thresholds. Article 9 of the law is a particular bug bear. It makes "advantages in kind" received by employees with permanent as well as comtemporary contracts taxable.
"Mobile phones, life insurance policies and cars provided to members of staff can now all be taxed," says Hussein. Employees face tax rates of up to 20 per cent on the cost of fuel and maintenance of vehicles and on mobile phone bills.
The new regulations, says Hussein, are likely to lead to more, not less, confusion, since no formula has been agreed for assessing the real annual cost of maintaining and fueling a vehicle, or of determining how many calls made on a company mobile are personal rather than business related.
Others complain that the executive regulations are biased towards small and medium- sized enterprises (SMEs) financed by the Social Fund for Development (SFD), which will enjoy a five-year tax exemption. SMEs financed from other sources are not exempt.
"To exempt SMEs under the SFD from tax, but then charge similar SMEs financed by individuals is clearly unfair," says economist Fouad Thabet. It could also, he suggests, be unconstitutional, since it discriminates between citizens who should enjoy equal rights.
"This unequal treatment of SMEs will act against government efforts to encourage the SMEs to become part of the formal economy," predicts Thabet.
The strongest criticism of the law, however, has come from legal auditors who can now be held responsible for the accounts they sign and who may be subject to legal action and/or imprisonment should those accounts be shown to be misleading.
According to Gad, the law attempts to place much of the burden currently shouldered by tax officers onto company accountants since "the accountant will only be subject to legal action if the authority can prove that he deliberately ratified fake reports and accounts."
Accountants, though, argue that the legal responsibility for providing accurate accounts lies with the tax payer, who can deliberately withhold information in an attempt to underestimate profits.
Tax payers who fail to file returns within the deadline will, says Gad, be subject to an LE10,000 fine. Late returns will also face a more thorough scrutiny than those filed on time.
Under the new law only a random sample of returns will be scrutinised in full. "This goes in line with the spirit of the new law which is based on mutual trust between the authority and tax payers," said Ghali during a meeting Tax Authority heads of departments.
According to Ghali income tax revenue stands at LE40 billion, or 30 per cent of the total government budget. "However, the manner in which tax is collected is as important as total revenue. We have to remember that we are a service body not an establishment to collect money."
What that means in practice is likely to become much clearer in the next few weeks.