Merging the sales and income tax authorities into one entity could create, rather than solve, problems writes Sherine Nasr
In an unexpected move the Ministry of Finance this week announced that the income tax and sales tax authorities will be unified into one entity, headed by Mahmoud Mohamed Ali, the former chairman of the Sales Tax Authority.
"The merger does not mean that the laws governing each tax will also be unified. The merger aims at unifying the tax administration but not the laws governing them," said Ali at a press conference last week.
According to the tax official the merger is one step in a series of reforms aimed at creating an efficient tax administration. The ultimate objective is to provide quality service to taxpayers and foster confidence and transparency in the tax society.
"We are keen to create one efficient tax administration in order to eliminate the duplication and mis-interpretation of laws governing taxes in Egypt, and reduce the cost of collecting taxes nationwide," said Ali.
But Egypt's business society believes there is more to the merger than meets the eye. Observers speculate that the step is being undertaken to guarantee that faking a tax return becomes virtually impossible, since the activity of a taxpayer will now become common knowledge between both authorities. The idea has not fallen well with the business society, however, particularly after promises were made by the government that the information regarding a client in one authority will remain exclusive to it only.
However, Ali expressed his enthusiasm for the new arrangement, and said that out of 126 countries applying the sales tax, 115 have a unified administration for all taxes with nine countries only running a separate sales tax authority.
While the full merger is scheduled to occur over a three-year period, initial steps have been undertaken in order to launch the process. A new building will be established to accommodate the departments of the newly unified tax administration, while a suggested organisational framework for the new entity is being put in place. The new system is based on dividing taxpayers into categories according to the scale of their activity. A Large Taxpayers Office (LTO) -- which has been operative for nine months -- deals with major taxpayers whose revenues contribute almost 70 per cent of the total sales tax income. Offices servicing medium-sized taxpaying activities are also scheduled to be established in several governorates.
"Three tax offices of this category will soon be established and provide the same facilities that are extended to the large taxpayers," Ali said. He added that a third type of office will be established for smaller activities.
A more complicated process for merging the different departments and major cadres in both authorities into one entity, is also scheduled to gradually take place.
A new course for the preparation of a comprehensive tax inspector is now in process. The aim is to educate a number of carefully selected tax inspectors from both authorities in the technicalities of the laws stipulated by both tax regimes. Participants will form the first generation of comprehensive tax inspectors who will be in charge of providing services under the newly- formed unified tax administration.
According to Ali, 16 training centres established in different regions will be in charge of introducing comprehensive tax inspectors. Training will include field visits, workshops, specialised educational lectures on different accounting and tax systems, as well as a comparative analysis of these systems, an in-process instruction, and full computer training. "The courses ultimately aim at reinforcing the professional, technical and personal abilities of the participants," said Ali who added that the process of shifting into one tax administration will be far-fetched, if training is insufficient.
Smooth as they may sound, the latest announcements have raised some concerns.
A tax expert who prefers to remain anonymous says that he is not optimistic about the success of the merger, which was announced abruptly, without prior notification.
"The unification is now a reality but only on paper. The system that will support it is not yet in place," he said. The tax expert questioned the speed with which such steps will be taken. "The new income tax law was only very recently ratified, and matters should have gone a bit slower."
The expert said that while an income tax inspector can master the sales tax in a span of months, it would take the sales tax inspector "years" to grasp the technicalities of the income tax. "It is ridiculous to set a system before we train the cadres who will supervise it," he said adding that, "unifying both tax authorities into one should have been done at the very final stage of reforming the tax system in Egypt."
There are also fears that complications arising from the new arrangements could put taxpayers off. If so, the government's effort to build bridges of confidence to guarantee voluntary registration, could go to waste.