New rules oblige companies taking payments in foreign currency to pay VAT in same currency

Companies operating in Egypt will now be required to pay the government in foreign currency for the value added tax they owe on goods and services sold in the same foreign currency.

The new requirement was introduced by the Finance Ministry last week as the treasury grapples with a longstanding foreign currency deficit.

The development is likely geared to try and keep as much foreign currency as possible in the formal economy, said Mohamed al-Bahi, head of the Tax and Customs Committee in the Federation of Egyptian Industries, speaking to Mada Masr.

The Finance Ministry’s decision is an amendment to the executive regulations of the unified tax procedures law and was published in the Official Gazette on Wednesday. It came into effect last week.

Under the new amendment, companies are given the option of making a foreign currency deposit in a government bank worth the equivalent of the sum owed in VAT for that month, in which case they can pay the VAT itself in Egyptian pounds.

The export sector is exempt from VAT and will not be affected.

The new rules constitute a substantial change to the business environment, which industry figures anticipate could impact some companies, especially those working in the tourism sector.

Before the amendment, tax authorities recommended that companies calculate their earnings from sales in Egyptian pounds — even if they conduct transactions in other currencies — and pay VAT accordingly.

A legal opinion issued by the State Council around 20 years ago said that a tax base should be calculated in local currency, according to a former high-ranking Egyptian Tax Authority official, who spoke to Mada Masr on the condition of anonymity. Opinions from the State Council, a legal body overseeing disputes related to government bodies, provide a basis for decision-making in administrative cases.

“The State Council’s opinion was based on the fact that paying taxes in local currency is a fundamental aspect of state sovereignty,” said the former official. The option to pay tax in foreign currency existed, the source said, but common practice ordained that the tax base should have first been calculated in Egyptian pounds. Though the new change is in conflict with the State Council’s precedent, it won’t prevent things from proceeding in accordance with the Finance Ministry’s new amendment, the source clarified, unless someone takes legal action against the ministry at the administrative court.

What it does constitute, said Bahi, are changes for the tourism sector.

Tourism companies that need to make payments outside of Egypt — such as agencies organizing Hajj and Umrah trips — might struggle to have enough foreign currency at hand to make their payments now that they have the additional obligation of paying VAT in foreign currency, said Hossam Hazzaa, a member of the Egyptian Tourism Federation.

“The tourism sector suffers from existing restrictions on the availability of foreign currency and its use in digital transactions abroad. The Central Bank has set a maximum cap of $250 per month in digital payments abroad, which of course is not sufficient for the needs of any tourism company,” said Hazzaa.

“Paying VAT in foreign currency under the same restrictions on using foreign currency and its availability will practically mean depriving tourism companies of a resource they relied on to finance their payments in foreign currency,” he added.

But other sources say the government needs to receive as many payments in foreign currency as possible at the moment, in order to guarantee state revenues.

“In light of the foreign currency crisis,” said a high-ranking source in the tax authority, “the state has priority over the foreign currency available to investors as long as they have paid the VAT in foreign currency.”

Bahi added that the decision will aim to divert foreign currency from going to the parallel market. Noting the widening gap — as much as 70 percent — between the official exchange rate and the rate on the parallel market, he said that many companies may be tempted to pay VAT in local currency, taking their foreign currency to parallel markets instead of keeping it in the formal economy.