Tax on commercial and industrial activities

Tax on natural person

Contents

Conditions for levying tax on commercial and industrial activities

Scope of taxable profits

Tax bracket determination

Tax exemptions

Conditions for levying tax on commercial and industrial

activities

firm independence

regional Seeks for profit

Conditions for levying tax on commercial and industrial

activities

1. there should be a firm:(A firm is all what brings income or interest to it’s owners… even if it’s a rented car , it is regarded as a firm)

2.carrying on business independently.

3.The firm should be working in Egypt.

(The regional tax base means that :the tax is imposed on all firms working in

Egypt whether their owners are Egyptians or foreigners)

4.The firm seeks for profit.

Scope of taxable profits:

1. Commercial and industrial firms …including:

– Commercial acts– industrial acts – petroleum – mines – the firms related to handicrafts– any industrial and commercial activities even if it is an isolated transaction

2. Brokerage acts.

Scope of taxable profits:

3. Casual operation of brokerage and commission.

4. Profits on leases.5. Profits of construction and

purchase of real estate with the aim of resale.

6. Firms for land reform and reclamation , breeding projects of poultry , cattle and fish.

7. Profit of all kinds of transport activities .

8. Profits of long term contracts .

Tax bracket determination

watch out :

You are the tax officer

Tax bracket determination

Income statement :

Revenue- Expense

accounting net profit(ANP)

Add:expenses included in determining profits , but not deductible

Revenues not included in determining profits , but taxable

Deduct:expenses not included in determining profits , but deductible

Revenues included in determining profits , but not taxable

tax net profit (TNP)

acc

ou

nta

nt

tax

off

icer

Tax bracket determination

Taxable revenues

Allowable deductions

Taxable revenues

sales Sale of remnants

Capital gains

Recovered bad debts

Subsidiary revenues

sales

I. Approaches followed by firms for

understating the sales figures

( added)

II. Approaches followed by firms for

overstating the sales figures

(deducted)

sales

Approaches followed by firms for understating the

sales figures:1.Sales must be recorded:Some firms may not record a part of its sales , by postponing the sales entry to the beginning of the new period.

sales

2 0 1 2Dr: accounts receivable

Cr: sales

2 0 1 3Dr: accounts receivable

Cr: sales

on 31st December , x company has sold goods for the amount of L.E 1000:

, so the amount of postponing sales must be deducted from 2013 operating income and

added to 2012 operating income

sales

2.Delivery of goods to sales agent is not a sale, because profit of these sales is not

realized until the goods are sold:

Some firms may not record the goods which have been sold by commission agents during the year.

sales

firm

Goods5 0 , 0 0 0$

agent

Sold:$20,000

The amount to be recorded is the amount of goods sold (20,000) only.

sales

3. Goods withdrawn by the owner for personal use should be recorded at the

cost :

Some firms may not record goods withdrawn by the owner for personal use.

sales

4. Goods accepted by customers during the year should be recorded

as sales:

Some firms may not record goods sent and accepted by customers during the year , as being under-acceptance goods during the year.

sales

5. Some firms may records artificial sales returns.

6. Some firms may record sales returns at a value higher than the original sales value.

Example (1):

The net profit of ABC firm amounted to L.E 120,000 for the year ended on

Dec.31st. Examining the firm’s books revealed the following:

1.There were sales made on 28th. Of December, received by the customers on the same date, with a value of L.E 25,000 entered on the 8th of January.

Example (1):

2. amongst the goods sent to commission – agents during the month of December with a value of L.E 50,000 a part was sold for the amount of L.E 20,000 with agent’s commission thereon being 5% still due. But this transaction was not recorded during the financial year, and only the part remaining unsold was included in inventory.

Example (1):

3. sales returns recorded during the year included sales returns a value of L.E 5,000 were actually returned on 3rd,January of the new year. It was also revealed that half of the goods which were sold for an amount of L.E 6,000 were returned , but recording was effected for the amount of L.E 3,100.

Example (1):

4. the owner withdraw goods for personal use , the costs of which was estimated at the amount of L.E 4,000 which did not appear in the books.

Required:

Determine the taxable net profit.

