Egyptian Income Tax

Part One
Income tax of Natural Persons

Edited by:
Pro.Said Abd El-Moniem
2014

1
 Lecture Ten
Chapter Five
Revenues of Commercial and
Industrial Activity

Edited by: Dr. Engy El Hawary

 Example 5-3
Industrial sole proprietorship has been using Full costing method with LIFO in the
preceding years, but it switched to variable costing with FIFO in the current year. So,
if you know the following:

1- The beginning inventory of finished production is 3,000 units at cost L.E 9,000.

2- Finished production during the year was 47,000 units.

3-Net sales during the year was 40,000 units.

4- The overhead cost was L.E 94,000 variable and L.E fixed.

Required:

Compute the difference resulting from changing the inventory valuation method for
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tax purposes.
1- Quantity of ending inventory:

Units
beginning inventory 3000
Finished production during the year 47,000
Total available 50,000
Less: Net sales (40,000)
Ending inventory 10,000

2- Determination of unit cost:

Items Full cost Variable cost
method Method
Variable cost 94,000 94,000
Fixed cost 47,000 ---
Total Costs 141,000 94,000
Quantity of finished units produced 47,000 units 47,000 units
Cost per unit 3 L.E / UNIT 2 L.E / UNIT

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3- The difference resulting from changing the inventory valuation
method:
According to the LIFO method with full costing method: L.E
Beginning inventory (3000 units*3) 9,000
From production (10,000 units ending-3000 beginning units) = 21,000
7000 units from production * L.E 3
Total 30,000
According to the FIFO method with Variable costing method:

From production 10,000*2 20,000

The difference 10,000

The difference should be added to the accounting profit and taxed

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 Taxable
revenues

Revenues of
Subsidiary Capital
current
revenues gains
activity

Revenues realized not from the basic From sale of From the
Commercial Industrial excess of
firms firms activity firm fixed
assets ( compensatio
1-compensations on cash basis, 2-collected bad ns for
debts approved by tax office in the same year capital losses destruction
of collection, 3-subsidies on cash basis, 4- are or requisition
approved foreign currency variance (translating deducted) of fixed
the foreign currency is not taxable), 5-the firm assets over
building and agriculture land revenues, 6- their book
treasury notes returns (at 20% only) this 20% value
can be deducted from tax due if not exceeding
it, 7-returns of deposit and saving accounts (if
with registered banks and post office
exempted) cost of financing and investing is
taxable, 8-profits of dealing in securities of not
listed companies only are taxable while losses 6

are deductible (deduct profits and add losses

of listed securities
 Continue: The taxable revenues:
Second: The tax treatment of incidental revenues:
These revenues are considered to be outside the scope of the basic
activities of the firm. Incidental revenues include:

1. Subsidy: they are sums received by the taxpayer from government

or any party to achieve economic or social objectives.

- Cash subsidies are taxable on a cash basis.

- If the subsidy is in a form other than cash (property or services), the
market value of subsidy is subject to tax.
 Continue: The taxable revenues:
2- Bad debts recovered:

sometimes accounts that have been written off as non- collectable (bad debts)
are collected (bad debts recovered) at a later date. The following rules may
be noted for the purpose of tax treatment:

- If the bad debts were allowable as deduction in determining the tax net
profit for the previous year, they would be included in the taxable revenues
for the year in which they are received.

- If the bad debts were not allowable as deduction in determining the tax net
profit for the previous year, they would not be included in the taxable
revenues for the year in which they are received.
 The taxable revenues:
3- Compensations:
they are sum received for damages suffered by the taxpayer.
compensations include:

A- Insurance compensations related to current assets (insurance

policies that cover the loss may occur because of unexpected
events such as fire). The amount of insurance compensation
should included in the tax profit regardless whether the firm
replaces this asset by purchasing other assets or not.

