VAT Implications of Installment Sales Interests

Recently, due to the lack of liquidity for end consumers, investors and entrepreneurs have turned to installment sales. In fields like automobiles, the benefits of installment sales can exceed 25% of the original selling price, among other activities. This necessitates a precise understanding of the tax treatment of these benefits to avoid any tax burdens.

The Installment Sales Interests VAT Base

The value taken as the basis for tax imposition on installment sales includes “the benefits of installment sales exceeding the credit and discount rate announced by the central bank on the date of sale,” and not the total value of the benefits. This means that if the interest rate on installment sales does not exceed twice the credit and discount rate announced by the central bank, these benefits fall outside the scope of VAT.

Key Compliance Requirements for Adhering to Egyptian Tax Authority’s Installment Sales Regulations

In installment sales, a contract must be concluded between the parties, clarifying the following:

• The sale price, installment period, the amount of each installment, its due date, and the conditions for fulfilling the price.
• The sale price under the installment system exceeds the value of the goods according to market forces and transaction conditions.
• The value of the installment interest must be separated from the value of the goods listed in the tax invoice.
• The price must be paid in installments that correspond to the nature of the sale.

Challenges and Issues Encountered During Tax Examinations with the Egyptian Tax Authority

Due to the nature of installment sales requiring contracts with customers, and given that the contract is a crucial legal document as it contains the interest rate, the Egyptian Tax Authority sometimes struggles to review all the contracts, especially with their large number. They may resort to dividing the contracts relatively between those with higher or lower interest rates than twice the credit and discount rate announced by the central bank. However, if the percentage of contracts with a lower interest rate is not significant, the company should prove this to avoid unfair tax assessments, which may not be equitable. We hope the new Ministry of Finance sets modern standards and principles for tax examination to facilitate and expedite the examination procedures and ensure tax fairness between taxpayers and the Egyptian Tax Authority.

Benefits of Installment Sales for Investors

• Reduced Tax Burdens: VAT is imposed on the difference between the interest rate offered to customers and twice the credit and discount rate. Therefore, the tax base is lower, leading to reduced VAT, encouraging customers to prefer installment purchases. This provides a complementary tax incentive to the economic incentive.
• Increased Sales Volume: Installment sales allow customers to buy products or services they may not be able to pay for in full at the moment, increasing the volume of sales and demand for goods and services.
• Expanding Customer Base: Installment sales can attract a wide range of customers, including those financially constrained but eager to purchase products immediately.
• Continuous Cash Flow: Installment sales provide a continuous cash flow for the company through monthly payments, helping improve cash flow management and cover operating expenses.
• Enhancing Brand Loyalty: Installment sales offer an added advantage to customers, which can enhance brand loyalty and increase the likelihood of returning to purchase from the same company in the future.
• Achieving Additional Profits: Some companies may charge interest or additional fees on installment sales, potentially increasing final profits.
• Reducing Inventory: Installment sales help accelerate inventory turnover, reducing storage costs and the risks associated with unsold goods.
• Improving Customer Relationships: The installment payment system can help build stronger, more enduring relationships with customers by offering flexible financing options and payment facilities.
• Competitive Advantage: Some customers may prefer companies that offer installment options, giving the company a competitive edge in the market.

Conclusion

Understanding the tax impact of installment sale benefits and interests, ensures the continuity of the activity, increased company liquidity, and profitability. These benefits are not merely incidental income but are considered an additional activity alongside or complementary to the primary activity or an independent activity. The resulting tax burdens from non-compliance with application may threaten the company’s ability to expand, stabilize, and compete.

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