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ARTICLE
6 March 2024


OECD PILLARS IN EGYPT: A NEW ERA FOR DIGITAL ECONOMY TAXATION

Ai
Andersen in Egypt
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Andersen in Egypt is offering comprehensive and varied legal and tax services to
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In the evolving landscape of international taxation, the Organization for
Economic Co-operation and Development has introduced two significant frameworks
known as Pillar One and Pillar Two.
Egypt Tax
Hamdy Yahia
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In the evolving landscape of international taxation, the Organization for
Economic Co-operation and Development (OECD) has introduced two significant
frameworks known as Pillar One and Pillar Two. These frameworks aim to address
the challenges posed by the digitalization of the economy and base erosion and
profit shifting (BEPS) practices by multinational enterprises (MNEs). However,
their implementation poses both challenges and opportunities for jurisdictions
like Egypt, particularly concerning the application of domestic income tax laws
and existing double tax treaties.


PILLAR ONE: A SUSTAINABLE TAXATION FRAMEWORK FOR THE DIGITAL ECONOMY

Pillar One is designed to deliver a sustainable taxation framework in today's
digitalized economy, ensuring fairness and more efficient allocation of taxing
rights. It focuses on nexus and profit allocation, aiming to prevent the erosion
of tax bases and the shifting of profits to low-tax jurisdictions by digital
businesses. By reallocating taxing rights, Pillar One seeks to address the
challenges of traditional tax rules that are no longer suitable for the digital
economy.

In the case of Egypt, the implementation of Pillar One may require a
reevaluation of its domestic income tax laws to accommodate new rules for nexus
and profit allocation, especially concerning digital businesses. This may
involve revisiting the definition of permanent establishment and revising
transfer pricing regulations to ensure that profits are fairly allocated in line
with economic activities conducted within Egypt.


PILLAR TWO: ENSURING A MINIMUM LEVEL OF TAXATION FOR MNES

Pillar Two aims to ensure that large MNEs pay a minimum level of tax on the
income arising in each jurisdiction where they operate. This global minimum tax
is intended to address remaining BEPS issues, such as profit shifting to low-tax
jurisdictions and the use of aggressive tax planning strategies to minimize tax
liabilities.

For Egypt, the implementation of Pillar Two may necessitate amendments to
domestic tax laws to introduce a minimum effective tax rate for MNEs operating
within its jurisdiction. This could involve the introduction of a top-up tax to
ensure that MNEs pay a minimum level of tax on their profits, regardless of
their tax planning strategies.


CROSS-BORDER SERVICES

Cross-border services are subject to taxation in Egypt. The VAT Law includes
provisions for the taxation of services provided by non-residents to Egyptian
businesses or individuals. It is essential for service providers to understand
their obligations and potential VAT liability when offering services across
borders.


CHALLENGES AND OPPORTUNITIES FOR EGYPT'S TAX LANDSCAPE

The implementation of OECD Pillar One and Pillar Two in Egypt poses several
challenges and opportunities for the country's tax landscape. On one hand, it
offers an opportunity to modernize and align Egypt's tax laws with international
best practices, enhancing transparency and fairness in the tax system. On the
other hand, it may increase the administrative burden on tax authorities and
businesses, particularly concerning compliance with new rules and reporting
requirements.

In addition, the impact of these frameworks on Egypt's double tax treaties must
be carefully considered. While the objectives of avoiding double taxation and
preventing tax evasion remain paramount, adjustments may be needed to ensure
that existing treaties are compatible with the principles of Pillar One and
Pillar Two.


COMPARISON WITH OTHER JURISDICTIONS: KSA, AND UAE

Other jurisdictions in the region, such as Saudi Arabia (KSA) and the United
Arab Emirates (UAE), have also been grappling with the challenges posed by
digitalization and BEPS practices. These countries have demonstrated varying
degrees of flexibility in adapting their tax systems to accommodate new
international tax frameworks.

For example, the UAE has implemented significant reforms in recent years to
enhance its tax transparency and compliance measures, including the introduction
of country-by-country reporting requirements and economic substance regulations.

Similarly, KSA has taken steps to strengthen its tax administration and
enforcement capabilities, including the establishment of specialized tax
tribunals to adjudicate tax disputes. And recently the KSA government introduced
a proposed income tax law bill. the primary aim of this new tax law is to
modernize and align the existing tax legislation with international best
practices. Drawing inspiration from leading G20 nations and other progressive
jurisdictions, the proposed laws seek to enhance efficiency and effectiveness in
tax administration. Furthermore, the introduction of a new income tax law is
designed to align with the Kingdom's overarching vision and strategic
objectives. Emphasis is placed on fostering foreign investment, stimulating
domestic economic growth, and bolstering tax compliance and transparency. These
efforts are also geared towards reinforcing the Kingdom's commitment to
international tax cooperation and its role as a pioneering contributor to global
tax initiatives.

However, challenges remain, particularly concerning the interpretation and
application of new tax rules and the coordination of tax policies at the
regional level. Differences in legal systems, administrative capacities, and
economic structures may also affect the implementation of OECD Pillar One and
Pillar Two in these jurisdictions.


READINESS OF EGYPT'S TAX MANAGEMENT AND TAXPAYER COMMUNITY

As Egypt prepares to digest the impact of the OECD Pillar One and Pillar Two,
questions arise regarding the readiness of its tax management and taxpayer
community to adapt to these changes. Are the current official tax management
systems equipped to handle the administrative burden associated with the
application of these frameworks? Is the taxpayer community aware of the
implications of the top-up tax rate calculation and prepared to comply with new
reporting requirements?

Furthermore, what impact will these changes have on tax planning efforts by tax
experts? Will there be a need for adjustments to existing tax structures and
strategies to ensure compliance with new rules and regulations? Additionally,
are amendments to the tax law provisions and litigation environments necessary
to align Egypt's tax system with international best practices?


CONCLUSION

The implementation of OECD Pillar One and Pillar Two represents a significant
milestone in the evolution of international taxation, with far-reaching
implications for jurisdictions like Egypt. While these frameworks offer
opportunities to enhance fairness and transparency in the tax system, they also
pose challenges in terms of administrative complexity and compliance costs.

To effectively navigate these challenges, Egypt must ensure that its tax
management systems are equipped to handle the increased administrative burden
and that its taxpayer community is adequately informed and prepared to comply
with new requirements. Furthermore, adjustments may be needed to existing tax
laws and treaties to align with the principles of Pillar One and Pillar Two
while safeguarding the objectives of avoiding double taxation and preventing tax
evasion. Ultimately, by embracing these changes and adopting a proactive
approach to tax reform, Egypt can position itself as a competitive and
attractive destination for investment in the digital age.

The content of this article is intended to provide a general guide to the
subject matter. Specialist advice should be sought about your specific
circumstances.

Authors
Hamdy Yahia
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