The Tax Treatment of Small and Medium Enterprises in Developed and Developing Countries: A comparative Analysis of Australia and Egypt

Abstract

Many countries design specific tax measures for taxing small and medium enterprises (SMEs) as SMEs play an important role in creating jobs and promoting economic growth. These specific tax rules for SMEs broadly aim to mitigate the overall tax burden including tax liability and tax compliance costs. This article seeks to contribute to the important issue of how such rules for SMEs should be designed in both developed and developing countries through a comparative analysis of the Australian and Egyptian approaches to the issue. In this context, the article first reviews the theoretical literature in relation to taxation of SMEs and international experiences in that field in general. The article then conducts a comparative analysis of the Australian and Egyptian experiences in taxing SMEs and assesses the tax treatment of SMEs in both countries in terms of the tax policy principles of economic efficiency and simplicity, highlighting in particular two significant new initiatives in Egypt in laws of 2017 and 2020. The findings reveal that Australia and Egypt have adopted different approaches in providing specific tax treatment to SMEs either within the income tax system or through measures in relation to other taxes. Australia provides specific tax measures for SMEs such as a reduced income tax rate and exemption from capital gains tax and fringe benefits tax. In contrast, Egypt focuses on granting conditional tax exemptions to specific types of SMEs and designing specific measures to simplify tax compliance for SMEs. Both approaches aim to create efficient and simple taxation of SMEs. Nevertheless, simplicity seems to have gained particular attention from policy-makers in both countries. Furthermore, however, Egypt has introduced various measures which deviate from accepted appropriate income tax norms. This may create a significant challenge for any future reform of income taxes in the country, and will affect the stability of the overall income tax system. In order to avoid such potential issues, Egypt may learn some lessons from Australia in designing the tax measures that apply to SMEs through balancing the different objectives that a tax system aims to achieve.