Egyptian Income Tax

Part One
Income tax of Natural Persons

Edited by:
Pro.Said Abd El-Moniem
2014

1
 Lecture Eleven
Chapter Five
Revenues of Commercial and
Industrial Activity

Edited by: Dr. Engy El Hawary

 3-The tax treatment of capital gains.
When company stops getting benefits from the fixed
asset (land, building, cars, equipment, furniture),
it is sold.

1. Gains are realized when company receives

selling price for an asset more than its book
value.
2. Losses are realized when company receives
selling price for an asset less than its book value.
Note:
Book value = Cost of asset Accumulated depreciation

Depreciation is decreasing in the value of the fixed

assets due to use them.

Depreciation = (cost salvage value) useful life

Accumulated depreciation is the sum of the annual

depreciation.
Example 5-5

A sole proprietorship bought a building for L.E 500,000 on 1

April, 2001. On 1 July 2004 the firm spent L.E 100,000 on an
extension to the building. The building was sold on 30
September 2014 for L.E 900,000.
If you know that a tax accumulated depreciation until the
date of selling is L.E 350,000.
Required :
Calculate Taxable capital gain on the disposal of the store.

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Solution

L.E L.E
Disposal Proceeds 900,000
Less: Book value
Purchase cost 500,000
Extension cost 100,000
Total 600,000
Less : Tax Accumulated depreciation (350,000)
Book value (250,000)
Taxable capital gains 650,000

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Example 2

Alex Co., purchased a new machine on January 1, 2010, at a cost

$17,000. The company estimated that the machine will have a
salvage value of $2,000 at the of its 5- years life.
Required:
1. Compute the depreciation expense per year.
2. Compute the accumulated depreciation at the end of 2012.
3. Compute the book value at the end of 2012.
4. If Alex Co., sold the machine at the end of 2012 for $10,000,
compute the capital gain or loss.
5. If Alex pharmacy sold the machine at the end of 2012 for $7,000,
compute the capital gain or loss.
1. Depreciation expense per year =(17,000 2,000) 5-year =$3,000
2. Accumulated depreciation at the end of 2012=

Year Depreciation
2010 $3,000
2011 3,000
2012 3,000
Accumulated depreciation 9,000

3-The book value at the end of 2012 = cost Accumulated depreciation

= $17,000 $9,000 = $8,000
4- Capital gain = selling price book value
= $10,000 $8,000 = + $2,000 gain.
5- Capital gain or loss = selling price book value
= $7,000 $8,000 = - $1,000 loss.
 Deductible Costs
General conditions for deductible costs:
1. They should be related to the activity and necessary for
practice the activity.
2. They should be real.
3. They should be supported by documents. The costs that
are customarily not supported by documents as buffet
and cleaning expenses are deductible provided that not
exceeding 7% of total costs supported by documents.
4. They should be related to tax period on accrual basis.

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 Deductible Costs
The deductible costs include:
1-Returns of loans (borrowed for the activity) are deductible except:
-returns paid on loans borrowed from exempted natural persons.
- returns paid at annual interest rate exceed twice the declared rate by the Central
bank.
2- Depreciation of fixed assets (tangible and intangible) only that calculated according to the tax
law. Two systems are used:
straight line deprecation 5% depreciation rate for the acquisition cost of tangible assets
and 10% for the intangible assets
and Depreciation basis system: If the balance at the end of the tax period (beginning balance
+purchases- disposal value of assets) during the year.
is negative, it should be added, if the balance is L.E 10,000 or less it should be deducted. If the
balance exceeds L.E 10,000 the depreciation rate is 50% for computers and 25% for furniture and
machines
3- Initial Depreciation: The law allowed in the first tax period an additional deduction (only once)
equal to 30% of the machines cost provided that it is used in industrial production and there is
regular book.
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4- Duties and taxes previously paid by the firm as building tax

5- Sums deductible to favor of special funds as pension funds (only 20% of total salaries and
wages only is deductible).

6- Contributions and subsidies:

-Paid to the government are deducted
-Paid to registered governmental Egyptian societies are deducted at maximum 10% only.

7-Insurance premium related to taxpayer (not exceed L.E 3000)

8-Social Insurance premiums actually paid by the firm to the favor of the workers and his own.
9-Bad Debts provided that : - keep regular books
- related to the activity.
-the amount previously included in the firms accounts.
If these bad debts are recovered , it will be included in the revenues of the period in which it is
collected.
10- Fines , financial penalties paid by the taxpayer as a result of non contractual liabilities are
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deductible.
 Other deductible costs:
1-
Salaries and wages of employees and fringe benefits. (Salary of the
owner is not deductible salary of one of his relatives for actual work
deducted provided that not exceeding the other empolyees)
2-Employees commissions.
3-Car expenses for the activity.
4- Insurance premiums on assets of the firm.
5-Advertising expenses
6- Travel and transport expenses related to the activity.
7-Embezzlement and theft losses related to the activity (deductible
loss = book value insurance payments)

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Non Deductible Costs:
1- Reserves and provisions:
Only the previously taxed provisions are deductible.

