What are capital goods? In a legal capacity,capital goods have been defined as goods that are purchased and used in the production of other goods, as such they are not the end user good that consumer could purchase. In other words, these goods are tangible assets that a business uses to produce goods or services that are used as inputs for other businesses to produce consumer goods. However, many questions have recently been raised with regards to this legal term.
Our firm was recently approached with a matter regardingthe classification of capital goods and the rights in procuring/importing those said goods in order to facilitate one’s business. For instance, would a building be considered a capital good? Or is the term more confined to objects such as that of machinery? In order, to providepicture as to how the term is defined in Egypt we look at two different rulings from different ranks of the Egyptiancourt systemto answer our question.
Moreover, it should be noted that alegal principle laid under the Egyptian jurisprudenceisthat no tax is imposable without adequate laws.
The Sales Tax law No. 11/1991 defines the (industrial) goods subject to the Sales Tax asindustrial productswhether locally produced or imported.
The importer manufacturercan either bea natural person (a legal entity or natural person) ora moral person (such as a corporate entity) which imports industrial goods or services for trade.
From the above, it is clear that the importer/tax payer under the Sales Tax law is the person who imports industrial goods and services subject to the Sales Tax Law fortrade. In case the reason behind the import of these said goods is not for trade, but rather for usagesuch as manufacturing, then the said goods should not be subjected to the Sales Tax.
In a case which had to do with plastic injection machinery that was imported in order to facilitate the production of plastic items in Egypt, the claimant was imposed to pay a tax of EGP 63,253.60 on the machines imported. This was found to be contradictory to the law No. 11 of 1991 regarding general sales tax.
The Administrative Court rendered the aboveruling in Lawsuit No. 8529/75 providing for that the definition of (industrial) Goods that are subject to the Sales Tax is clear, andthat the said definition refersto all industrial products whether locally produced or imported. The court added in this respect that the generic nature of the article of the law implies subjection of all imported goods irrespective of the reason behind importing them, whether for trade or for production/manufacturing.In our view, this controversial ruling is inconsistent with the legal principles that no tax is imposable without law and that the legal provisions of the law are complementary to each other to the extent that their interpretation should avoid any inconsistencies.
The High Constitutional Court has furtherruled that the provisions of the Sales Tax law are complementary to each other to the extent that the interpretation of the different provisions of the law should avoid any inconsistencies thereto (Lawsuit No. 28/72 Jud on 25th November 2013).
In the abovementioned judgment , taxes were imposed based on decree of the minister of national administration No. 239 for the year 1981 regardingthe unified fees of the local council, in whichthe constitutional court ruled as unconstitutional with respecttoabove-mentioneddecree, henceruledto refund the previouslypaid tax feesto the claimant.
Hence, since the Sales Tax law has defined the importeras a natural or moral person which imports industrial goods or services for trade, this definition clarifies the legislator’s intention to only subject to the Sales Tax law on such goods and services imported for trade. The imported machines and equipment for usage in manufacturing rather than trade should be excluded from the subjection to the Sales Tax law.
In our view, the ruling of the High Constitutional Court is binding on all courts and authorities. Pursuant to the High Constitutional Court law, the rulings of the said court acquire prevalence.
Our litigation team is fully aware of the said rulings and we are already assisting a number of clients in obtaining tax refundsfor Sales Taxes already paid to the Tax department without just cause on goods and services imported for manufacturing rather than for trade.
By Laila Khalil
for Eldib Advocates
In August of 2016, the Egyptian Parliament approved a law for settling tax disputes between civilians and the tax authority. The law, which is considered the last option for an amicable reconciliation with the tax authority, later took effect on September 28, 2016. The aim of the law was to resolve a backlog of more than 6,000 tax disputes in court worth approximately EGP 60 billion. This resolution was based on pragmatic provisions that promised quicker, easier, and more efficient dispute resolution processes. Moreover, the law was meant to encourage the process of settling tax disputes, a move persuading foreign investors who fled after the 2011 uprising to return. The law was expected to yield additional revenue of EGP 10 to 15 billion during the 2016-2017 fiscal year. Tax revenues were expected to benefit as well from increased collection from existing taxes and improvements in tax administration.
Tax disputes are normally lengthy procedures that utilize substantial time and money. The government was losing valuable resources over disputes that could easily be shortened by proficient experts. The new law outlined regulations to expedite prolonged tax disputes by resolving them through committees of independent experts, as opposed to courts. The law allows the committees to end disputes at any level in all types of taxes before courts of all degrees. These committees will consist of experts who are not affiliated with the tax authority; however, they will each also include a member from the judicial consultants and a technical member from the Egyptian Tax Authority. This law was said to be implemented for the period of one year. Deputy Minister for Tax Policies at the time, Amr El-Monayer had stated that the committees were to be handling disputes concerning various taxes, such as commercial and industrial profits tax, income tax, payroll or sales tax, and even disputes that may arise during the one-year implementation period of the newly revised Value Added Tax (VAT) law. He added that in order to alleviate the load from the tax community, he agreed to allow some committees to resolve disputes within the Federation of Egyptian Industries (FEI), the Federation of Egyptian Chambers of Commerce (FECOC), the Egyptian Businessmen Association (EBA), and the Federation of Egyptian Banks.
In March 2017, at the end of the period of implementation of the new law, the Ministry of Finance released a statement announcing that the tax law had added LE 15.6 billion to the Egyptian treasury. Furthermore, the committees had resolved more than 4500 disputes between the Public Tax Authority and taxpayers, in accordance with the amendments to the Tax Dispute Resolution Law No. 79 of 2016. The resolutions led to settlement agreements and agreements upon final taxes estimated at EGP 1.5 billion. After large success the law was renewed for another year.
The Finance Ministry decided to extend the mandate of the Tax Dispute Resolution Act for another two years in March 2018. However, three months after its extension, the Ministry decided to significantly reduce the mandate from the two year period to a meager four months. This decision came with the slow income of new disputes as well as the Ministry’s desire to speed up the resolution of approximately 150,000 tax disputes currently on file. On July 25th2018, the parliamentary signed off on the reduction of the mandate. The Act will now expire on December 31st, 2018. By cutting down the period, Finance Minister Mohamed Maait also aims to encourage serious financiers to take quicker action before the termination of the mandate. The objective of this decision, reflecting the initial goal of the Resolution Act, is to ultimately waste less of the Ministry’s financial and temporal resources.
For Eldib Advocates