The simplified tax regime for micro and small enterprises in Egypt: An analysis of the theoretical and implementation issues

Abstract

Unlike previous studies focusing on the tax regimes of small and medium enterprises ('SMEs'), this article examines and analyses simplified tax regimes for micro, small and medium enterprises ('MSMEs'). Very recently, a simplified MSME tax regime was introduced in Egypt under the Micro, Small and Medium Enterprises (MSMEs) Law No 152 of 2020. This article employs an analytical and positive approach to assess these tax measures against the criteria of a good tax system and also evaluates the related implementation issues. The new tax measures include granting conditional tax exemption for capital gains and a dividend tax. Further, a separate MSME tax regime was introduced replacing the income tax provisions under the Income Tax Law No 91 of 2005. The MSME tax regime imposes a lump sum tax on micro businesses and an annual turnover tax at progressive rates on small businesses. The theoretical analysis and assessment of the MSME tax regime reveals the following: (i) the regime satisfies the economic efficiency criterion as it reduces the tax burden on SMEs, thus allowing to them to compete with larger businesses; (ii) it simplifies tax compliance procedures but is limited only to MSMEs registered with the MSME authority; (iii) the regime is inequitable as it discriminates between registered and non-registered MSMEs, and it does not consider their heterogeneity; (iv) there will be a decline in tax revenue collected from MSMEs, which represents a tax expenditure arising from the MSME regime; (v) there is a need for coordination of the regime with the Value-Added Tax Law; and, (vi) it is critical to establish measures that minimise resistance to the new system.