2-Fines and penalties as a result of misconduct.

3- Income tax

4- Returns of loans exceeds twice the interest rate declared by central

bank.

5- Returns of loan paid to exempted natural persons.

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6- Cost of financing and investment of exempted revenues

 Exercise

The net profit of Alex sole-company for the year ended December 31,
2012 was L.E. 778,000. The tax examination revealed the following
information:
1. There ware sales amount of L.E.30, 000 which were not recorded at
all. The cost of these sales was L.E. 25,000.
2. There ware sales amount of L.E.20, 000 which were not recorded as
sales revenue.
3. The firm delivered goods with a cost of L.E. 15,000 to one of its
local branches. These goods were recorded as sales, at a price L.E.
20,000 . These goods were sold.
4. The firm traded- in goods for land. The land market value is
L.E.25,000. the goods were recorded as sales amount of L.E.
20,000.
5. The owner withdrew goods for his personal use. This goods were
recorded as sales at price L.E.10,000 while its cost is L.E.9,000.
6- The income statement includes the following items:
A. L.E. 20,000 subsidies received. The amount includes
L.E.10,000 received in cash and the remainder is in the form of
furniture, its fair market is L.E. 17,000
B. L.E.9,000 bad debts recovered including L.E. 7,000 was earlier
allowed as deduction and the rest was not allowed.
C. L.E. 20,000 capital gain of a building which was sold for L.E.
90,000 in May,1 2012. The book value of the building for
accounting purpose was L.E.70, 000 and for tax purpose was
L.E.72, 000.
D. L.E. 10,000 interest expenses which include L.E. 2,000
belonging to interest on the owner's loan. The remaining
interest was related to the loan of the owner's brother. The
interest amount of this loan under the central bank equals L.E.
8,500.
E. L.E 20,000 contributions to government units.
F. L.E. 15,000 computer depreciation expense, while taxable
computer depreciation expense L.E 14,000.
 G- L.E. 10,000 the firm's share in social insurance.
H-L.E. 7,000 allowances for retirement compensation. This
amount was deposited in the favor of the independent private
insurance fund. The total wages = L.E 40,000.
7- L.E. 12,000 compensation received from an insurance company for
goods which were damaged by fire, the total amount of
compensation was used to purchase other goods. This
compensation was not recorded in the accounting books during the
year.
8- L.E.5,000 annual social insurance contribution of the owner is not
recorded.
Required:
1. Make the necessary adjustments to measure the taxable net profit
and the tax base of the firm for the taxable period 2012.
2. Determine the tax amount for the taxable period 2012.
Accounting net profit 778,000
Add:
1. Gross profit on goods sold, which are not 5,000
recorded (30,000 -25,000).
2. Sales revenue not recorded. 20,000
3. Goods delivered to local branches and sold -------
(recorded as sales so no adjusting).
4. Difference in the value of goods exchanged 5,000
for land as the transaction should be
recorded at the market value of the land
(25,000 20,000)

6.a. The difference between the fair market 7,000

value and the recorded value of subsidy
received in the form of furniture (17,000
10,000).
6.d Interest of loans:
- Belonging to firm's owner, it 2,000
disallowed as deduction.
- Related to brother's owner, it is -------
allowed as deduction up to the
interest amount under the central
bank. Interest of loan (8,000) less
than central bank (8,500) ,thus no
adjustment.
6.e. Contributions Paid to government unit are -------
allowed as deduction, thus no adjustment.
6.f. Overstated computer depreciation expense 1,000
(15,000 14,000).
6.g.The firm's share in social insurance is -------
allowed as deduction, thus no adjustment is
made.
6.h. allowance for retirement compensation is -------
allowed as deduction with maximum 20% of
total works salaries (40,000 X 20%= 8,000),
so actual share 7,000 is less than 8,000, thus
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 830,000

Less:
5. Withdrawals of goods should be recorded at cost
(1,000)
(10,000 9,000).
6.b. Bad debts recovered not taxed because it was (2,000)
not previously deductible(9,000 7,000)
6. c. Overstated gain on the sale of building. (2,000)

8. Social insurance premium belonging to firm's owner (5,000)

is allowed as deduction. (10,000)

Taxable net profit 820,000

Deduct
Family exemption (5,000)
Tax base

815,000

Note:

The capital gain for tax purpose= L.E.90,000 - L.E.72, 000 = L.E. 18,000

The capital gain for accounting purpose (recorded gain) = L.E.20, 000
So overstated gain on the sale of building= L.E.2,000 should be deducted.
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Tax base = L.E. 815,000
Tax amount=

Bracket L.E.15,000 X 10% L.E.1,500

no.1 : =
Bracket L.E.20,000 X 15% = L.E.3,000
no.2:
Bracket L.E.775,000 X 20% = L.E.155,000
no.3:
Tax amount L.E.159,500

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End of Chapter

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