The Finance Ministry has stepped in to resolve a major transitional headache for the construction sector following new VAT rules, approving a new accounting mechanism to effectively apply the new 14% VAT law to contracts inked before the new VAT rules while technically maintaining the original 5% rate, according to an official decision seen by EnterpriseAM.

The decision responds to the industry’s concern that it would be charged a flat 14% VAT for already inked contracts without the ability to deduct input purchases, potentially leaving many with much higher tax bills than they had budgeted for. Needless to say, concerns about unrecoverable losses, unsolvable contractual disputes, and project stoppages are more than understandable.

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REMEMBER- The move follows VAT amendments ratified in July that subjected all new construction and contracting contracts 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. During the transition period, VAT will be applied based on the date of the contract, rather than the payment date, to reflect the sector’s phased payment structure.

The Finance Ministry will tax old contracts with the new statutory 14% VAT rate — but, importantly, for only 36% of the total contract value. Doing this taxes these contracts in practice at the originally planned-for rate of 5% while technically keeping to the letter of the law. The ministry took this action because it is not able to amend an already-issued law, a government source told EnterpriseAM.

The Finance Ministry is targeting around EGP 6 bn in tax revenues from the updated VAT treatment of the construction sector during the current fiscal year, according to the source.

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