The Finance Ministry is considering introducing a new framework for collecting customs on royalties for imported goods and services, government sources told EnterpriseAM. The move is designed to address long-standing disputes with several foreign companies.

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But first, what do royalties mean in this context? They specifically cover the amounts paid for the use, licensing, or exploitation of any intellectual property rights. This includes, for instance, fees for franchise agreements, the use of intellectual property rights, and consulting services. It also extends to goods produced locally under agreements between local and foreign manufacturers.

The move does not require legislative amendments, as the law already stipulates them, but the mechanism for their collection has not yet been issued, the source noted.

How we got here: The Customs Authority in 2021 suspended (pdf) customs on royalties after the levies “significant debts for foreign firms due to valuation differences arising from royalties, sparking a major issue.” However, this decision does not mean waiving the duties that are being calculated, meaning that they are being recorded as outstanding debts. Moreover, the “five-year prescription rule” does not apply in this case, our sources said, meaning that the Customs Authority does not lose its right to claim these debts even after five years pass.

The new system aims to establish clear rules for when and how royalties would be subject to customs. It will also introduce new ways to collect VAT on these royalties. The move is expected to significantly resolve the issue related to foreign firms’ debts, attracting more foreign investment to the country, according to our sources.

It will be part of an updated customs system: The mechanism for calculating customs duties on royalties is expected to be part of the updated customs system, which also includes new provisions, the sources told us.

The new tax and customs system is part of Egypt’s structural reform program agreed with the IMF, the sources noted. The IMF is set to hold its combined fifth and sixth reviews of Egypt’s USD 8 bn EFF arrangement later this year, it noted in its recently released report on the program’s fourth review. Earlier this month, the IMF decided to combine the fifth and sixth reviews, stating that “more time is needed” to make progress on the state withdrawing itself from the economy and the broader reform agenda.

The government is currently working to identify foreign companies providing services such as consulting, intellectual property licensing, and trademark usage in the local market and reviewing their contract structures. This comes alongside drafting new regulatory and mandatory mechanisms for the new sector.

Maintenance and replacement contracts and after-sales services between local and foreign companies will be subject to custom duties if their value is included in the overall price of the imported goods, according to our sources.

A game changer? The proposed customs duties are expected to have a significant impact on foreign transfers and overall foreign currency flows, one of our sources said, adding that an “unprecedented surge” in VAT revenues is also expected.

What went wrong? The Customs Authority used to assess customs duties without fulfilling the fundamental conditions set by the international customs law for royalties and international marketing expenses. The most important one is that they must be added to the price of the commodity and related to it, customs expert Badawi Ibrahim told EnterpriseAM.

This led to four problems, Ibrahim noted, one of which is the collection of customs duty on product components. Secondly, the VAT is collected on the product, including the royalty. This leads to paying higher than expected tax amounts. When receiving imported services from an unregistered foreign provider, the service recipient pays 14% VAT on the services contract under the reverse charge mechanism. In addition, income tax is also paid on that service, Ibrahim noted, adding that this creates a situation of double taxation on VAT.

Also, the Customs Authority imposes late payment penalties on VAT.. Finally, the fourth problem arises when an agreement includes other services beyond just royalties, without explicitly detailing their specific proportion of the total contract value, Ibrahim added.

International agreements will be taken into account to avoid double taxation, ensuring the interests of foreign companies operating in various sectors in Egypt, according to our sources.

The planned customs aim to localise brands and expand franchises through clear mechanisms that meet international standards.

Decisive solutions in the making: Our sources told us that the proposed solutions will introduce a flexible system for collecting customs duties on royalties. This includes a mechanism to ensure accurate VAT collection and the cancellation of fines previously imposed by certain customs departments. Additionally, tax will not be levied on services unless they are explicitly included in the price of goods on invoices submitted to customs outlets.

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