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Tuesday, 17 November 2020

A shorter window in which to remit VAT will see tighter credit terms and squeezed cashflows at some businesses

SPOTLIGHT- A shorter window in which to remit VAT will see tighter credit terms and squeezed cashflows at some businesses: Last month, amendments to the Unified Tax Act came into effect after being published in the Official Gazette. Under the changes, businesses now need to file their VAT returns and remit payment within one month — instead of two — of an invoice being issued, payment being received, or a good / service being delivered. We surveyed businesses and industry lobby groups to get a feel for how these changes are affecting the business community and how companies are adjusting to meet the new requirements.

The bottom line: The challenge is greater for businesses that offer services or for those selling goods who extend supplier credit of more than one month without enjoying the same credit on the other side. Of the two, the challenge is probably greater at service businesses — think: lawyers, advertising agencies, accountancies — at which it’s not unusual to have clients paying after 60-90 days.

The taxman says there have been few hiccups so far: While it’s early days, the Tax Authority is seeing a “high level” of compliance from businesses so far, the Tax Authority’s director of taxpayer services Mohsen El Gayar and head of the research department Ragab Mahrous told us.

And don’t expect business to rise up in rebellion over this the way some are about, say, export subsidies: Company officials were uniformly making arrangements to ensure they comply with the requirements.

But businesses are feeling the pressure: The most common grievance we’re hearing is that the window to file VAT returns is now narrower than the typical business cycle of buying and selling goods and services. A senior representative from Arafa Group told us that, while not impossible to comply with, the new deadline does increase pressure on businesses. “It takes time to deliver our goods from point A to point B, and then more time for these deliveries to be sorted and stored in warehouses. There are issues that inevitably arise and slow down in the process, but we were typically able to smooth them out over the two-month filing period,” they said.

The biggest issue is the hit to cashflow for businesses that buy and sell on credit over at least two or three months. Anyone not collecting an invoice in under a month will still need to remit VAT to the tax authority and will have to dip into their own pockets to pay on time, home appliances manufacturer Universal Group Chairman Mohamed Geneidy told us. The risk is that this translates into tighter credit terms from sellers to buyers, squeezing some buyers out.

Businesses that work with the government face the same issues: Cargo shipping companies that transport basic commodities such as wheat for the General Authority for Supply Commodities (GASC) need more than one month to load and ship cargo and finalize all the necessary paperwork, says head of hauling company El Zeny Group Ahmed El Zeny. The cashflow challenge is necessarily linked to that of navigating a bureaucracy — the companies collect their payments from GASC, which gets its funding through the Supply Ministry, which in turn needs to get approval from the Finance Ministry, El Zeiny explains. The process of getting the money through the pipeline for businesses to be able to meet their tax payments can sometimes take several months, he said.

Arafa and Universal agree that it’s not an outright problem for businesses — provided the economy is operating smoothly and individual businesses aren’t facing liquidity crunches.

What about businesses that rely on installment-based payments from consumers? Automotive distributors who sell vehicles through installment plans, remit VAT on their sales after the final payment is received from the customers, head of the Egyptian Automobile Manufacturers Association Khaled Saad told Enterprise. That’s why the sellers issue their invoices dated for the day they receive the last installment, ensuring they have no mismatch between incoming and outgoing cash and have the benefit of having the full payment amount on hand, Saad explained.

On the real estate front, it depends on whether you’re renting out fully furnished or unfurnished units: Sales of residential units are not subject to the VAT, but commercial space is, the head of a real estate developer who requested anonymity told Enterprise. Meanwhile, companies that rent out units are currently only required to pay a withholding tax on unfurnished units but have to collect VAT on furnished rentals. Al Ismaelia for Real Estate Investment, for example, has so far only rented out unfurnished units but will begin renting furnished units with equipment that will require the company to remit VAT on the monthly rent payments. A company source told Enterprise that, much like other businesses, the small window for VAT filing is “a bit of a hassle” but far from impossible to comply with — provided renters are paying on time.

So, how are businesses coping? Some companies are having to hire more staff to push through the process of selling their goods and collecting payments in half the amount of time. This is the case for Arafa Group, and while the move has helped the company keep up with the shorter time frame for its VAT filings and avoid having to dip into its pockets to pay the state treasury its due, it has also translated into more fixed costs, namely more salaries to pay, the company told Enterprise.

Other companies make sure their tax dues are accounted for in their payment cycles: For Al Ismaelia, the company relies largely on post-dated cheques from its renters to ensure that, when it comes time to remit taxes to the Tax Authority, the company doesn’t find itself chasing after payments to meet its deadlines. If a unit is rented out under a five-year contract, for example, the company collects post-dated cheques at the beginning of each year for the 12 months ahead.

The Tax Authority’s Mahrous does, however, expect businesses to more tightly manage inventory costs as a result of the change, saying companies will want to make sure that they don’t incur extra costs on unused goods, he told Enterprise.

In a world where everyone buys and sells on credit, liquidity for costs of goods shouldn’t be a problem, says the Finance Ministry. A manufacturer buys raw materials on credit and then sells its products to distributors on credit as well, which theoretically means they won’t be shouldering the burden of both costs simultaneously, El Gayar said. Unless, of course, the buyer on the other side doesn’t pay that invoice within 30 days…

Anyone who has looked at an aged receivables report knows the bottom line: When business is good, remitting within 30 days won’t be a challenge. But if your customers are under any type of economic stress, you can expect to be having uncomfortable conversations with some — and dipping into your own pockets to keep the tax man happy as you do.

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