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Advance Payment System: A Method for Tax Management

According to the provisions of Law No. 91 of 2005, the Income Tax Law, in articles (61) to (65), the advance payment system is considered an optional system as an alternative to the deduction system under the tax account.

The financier himself determines an amount to be paid under the tax account based on the profits estimated by him for the tax period on which he wishes to apply the system. These amounts are settled upon submission of the annual tax return.

The following are the Rules for Implementing this System

1- The purpose of this system is for the financier to pay an amount equivalent to 60% of the following:

  • The last tax acknowledged by the financier. The last tax acknowledged by the financier is the tax based on the last tax return submitted by him, or the final tax acknowledged by an internal committee, an appeal committee, a court judgment, or a reconciliation decision.
  • The tax estimated by the financier for the year in which he wishes to apply the advance payment system in either of the following cases:
    • If the financier has not previously submitted a tax return, as in the case of starting a business.
    • If the tax return submitted by him for the previous tax period includes a loss.

2- The financier who wishes to apply this system must submit a request on Form No. 1 (Advance Payments) to the competent tax authority at least 60 days before the start of the tax period on which he wishes to apply the system. The authority must respond to his request within 60 days of its submission. Failure to respond within this period is considered a rejection of the request. In case of approval, the financier’s tax card is marked as subject to the advance payment system, and the deduction system specified in Article (59) of the law does not apply to him.

3- The obligations imposed on the financier under this system:

  • Pay an amount under the tax account due for the tax period on which he wishes to apply the system, equal to 60% of the tax calculated in three equal installments, each to be paid successively on the following dates:
  • For tax periods starting on 1/1 and ending on 12/31 of each year, as follows:
    • The first installment is due no later than June 30.
    • The second installment is due no later than September 30.
    • The third installment is due no later than December 31.
  • For overlapping tax periods, the installments are determined as follows:
    • The first installment is due no later than six months from the start of the tax period.
    • The second installment is due no later than three months after the deadline for payment of the first installment.
    • The third installment is due no later than three months after the deadline for payment of the second installment.

When submitting the annual tax return, the financier reconciles the amounts paid according to this system with the tax due based on the tax return and commits to pay the remaining portion of the tax after deducting what has already been paid under this system, plus an annual return calculated according to the lending rate and discount announced by the central bank at the beginning of the calendar year for the tax period to which the system applies, minus 2%, excluding fractions of the month and the pound.

The financier must provide the relevant parties with evidence of the authority’s approval of the application of this system for each transaction.

4- Rights of the financier: The financier may, after paying the second installment of the three advance payments, request a reduction or non-payment of the third installment by notifying the competent authority if it becomes apparent to him that his actual profits for the tax period will be lower than the profits previously estimated for the same period.

5- If the remaining period after submitting the request to apply the advance payment system is less than twelve months, for example, in the case of amending the tax period or cases of cessation, the financier may request a reduction in the number of advance payments for the tax period to which the system applies.

6- If the financier does not wish to continue with this system, he may submit a request to revoke the application of this system and be subject to the deduction system under the tax account. This request is conditional upon meeting the following conditions:

  • The financier has applied the advance payment system for at least one full year.
  • The financier has paid all obligations under this system.
  • The financier submits his request to the competent tax authority to revoke the application of this system at least 90 days before the start of the tax period from which he wishes to revoke the advance payment system.

If the above conditions are met, the tax authority accepts the financier’s request to revoke the application of this system and notifies him of this within 60 days from the date of submission of the request. If the authority does not notify the financier within this period, it is considered acceptance of the financier’s request to revoke this system.

The authority may exempt the financier from applying the advance payment system in either of the following cases:

  • The financier incurs losses for two consecutive tax periods.
  • Change in the legal form of the establishment or company.

The competent authority must notify the financier of this by a recommended letter accompanied by an acknowledgment of receipt. The authority may deprive the financier of applying the system if it finds significant discrepancies.

Significant discrepancies mean that the actual taxable profits exceed the estimated profits by at least 20% in each year in which the system is applied.

The financier may avoid significant discrepancies if he finds that his actual profits for the tax period will be higher than the profits previously estimated for the same period by increasing the value of the remaining payments to avoid being deprived of applying this system. This adjustment is made by submitting a request to the tax authority.

Notification of the financier’s deprivation of applying the system must be made by a recommended letter accompanied by an acknowledgment of receipt, taking into account the circumstances of each case.

In all cases of exemption and deprivation, the financier automatically reverts to being subject to the deduction system under the tax account, and the competent tax authority must amend the marking on the tax card to indicate the cancellation of the application of this system.

Conclusion

The Advance Payment System allows financiers to pay 60% of estimated or last acknowledged tax, with obligations to submit Form No. 1 at least 60 days before the tax period. They pay in three installments, reconciling upon annual tax return submission. Financiers have rights to request installment reductions and can revert to the deduction system by meeting specific conditions. Exemption from the system is possible in certain cases, but deprivation occurs if significant discrepancies are found. Financiers return to the deduction system automatically if exempted or deprived.

To find out more, please fill out the form or email us at: info@eg.Andersen.com

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Written By

Ismaeel Mohamed - Senior Tax

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