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Wednesday, 1 August 2018

FinMin to impose a real estate tax on oil and gas developments

EXCLUSIVE- FinMin to impose a real estate tax on oil and gas developments: The Finance Ministry is planning to impose a real estate tax on oil and gas assets, according to documents seen by Enterprise. The move appears to have been in the works for some time and according to the documents, the Finance Ministry, the EGPC and oil and gas companies have been holding meetings on how this real estate tax would be imposed. It is not yet clear whether an agreement had been reached with foreign and local energy companies with regards to the tax. Nonetheless, the ministry had drafted a framework and formula for how the new tax would work and sent it to the Oil Ministry for approval and sign off.

How will the new tax work? The real estate tax rate for the oil and gas sector has been set at 10% of the tax base (the value which will be taxed). The Finance Ministry has developed a formula to calculate the tax base, which will include assigning a value for the oil and gas fields based on the book value of the field’s land and facilities, the period of time since the development of the field, and the average inflation rate over the past 10 years. A value for the rate of depreciation of the asset will be set and deducted from the value of the assets. The lifespan of the development, will also be factored into the tax base. Companies leasing a field can claim a tax deduction of 32% of the value of the field. (We’re still unpacking the nuances of this very complicated tax formula and we’ll have more for you on this once we do)

How big of a burden will this be for oil and gas companies? Oil and gas companies already have the largest corporate tax rate of any sector in the country, with a rate of 40.55% of their profits, compared 22.5% for all other sectors. Provisions in every concession agreement determine the rate at which companies pay a capital gains tax. Companies are exempt from paying taxes on dividends and VAT. EY has an excellent primer and explainer on the tax framework for the sector, which you can check out here.

Part of a wider plan to expand real estate taxation: The move to part of a set of sweeping new tax reforms the Finance Ministry is planning, which include expanding real estate tax revenues. The ministry is planning to undertake this year a massive survey and appraisal of the country’s real estate assets, which by law is conducted once every five years, according to Al Mal. the appraisal will determine the value of residential, commercial, and industrial properties to better calculate the the tax base. Sources tell the newspaper that the ministry is considering delaying the application of the resulting new taxes for another year.

Furthermore, sources had told us in June that Madbouly government is gearing up for a major overhaul of how real estate taxes are calculated, is working on a new formula that would set “clear and simplified” guidelines for the tax assessment of industrial properties, hotels, ports and airports. The government is on track to collect as much as EGP 5.3 bn from real estate taxes in the next fiscal year, up from EGP 3.5 bn this year.

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