B- Insurance compensations related to fixed assets. The excess of

insurance compensation over the book value of these assets
(capital gain) should included in the tax profit.
 The taxable revenues:

4- Interest revenues derived from some transaction with

customers such as interest of credit sales are includable in the tax
profit.
Example (1):
The net profit of sole-company for the year ended December 31, 2012 was
L.E. 105,000. The tax examination revealed the following information:
1- The income statement includes the following items:
a- L.E. 10,000 subsidy received from ministry of health to support the
firm's hospital. This amount includes L.E.3,000 received in cash and
the remainder is a medical devices, its fair market is L.E. 8,000
b- L.E.5,500 bad debts recovered including L.E. 3,500 was earlier
allowed as deduction and the rest was not allowed.
2- The following item was not recorded in the accounting books during the
year:
- L.E. 15,000 compensation received from an insurance company for
goods which were damaged by fire, the total amount of
compensation was used to purchase other goods.
Required:
Make the necessary adjustments to measure the taxable net profit of the
firm for the taxable period 2012.
 L.E. L.E.
Accounting net profit 105,000

Add:
1.a.The difference between the fair market value ant the 1,000
recorded value of subsidy received in kind (medical
devices) (8,000 7,000).

2-The amount of compensation for the damaged goods is 15,000

taxed regardless the replacement.

16,000
121,000
Less:
1.b. bad debts recovered not taxed because it was not (2,000)
previously deductible(5,500 3,500)

Taxable net profit 119,000

Example 5-4
Net Profit of commercial sole proprietorship from the income statement for 2014 was L.E 35,000. So, if you know that:
1-Revenues of the firm included:
-L.E 4,000 collected bad debts of which an amount of L.E 3,500 was approved by tax office.
-L.E 2,000 juridical compensation to favour of the firm counterfeiting its trade name, noting that the amount
collected of it was L.E 1,200 only
-L.E 3,000 as a profit on sale of securities in the Egyptian Stock of Exchange
-L.E 2,500 profits of shares in private Egyptian shareholding company
-L.E 8,000 interests of deposits with registered banks
-L.E 11,000 revenue of realty, noting that the monthly rent is L.E 1,000.
-L.E 8,000 foreign currency variance include L.E 1,500 from the accounting for translating the foreign currency
accounts.
-L.E 10,000 profits of sale of securities in the Egyptian Stock of Exchange after re-evaluation by the firm (purchase
price is L.E 20,000 and selling price is L.E 35,000) the revaluation is L.E 25,000.
2-Revenues of the firm NOT included:
-L.E 2,000 compensation received from an insurance company for goods damaged by fire knowing that this amount
was used to purchase other goods.
-L.E 4,000 subsidies received of which L.E 1,000 in cash and the remaining is in form of computer that has a value of
L.E 5,000.
3-Costs of financing and investment related to the revenues exempted from tax is L.E 1,000. 13

Required: Make the necessary adjustments to determine the taxable net profit for year 2014.
 L.E L.E
Net profit according to income statement 35,000
Add to it:
1- Accrued revenue of realty according to the accrual basis.
(1000*12)-11,000= 1,000
2- Tax differences resulting from sale of securities (35,000-20,000)-
10,000= 5,000

3-The entire amount of compensation for damaged goods because

it is taxable regardless of the replacement 2,000
4- Subsidy received in cash, because it is taxable. 1,000
5-The market value of subsidy received in kind because it is
taxable 5,000
6- Cost of financing and investment 1,000
15,000
Total Taxable profit 50,000
Deduct from it:
1-Collected bad debts, not taxable because it was not previously
deductible. 4000-3500= 500
2- Juridical compensation not collected, because it was taxable on
cash basis 2000-1200= 800
3- The currency gain of translation not taxable because it is
fictitious gain 1,500
4- Profits on sale of securities listed on the Egyptian stock
exchange 3,000 (5,800
Adjusted net profit 44,200
5- Exemptions:
a- Profits of shares in private Egyptian shareholding company 14

(shareholder) 2,500
b- Interests of deposits with registered banks 8,000 10,500
Taxable net profits 33,700