Tax Compliance for Heavy Industries in Egypt

Heavy Industries in Egypt serve as the driving force for development and are the foundation of economic prosperity. Although these industries face complex challenges in the realm of taxation, they are also supported by numerous tax incentives and benefits that enhance their competitiveness. Navigating this intricate tax landscape requires a thorough understanding of the latest regulatory and tax developments, coupled with a strategic approach that enables companies to leverage these privileges effectively. To manage the tax burden in this sector, a comprehensive and precise analysis of all relevant aspects is essential, allowing these industries to handle their tax obligations efficiently while capturing opportunities for sustainable growth.

Types of Heavy Industries in Egypt

Egypt’s heavy industries are diverse, covering several key sectors, including:

• Transport and Logistics Industry: Encompasses the manufacturing of vehicles and heavy-duty vehicles, such as trucks and buses, as well as the production of trains and ships.
• Iron and Steel Industry: A prominent sector in heavy industry, involving the production of various types of steel used in construction and building.
• Cement Industry: Considered a core heavy industry, crucial for infrastructure and construction projects.
• Chemical Industry: Includes the production of essential chemicals and industrial products such as fertilizers, plastics, and pesticides.
• Machinery and Equipment Industry: Encompasses the manufacture of industrial machinery, agricultural machinery, and heavy equipment used in construction.
• Energy Industry: Involves energy production from diverse sources like natural gas, coal, and nuclear power, which is essential for supporting other industries.
• Electronics Industry: Covers the production of electrical and electronic devices, such as household appliances and industrial equipment.
• Petroleum Industry: Encompasses the extraction and refining of petroleum and natural gas, a vital heavy industry in Egypt.
• Non-Ferrous Metal Industry: Includes the extraction and processing of metals like aluminum and copper, used across a wide range of industrial applications.

In this article we will focus on the following industries, given the extensive discussions and heightened debate they have generated recently.

First: Transport and Logistics Industry

The Transport and Logistics sector is a key enabler for economic and social activity. Additionally, it’s a core enabler for the growth of wider sectors, including tourism, construction and real estate. We will focus on Automotive industry and explore the vehicle manufacturing sector due to the complexity of this industry and the numerous questions surrounding tax treatments related to value-added tax (VAT).

The full Entire Automotive Sector Activities in Egypt:

• Manufacture, Export, and Maintenance of Vehicles, and Management of Service Centers for Company Products and Affiliates: This includes the manufacture and assembly of various types of passenger cars, sports cars, and four-wheel-drive vehicles. It also involves the import, export, distribution, and wholesale and retail sale of passenger cars, sports cars, four-wheel-drive vehicles (Unimog), trucks, buses, trailers, and all related spare parts and accessories, as permitted by law. Additionally, it covers mobile after-sales services, including importing workshop tools and machinery, preparing feasibility studies for companies, establishing and managing training centers for sales and maintenance, organizing exhibitions, advertising, and providing all forms of consultancy in the automotive field.
• Engagement in Various Commercial Agencies (as Agents or Brokers): This includes acting as agents for companies and factories producing transportation vehicles, machinery, and equipment of various types, along with trading cars, tractors, and related spare parts. It also covers representing national companies, factories, and marine, air, and land transport companies within the Arab Republic of Egypt. Furthermore, it includes activities related to import and export that serve the company’s objectives, the trade, sale, marketing, and export of vehicles and various transportation means, batteries, manufacturing of car bodies, and establishing and operating service stations.
• Vehicle Trade: Includes the sale of single and double-cabin pickups, motorcycles, and buses of all kinds, as well as spare parts and accessories.

The Automotive Industry is Subject to an Excise Tax Rate in Addition to the VAT Rate as Follows:

Inputs Tax Rate:

• Subject to the General Rate of 14%: This rate applies if the company’s purchases include materials and supplies for car assembly, such as sheet metal, iron beams, iron crossbars, shock absorbers, dashboards, bumpers, control arms, exhaust systems, hoses, seats, glass, batteries, tires, paints, wiring harnesses, filters, cassette players, spark plugs, brake pads, seat belts, radiators, belts, springs, welding gases, engines, chassis, doors, side panels, assembly supplies (e.g., nuts, bolts, chemicals), equipment, spare parts, and tools.
• Subject to Schedule Tax in Addition to the General Rate of 14%: This applies if the company’s purchases include fully assembled vehicles. The schedule tax rate varies depending on engine capacity, and input tax is deductible only against VAT. However, in certain cases, fully assembled vehicles are subject solely to VAT without additional schedule tax.
• Successful Case Outcomes after Disputes with the Egyptian Tax Authority and Internal Committees, Supported by Tax Appeal Committees:
  Tax Treatment for Commissioned Imports: Many companies in Egypt rely on agents for imports due to the lack of import licenses. The agent handles the import process, pays VAT upon customs clearance, and then transfers the imported goods to the client, receiving a commission as a small percentage of the total import value. The tax authority objected to the client deducting VAT for these goods because the customs clearance permit did not bear the client’s name or tax registration number. However, the Tax Appeal Committee upheld the deduction of input tax paid by the importing company on the grounds that:
  • The importing company did not claim input tax deductions on the imported vehicles in its monthly tax returns.
  • (We provided proof of VAT payment from the Central Customs Administration). The importing company issued a tax invoice for the commission only, inclusive of VAT, without including the value of the imported goods or the VAT collected on them. Thus, the client is entitled to deduct input tax, as the importing company did not benefit from it.

