OECD’s Global Tax Impact on Egypt and the Middle East

The global tax landscape is undergoing a historic transformation led by the Organization for Economic Cooperation and Development (OECD) with its proposal of the “Pillar One and Pillar Two” frameworks. Aimed at addressing tax challenges arising from the digital economy and ensuring fair tax contributions across borders, these initiatives are particularly relevant for developing countries like Egypt, which must adapt their tax systems to align with these global standards. This article examines the two pillars, their objectives, and the anticipated impacts on Egypt’s economy, especially as it relates to Egypt’s domestic tax system, its manufacturing sector, and the broader Middle Eastern context.

Definition of OECD Pillar Two

Pillar Two of the OECD’s global tax framework is primarily focused on establishing a global minimum tax rate to ensure that multinational corporations (MNCs) pay at least 15% tax on their earnings, regardless of where they operate. This framework introduces a series of rules aimed at minimizing “base erosion” or the shifting of profits to low-tax jurisdictions. These rules are known as the Global Anti-Base Erosion (GloBE) rules and include mechanisms like the Income Inclusion Rule (IIR), Undertaxed Payments Rule (UTPR), and Qualified Domestic Minimum Top-up Tax (QDMTT), which collectively seek to reduce tax competition and tax avoidance practices globally.

Differences Between Pillar One and Pillar Two

While Pillar Two is designed to establish a minimum tax floor, Pillar One targets the allocation of taxing rights, particularly from digital services and companies that generate substantial revenues in countries without a physical presence. Pillar One aims to allow market jurisdictions (countries where customers are located) to claim a share of profits from the largest MNCs. In contrast, Pillar Two sets a baseline tax rate for MNCs, regardless of where they conduct business, to prevent excessive profit shifting to low-tax regions.

Objectives of Both Pillars

Both pillars are part of the OECD’s Inclusive Framework, aiming to:

• Ensure a fairer tax distribution by reallocating taxing rights (Pillar One) and establishing a minimum tax rate (Pillar Two).
• Combat tax base erosion by addressing profit shifting and tax competition.
• Enhance transparency and cooperation among countries to foster sustainable tax practices.
• Promote global economic stability, as companies are discouraged from exploiting tax disparities between nations.

Egypt’s Domestic Tax System and Pillar Two

For Egypt, aligning with Pillar Two’s global minimum tax rate could be challenging, particularly in light of existing tax incentives that benefit local industries, such as manufacturing. Currently, Egypt offers significant tax incentives to encourage investment and stimulate economic growth, which often result in effective tax rates below the 15% threshold set by Pillar Two. However, if Egypt does not implement clear policies to align with the OECD’s minimum tax rate requirements, it could risk losing out on tax revenues to other jurisdictions that impose top-up taxes on Egyptian-sourced income.

Impact on Egypt’s Manufacturing Sector

Manufacturing is a core pillar of Egypt’s economy, supported by various tax incentives to attract investment and promote industrial growth. Under Pillar Two, companies that currently benefit from these incentives might still face additional tax liabilities if their effective tax rate falls below 15%. Consequently, Egypt could experience shifts in investor sentiment, as multinational corporations may re-evaluate their operations in Egypt in light of these new global tax rules.

Potential Losses for Egypt Without Clear Domestic Regulations on QDMTT, IIR, and UTPR

If Egypt does not establish clear guidelines around QDMTT, IIR, and UTPR, it risks losing tax revenues to other countries that have implemented these regulations. Specifically, the QDMTT allows a country to claim additional taxes to bring an MNC’s effective tax rate up to the 15% minimum. In the absence of QDMTT, other countries could exercise the IIR or UTPR to collect taxes on Egyptian-generated income, which would otherwise be retained within Egypt. Failure to implement these rules could thus undermine Egypt’s revenue base, especially from foreign firms operating domestically.

Impact of Global Minimum Tax Rules on Egypt’s Tax System

Introducing these rules within Egypt’s tax framework will likely bring both opportunities and challenges. On the one hand, adopting a global minimum tax rate could increase government revenue by limiting base erosion and profit-shifting activities. On the other hand, implementing these rules will require significant adjustments to Egypt’s tax system, particularly in establishing mechanisms for calculating and collecting these additional taxes and adjusting existing incentives to align with global standards.

Status of Domestic Regulations in the Middle East

Other countries in the Middle East have already started adapting to the OECD’s tax framework. The United Arab Emirates (UAE), Saudi Arabia, and Qatar have made strides in aligning their tax laws with global minimum tax standards. Their regulatory reforms provide valuable examples for Egypt as it considers how to implement similar changes. However, each country’s approach may vary based on economic priorities and the sectors they wish to protect, such as oil and gas or financial services.

Challenges in Implementation

The shift to a global minimum tax rate presents multiple implementation challenges for Egypt and other countries:

• Administrative Burden: Adopting Pillar Two will increase the workload for Egypt’s tax authorities, who must now conduct more rigorous reviews of tax filings and ensure accurate application of GloBE rules.
• Data Requirements: Implementing the global minimum tax requires significant data, which may pose a challenge given the current limitations in data collection and management.
• ERP System Readiness: Many companies in Egypt may need to upgrade their ERP (Enterprise Resource Planning) systems to accommodate the new reporting and compliance requirements. This could involve substantial costs, time, and training.
• Manual Adjustments and Calculation Complexity: Egyptian firms will likely need to invest in manual processes to ensure compliance, particularly in the early stages. Calculating the effective tax rate and determining compliance with Pillar Two’s requirements is expected to be complex, especially for companies with limited resources.
• High Complexity for Tax Professionals: The implementation of Pillar Two will require a high level of expertise in international tax laws and OECD guidelines. Tax professionals, whether in consulting firms or in-house roles, will need specialized knowledge and skills to manage the compliance and advisory demands associated with these new rules.

Conclusion

The adoption of OECD’s Pillar One and Pillar Two frameworks represents a fundamental shift in the global tax landscape, with far-reaching implications for Egypt and the Middle East. While the objectives of these frameworks—ensuring a fairer distribution of tax rights and establishing a global minimum tax rate—align with global economic stability, the road to implementation is complex. Egypt faces challenges in adapting its domestic tax system, particularly around preserving incentives for key sectors like manufacturing and ensuring it does not lose tax revenues to other jurisdictions.

For Egyptian tax authorities, policymakers, and tax professionals, aligning with OECD standards will require strategic planning, system upgrades, and a focus on building expertise in international taxation. Though challenging, this adaptation is crucial for maintaining Egypt’s competitiveness in the global economy and ensuring a sustainable revenue base in the face of an increasingly interconnected tax landscape.

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