Example (1):

Solution:L.E

120,000

54.100

(1,000)

173,000

L.E

25,00020,0005,000100

Net profit:

Add: Sales effected during year not recorded Sales by commission-agent not recorded Sales returns related to the following year Difference in the value of withdrawals which

were not recorded

Less: Sales commission of the agent on goods

sold: 20,000*5%

Taxable net profit

sales

Approaches followed by firms for overstating the

sales figures:1. The firm may record some

artificial sales by entering sales made at the beginning of the new period as having been occurred during the current period.

sales

2. The firm may record goods dispatched to agents as being sales.

3. The firm may record goods dispatched to customers and not accepted as being final sales.

4. The firm may not record sales returns.

5. The firm may fixed assets sales as part of sales.

Example (2):

The net profit of ABC firm amounted to L.E 40,000 for the year ended on

Dec.31st. Examining the firm’s books revealed the following:

1. There were sales for the value of L.E 3,000 which were made at the beginning of the new period and were delivered on same date, however they were entered in the sales of the current year although they were included as part of inventory at cost.

Example (2):

2.Goods sent to commission-agent , amounting to L.E 7,000 were also entered as being actual sales without entering them in the inventory, noting that their cost amount to L.E 5,500.

3. some goods costing L.E 1,200 sold for the amount of L.E 1,400 were actually returned during the year without being recorded as sales returns and were not entered as part of the inventory.

Example (2):

Required:Determine the taxable net

profit.

Example (2):

Solution:L.E

40,000

4,700

35,300

L.E

3,000

1,500200

Net profit:

Add: Sales related to the new period but recorded

during the current year Profit on goods sent to commission agent

and recorded as sales Profit on goods returned and not recorded

Taxable net profit

Sales of remnants:

( Revenues resulting from the firm's

sale of its leftovers is considered a

part of its revenues)

Sales of remnants:

Erroneous approaches for recording remnants

sales:1. Recording the sale of

remnant as a reserve account.

in this case ,to reach the correct tax bracket , the profit gain must be added to profit figure.

Sales of remnants:

fi rm (a)

Anoth

er ….

Capital gain or loss on the sale of fixes asset = selling price - book value

And instead of doing that … it record the sales of fixed assets as sales of remnants

2- Recording the sale of fixed assets as sale of remnants:

Sales of remnants:

In this case , to arrive at the correct tax bracket , 1.the sale value must be

deducted, 2.a gain or loss on sale

must be calculated and relevant tax treatment is to be followed (add, deduct, or exempted in some cases).

(capital gain or loss = selling price – book value

book value = cost – accumulated depreciation )

Example (3)

The net profit of ABC firm amounted 30,000L.E for the

year ended 31 dec,2011.Examining the firm's books

revealed the following:

The firm sold part of its building asset at 7,000L.E , its

cost is 15,000L.E, (accumulated deprecation

45,000) . The transaction was recorded as being sales of

remnants.

Example (3)

Solution: ANP 30,000Deduct:Sale value of fixed assets treated as remnants

(7,000)

Loss on sale of fixed assets (3,500)

TNP 19,500

loss on sale = 7,000 – ( 15,000 – 4,500)

Capital gains

Profits of liquidation of capital assets

Taxab le

Exempted

Revaluation profits

Taxab le

Exempted

Capital gains result from

Capital gains

Taxable

Capital gains on buildings , constructions , ships and aircrafts.

Capital gains on intangible assets.

Capital gains on non-depreciable assets as land, jewelry , and antiques.

Exempted

Capital gains on other assets as computers , information systems and software

1.Profits on liquidation of capital assets:

Capital gains

2. Revaluation profits: Taxable

Capital gains resulting from revaluation of a sole-proprietorship turning into a partnership

Exempted

To encourage creating shareholding companies, capital gains resulting

from revaluation of asset of a sole-proprietorship offering as a portion in

the shareholding company, provided that: the corresponding stocks are

not disposed off for a period of 5 years

In case of not affecting a change in the ownership structure , where the

capital gains are for shown the actual value of the firm because of price

escalation

Example (4)

A single firm purchased a building as a store

for L.E 90,000 on April 2003, the legal duties

and fees were L.E 40,000 ,other expenses

related were L.E 2,000. on first of April 2005 ,

the firm spent L.E 14,000 to renew the

building was sold are L.E 150,000.andthe

expenses related to this process were L.E

15,000.

