Wednesday, 8 February 2023

Contractors are the latest to oppose the e-invoicing system

Contractors are up in arms about the government’s e-invoicing system: The Contractors Union has been fielding complaints from companies in the industry over challenges they face with complying with the government’s e-invoicing system, industry sources told Enterprise. These companies say that the nature of their work and the industry at large don’t match with the government’s requirements for e-invoicing, pointing to time gaps between declared and realized revenues on their balance sheets, our sources tell us.

REFRESHER- The government has been working for the past couple of years to digitize all B2B and B2C invoices in a bid to give the government greater oversight over tax and reduce the size of the informal economy. The Tax Authority launched a pilot in late 2020 and has been gradually extending the system since then. Businesses are required to register their products and services to an account on the Tax Authority’s platform, which they then use to log all of their invoices on the platform. The system allows the authority to track each transaction back through the customer’s regular tax filings, which will include the invoice. Suppliers or contractors that have yet to join the e-invoicing platform have essentially been barred from doing business with local authorities as of December, according to the Finance Ministry.

Contractors aren’t the only ones who have opposed the e-invoicing system: Self-employed professionals — including lawyers, doctors, and pharmacists — previously came out in opposition to the system at the end of last year, arguing that the costs of registering through the system were too high. These expenses include installing a designated system and paying monthly and annual subscription fees, they said at the time.

The big problem: Contractors have around 10 tax problems that make it difficult for industry players to comply with the e-invoicing system, head of the Contractors Union Mohamed Sami Saad told Enterprise. One of these hurdles is the issue of accrued revenues — income that a business has earned but has yet to receive payment for, deputy head of the Contractors Union’s tax committee Shams Eldin Youssef told Enterprise. Contractors could book revenues months before they are able to realize payments, and this time gap could also extend between calendar years — for example, a contractor could book revenues on their balance sheet this year but only receive payment next year, but would have to pay taxes on the revenues this year, Youssef said.

This issue of accrued vs. realized revenues has also been compounded by recent raw material shortages, which have extended project completion timelines, Saad noted. Contractors — particularly small and medium companies — are “severely suffering” from material shortages that make it difficult for them to complete projects on time.

Altogether, the sector operates on loosely structured payments: The sector simply does not have organized, structured invoices, Contractors Union member Mamdouh El Morshedy told Enterprise. Some projects extend over many years and could see the value of the contracts change over the project’s lifetime, El Morshedy noted.

Then there’s the problem of all the off-the-book expenses: Contractors pay informal royalties (known in Arabic as etawa) at work sites, which can account for up to 50% of their costs, a source from the Contractors Union who asked to remain unnamed told us. These “royalties” are essentially paid — often to groups who informally claim ownership of an area — in exchange for access and security, but they’re not expenses that can be proven with invoices, our source explains. “It’s not like paying for a service from a registered provider, or buying supplies from a marble company,” where the transaction is proven by remitting a withholding tax at the point of sale, our source says.

What about subcontractors? The tax treatment for subcontractors is another problem the sector is facing with the e-invoicing system, Youssef and El Morshedy told Enterprise. Large contractors often rely on subcontractors for their projects, but are unable to prove this relationship — largely because these subcontractors are often informal players who are not legally registered. This informal element creates a tax burden on the companies, Youssef and El Morshedy said. The VAT Act does not exempt subcontractors from paying schedule taxes, but if the main contractor on a project remits the tax, the law considers that the subcontractor has also remitted the necessary tax. However, because subcontractors are not always registered (and therefore are not in the tax system), this can sometimes lead to double taxation.

So, what’s the ask? Contractors want the government to raise the percentage of expenses that can’t be proven above the currently allowed 7% to give them breathing room on some of these informal payments, Saad told us. Industry players are also asking for a grace period for small companies and subcontractors to get their ducks in a row with the e-invoicing platform, with requests to offer a window of at least six months to recover from the “consecutive shocks” to the industry, he said. There are also proposals to create a special, tailored system for contractors using the e-invoicing system to make it fit the nature of their work and financial cycles.

What the tax man has already done: The Tax Authority has worked on streamlining procedures for contractors by simplifying the invoice form they need to submit to the authority and eliminating the need for several supporting documents, the authority’s director of taxpayer services Mohsen El Gayar told Enterprise. The authority is also waiving taxes on inputs and allowing contractors to bypass the process of documenting or proving these expenses, and instead focusing primarily on sales invoices, El Gayar said.

Your top infrastructure stories for the week:

  • Another Egypt-Greece interconnector: McDermott inked an MoU with Eunice Energy Group to work on a 2-GW interconnector that will link Greece and Egypt’s electricity grids.
  • ADP not in talks for Suez Port management, says gov’t: The government denied that it’s in talks to sell development and management rights at Suez Port to Abu Dhabi Ports.
  • AfDB could provide funds to study plans for Nile river transport route: The government is in the final stages of securing a USD 2 mn funding from the African Development Bank (AfDB) for the second phase of feasibility studies on the proposed Lake victoria-Mediterranean Sea river transport route.

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