The Finance Ministry has been meeting with contractors and real estate developers to finalize the executive regulations for the latest VAT amendments, government sources told EnterpriseAM. Representatives of the Egyptian Federation for Construction and Building Contractors (EFCBC) and the Egyptian Tax Authority (ETA) were also in attendance.

REMEMBER- VAT amendments were ratified in July, subjecting construction and contracting services to the standard 14% VAT rate. Under the previous system, construction and contracting services were taxed at a flat 5% schedule rate without allowing companies to deduct input VAT. The government is estimated to make an extra EGP 200 bn in tax revenues from the recent VAT amendments, which also include taxing crude and cigarette tax hikes.

The meetings addressed several key issues, including the interconnection of the e-invoicing system, the awarding entities, and the tax calculation method for projects that were awarded before the VAT amendments passed or those still under construction.

While the ETA insists on enforcing the new law from the date of issuance, investors are pushing for a more lenient approach to address issues related to projects that are already underway, our sources said.

Contractors are unsure how to file their monthly VAT tax returns, a source from the EFCBC told us. The key issue is the lack of an agreement on how to handle projects awarded before the new amendments were issued. There is also the issue of existing inventory, the source highlighted, adding that if companies are not allowed to deduct the tax they have already paid on their stock of equipment, supplies, and building materials from operational cost, this could cause huge losses.

Case in point: Our source from the EFCBC said that his company purchased electrical transformers, motors, and other equipment for projects when the EGP / USD exchange rate was lower and shipping costs were favorable. Although the company paid the VAT on these items at the time of purchase, the ETA is refusing to allow the deduction of this tax, because the equipment has not been installed yet, the source said. This will result in about EGP 9 mn in losses.

As a result, many companies have contacted the ETA, requesting to deduct the tax paid on equipment they already had in stock, the EFCBC sources noted. Meanwhile, some government entities have requested the tax to be calculated at only 5%, pending new instruction from the ETA, while others are demanding a full 14% VAT deduction, the source added.

The EFCBC and real estate developers have submitted an urgent memo to the Finance Minister, proposing limiting the application of the VAT amendments to projects that were awarded after the law was enacted, the source said.

What’s next? All issues surrounding the application of VAT amendments to construction and contracting services will be resolved by next month with technical support committees set up to assist small contractors to join the new tax system, government sources told EnterpriseAM. The move will enable contractors to benefit from recent VAT amendments, allowing them to deduct input tax and, in turn, resolve the ongoing issues faced by subcontractors.

THERE’S MORE TO THE STORY- We dove into what new VAT rules could mean for contractors in a Hardhat published earlier this year. Check it out here.

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