Second: Iron and Steel Industry

• Activities of Iron Companies in Egypt: Production, trade, and distribution of building material supplies and iron products of all types.
• Iron Sales (Outputs):
• Reinforcing Iron Sales: Subject to VAT at the general rate of 14%.
• Reduced Iron Sales: Subject to VAT at the general rate of 14%.
• Formed Iron Sales: Subject to VAT at the general rate of 14%.
• Billet Sales: Subject to VAT at the general rate of 14%.
• Sales of Iron Oxides and Scales: Subject to VAT at the general rate of 14%.
• Production Waste (e.g., barrels, sheet metal, and damaged molds): Subject to VAT at the general rate of 14%.
• Reduced Tax Rate: A reduced tax rate of 5% applies to machinery, equipment, and rolling mills for rebar production (proof of industrial production use, such as documentation from the General Investment Authority or equivalent, is required).

Third: Cement Industry

• Activities of Cement Companies in Egypt: Production of various types of cement, industrial waste processing, thermal disposal services, alternative fuels, and exploitation of mines and quarries (excluding sand and gravel).
• Cement Sales (Outputs):
• Bulk Cement: Subject to VAT at the general rate of 14%.
• Packed Cement: Subject to VAT at the general rate of 14%.
• Clinker Sales: Subject to VAT at the general rate of 14%.
• Transport Services (Freight): Subject to VAT at the general rate of 14%.
• Cement Purchases (Inputs):
• Clinker: Subject to VAT at the general rate of 14%.
• Refractory Bricks, Grinding Aids, and Thermal Mortar: Subject to VAT at the general rate of 14%.
• Coal: Subject to VAT at the general rate of 14%.
• Limestone and Gypsum: Subject to VAT at the general rate of 14%.
• Feldspar: Subject to VAT at the general rate of 14%.
• Packaging Materials (Sacks): Subject to VAT at the general rate of 14%.

The company is entitled to deduct the full amount of tax on its inputs.

• Reduced Tax Rate: A reduced tax rate of 5% applies to machinery, equipment, and complete production lines, even if imported separately (proof of industrial use, such as documentation from the General Investment Authority or its equivalent, is required).

Fourth: Power Generation Stations Industry

Power solutions are second in complexity only to the automotive industry due to:

The intricate nature of the activity, requiring extensive design, operational, and resource demands. These stations necessitate vast infrastructure, heavy equipment, advanced technology, and significant resources, such as fossil fuels or renewable energy sources.

Types of Power Generation Stations:

• Thermal Power Stations: Operate by burning fossil fuels, such as coal, oil, or natural gas, to generate steam that drives turbines to produce electricity.
• Nuclear Power Stations: Generate heat through nuclear fission, which is then used to produce steam to run turbines.
• Hydroelectric Power Stations: Utilize water flow from dams or waterfalls to drive turbines and generate electricity.
• Solar Power Stations: Harness solar energy with photovoltaic panels to directly convert sunlight into electricity or use mirrors to concentrate sunlight and generate steam in thermal solar plants.
• Wind Power Stations: Employ wind turbines to convert wind energy into electricity.
• Geothermal Power Stations: Depend on underground heat to produce steam and operate turbines.
• Biomass Power Stations: Utilize organic materials (e.g., waste, wood, or agricultural products) to generate thermal energy, which can then be used to produce electricity.

These stations demand substantial investments and strict safety protocols, classifying them as core infrastructure within the energy sector.

Given the complexities and overlapping applications of VAT rates, our upcoming article will explore these challenges, address areas of ambiguity, and provide guidance on navigating them effectively.

Conclusion

Implementing new mechanisms and incentives for heavy industries strengthens the national economy and boosts exports, thereby channeling foreign currency into Egypt’s economy. Tax burdens significantly influence investment decisions, particularly in heavy industries that require substantial investments and carry high risks. Adopting practical tax strategies that align with both local and international developments ensure the sustainability of economic activity, enhances financial liquidity, and leverages available tax incentives and benefits.

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