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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