Viewpoint: Mohamed Hammouda
There are two key shifts shaping the tax and accounting environment in Egypt. The first is the Covid-19 pandemic, which is having a far-reaching impact across a range of sectors, from health care to manufacturing and retail. The need for social distancing has not only resulted in curfews and stay-at-home orders, but has also reshaped office cultures. It is also affecting the costs associated with doing business as companies adapt to these new circumstances. The second shift is the digitalisation of taxation, a trend that has been ongoing for some time. As part of a much broader set of reforms and initiatives aimed at improving the business environment, Egypt has begun digitalising services across the board, and in 2018 started the process of transitioning from a hard-copy tax system to a digital one. The goal of digitalising taxation is not only to boost efficiency and reduce bureaucracy, but also to improve the government’s ability to effectively collect taxes.
Fiscal and subsidy reforms have improved the government’s budgetary position, but the ability to effectively and efficiently collect taxes across the economy would put Egypt in a position to improve services and strengthen the country’s resilience to unexpected events, such as the pandemic. This transition is all the more significant because it affects companies across the country and is an integral element of efforts to create a competitive business and investment environment.
Demand for digitalisation has been catalysed by the Covid-19 pandemic. Digitalisation requires the development of a regulatory framework, which Egypt established in the form of a new tax law that grants access to all the financial statements of Egyptians to the tax authority. The legislation has reduced the challenges associated with filling out tax returns and resulted in greater transparency.
The digitalisation transition is also supporting efforts to formalise the grey economy. The informal economy is considerable in size, and comprises approximately 50% of GDP – and even more by some estimates. There are a number of policy initiatives, particularly concerning banking and finance, that have been implemented to encourage businesses to shift operations to the formal economy.
Despite the many benefits of the digital transition, a shift from an informal to a formal economy is not without challenges, even for fully regulated businesses. In many cases, the pandemic has exacerbated these struggles. For the many businesses that operate in the grey economy, the transition is in itself a significant obstacle. In order to continue to make progress in formalisation initiatives it is necessary to create solutions for informal companies that enable them to adapt. This will prevent the permanent division of the economy, which, if realised, would make it impossible for an informal business to become properly regulated and taxed.
For foreign investors and businesses, the digitalisation of taxation will help increase Egypt’s competitiveness as an economic destination in comparison to other fast-growing markets in the region. By more closely aligning Egypt with the taxation systems in Europe, international businesses will benefit from the simplification of bureaucracy. Once the transition is complete, taxation will be automated, eliminating the need for tax and accounting firms. In the meantime, however, these entities expect to see stable growth in demand for their services.
Automation and digitalisation are beginning to have a visible impact on the economy, and it seems that businesses which have been quicker to adapt to these trends have adjusted more easily to the new norms, including remote working. The recent volatility has underscored the need to remain technologically up to date, and tax consulting firms should be prepared to help their clients coordinate their internal programmes with new government systems.
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