Example (4)

Noting that :

The annual maintenance expenses

amounted to L.E 1,000.

The depreciation rate for tax purposes

is %5 annually.

Example (4)

Required:determine taxable capital gains of

the building.

Example (4)Solution:

L.E.135,000

(96,725)38,725

L.E.

90,0004,0002,000

96,00014,000110,000

(96,000)(4,125)

Sales proceeds: 150,000-15,000Less: Book value :• Purchase price• Legal duties• Other expenses related total cost• Renewable costs

Less: accumulated depreciation:• Till April 1, 2005 =

96000*5%*2• From April 1, 2005 =

110000*5%*9/12

Book valueTaxable capital gains

Recovered bad debts

For bad debts written off in previous periods

then collected in subsequent periods:

The debts was Approved to be written off

The collected bad will be included in taxable

revenues

The debts was not approved to

be written off

The collected bad debts will not be included in

taxable revenues

Subsidiary revenues

Buildings and agriculture land revenues

compensations

subsidies

Foreign currency gains

Revenues of securities

Returns on deposits and savings accounts registered banks

Subsidiary revenues

building and agriculture land revenues:

Revenues which the firm gets from building

and agriculture land owned and leased to

others.

The legislator excluded them from taxon

commercial and industrial activities,

because they are taxed under another

(building tax).

Subsidiary revenues

Compensations :

compensations received from

others for breach of contract ,are

entered in the taxable revenues of

the firm on cash basis.

Subsidiary revenues

Compensations :

compensations received from

insurance companies as a result of

damage occurred to fixed assets of the

firm , the excess over the book values

of the assets is considered as capital

gains and is entered in taxable

revenues of the firm.

Subsidiary revenues

Cash

Taxable(on cash

basis)

in-kind

Taxable (fair market

value)

Subsidies

Subsidiary revenues

Foreign currency gains:

Taxable

If there is a change in the exchange rate

Exempted

Due to translating the

financial statements

Subsidiary revenues

Revenues of securities+

Returns on deposits and savings accounts registered banks

These returns are exempted from taxes

Examples:

Net profit for sole proprietorship for the

year2006 was L.E. 35,000.the tax

examination revealed the following:

Examples:

A. Revenues of the firm include:

L.E. 4,000 bad debts collected of which

L.E. 3,500 was approved by tax

authority.

L.E. 2,000 juridical compensations in

favor of the firm for counterfeiting its

trade name. ,noting that the amount

collected was L.E. 1,200 only.

Examples :

L.E. 5,000 interest of installment sales.

L.E. 3,000 as a profit on sale of

securities listed on the Egyptian stock

of exchange.

L.E. 2,500 profits of shares in the

private Egyptian shareholding

company.

L.E. 8,000 interests of deposits with

banks.

Examples :

L.E. 11,000 revenues of reality ,

( noting that the monthly rent is L.E.

1,000).

Foreign currency variance of L.E. 8,000

which include L.E 1,500 as a result of

translating the foreign account into

local currency.

Examples :B. Revenues of the firm not included:

L.E. 7,000 compensations received form an

Insurance company for goods which was

damaged by fire , noting that this amount

was used to purchase other goods.

Examples :

L.E. 4,000 subsidies received form the

city council of which 1,000 in cash and

the rest in form of computer

hardware , its market value is L.E.

5,000.

Examples:

Required:Determine the taxable net

profit.

Solution

L.E35,000

14,000

(5,800)

(10,500)32,700

L.E

1,0007,000

1,0005,000

500800

1,5003,000

2,5008,000

Net profit:Add : Accrued revenue of realty The entire amount of compensation of damaged

goods Subsidy received in cash The market value of in-kind subsidyDeduct : Bad debts collected , mot taxable Juridical compensation not collected The currency gains of translation , not taxable Profits on sale of securitiesExemptions : Profits of stocks in private company Interests of deposits with banksTaxable net profit