Tax on profits of legal persons

Lecture 2
Tax Accounting- only record sales when cash is
received. Also, purchase expenses are only
recorded when they are paid.

A country’s tax system has a significant impact

on business activities conducted in the
country and may play a role in encouraging or
discouraging such business activities.
Government gets the money it spends from taxpayers.
This money is spent on:
• Health Care Programs
• Social security
• Military
• Pay off national debt
• Food and agricultural benefits
• Education programs
• Transportation
• Law and Order
• Housing and Development
• Trade and Industry
• Food and Environment issues
 The Egyptian Tax System consists of 2 groups
Second Group: Indirect Taxes First Group: Direct Income Taxes
on Expenditure and Trading Include taxes imposed on
Include taxes imposed on
1- profits of legal persons
1- general sales tax (juridical persons)
2- stamp tax 2- income of natural persons
- Income from professional and
non commercial activities
- Revenues from real estate
- Salaries and the like
Tax Accounting Course Addresses:
1.Tax on profits of legal persons
2.Tax on revenues from real estate wealth
3.The general sales tax
1. Tax on Profits of Legal Persons:
Article no. 48 of Law no. 91 of 2005 stated that
the following are treated as legal (juridical)
persons:
a) Corporations and partnerships.
b) Cooperatives and Unions.
c) Public authorities.
d) Banks and firms that have head offices
based abroad and branches in Egypt.
e) Units established by the local Authority.
 Article no. 47 of Law no. 91 of 2005 stated that the tax applies to:
1. Legal persons residing in Egypt, with all profits realized in Egypt
or abroad with exception of the Ministry of Defense.
2. Non-resident legal persons, with the profits realized inside Egypt
will be subjected to Egyptian tax.

Remark:
The legal person is a resident in Egypt, in any of the following
circumstances:
a. If it is established according to the Egyptian law.
b. If its head office is located in Egypt.
c. If it holds more than 50% of its capital.
 Characteristics of Tax on Profits of Legal Persons

1. This is a direct tax that is paid by the legal persons

themselves.

2. This is an annual tax where the tax period starts on the

1st of January and ends on December 31st or any other
period of 12 months which is used as a base for tax
calculation.

Every taxpayer is obliged to prepare an annual tax return

before the 1st of May every year or within 4 months
following the end of the financial year.
Remarks:
•Tax is due on the day following the end of the
fiscal period.
•Tax is due in case of the taxpayer’s death, end
of residence, or closure of exercising a
business activity.
3. Flat fixed tax rate on profits of legal persons at rate 22.5% of taxable net
profit.

An exception of this rate is stated for the profits of each of the following:
• Suez Canal Authority 40%
• The Egyptian General Petroleum Corporation 40%

• The Central Bank 40%

• Oil and gas exploration and production companies 40.55%

Remark:

Accounting Net Profit (ANP) is determined by accountants using the

Generally Accepted Accounting Principles (GAAP). However, ANP differs
from Taxable Net Profit (TNP). As TNP is determined according to the
provisions of tax law. Therefore, ANP should be modified (adjusted)
according to certain criteria in order to determine TNP.
Differences between Accounting Net Profit
(ANP) and Taxable Net Profit (TNP)

Taxable Net Profit TNP Accounting Net Profit ANP

Tax Return Income Statement
Determined by applying Determined by applying GAAP
provisions of tax law
adjustments
 Income Statement
xxx Net Sales Revenue
(xxx) (-) cost of goods sold
xxx = Gross Profit (gross margin)
(xxx)
(-) Operating Expense (selling and administrative expenses)
xxx
xxx
= operating income
xxx +/- any other expenses and revenues

xxx
= Accounting Net Profit (ANP)
The income statement is determined by accountants by applying GAAP.
However, it should be adjusted by applying the provisions of tax law to
determine the Taxable Net Profit (TNP)
 Annual Tax Return
Deduction Addition Items
xxx 1- Accounting Net Profit (as stated in the income
statement)
2- Adjustments:
Add:
xxx -Any increase in revenues according to tax law
xxx - Any decrease in expenses according to tax law
Deduct:
xxx -Any decrease in revenues according to tax law
Xxx xxx - Any increase in expenses according to tax law
xxx xxx Total
xxx Adjusted Net Profit
(xxx) (-) Donations
(xxx) (-) Exemptions (if any)

xxx 3- Taxable Net Profit (TNP)

xxx 4- annual due tax on profits of legal persons
TNP x 22.5%
Or
TNP x 40%, 40.55% according to the type of the
institution
Steps for calculating Tax on Profits of legal persons

1- An annual tax return should be submitted before the 1st of May every year

or within four months following the end of the financial year for legal

persons.

2- Accounting Net Profit (ANP) will be subjected to some adjustments

(modifications) either amounts to be added or deducted according to

provisions of tax law to determine the Adjusted Net Profit.

There is a positive relationship between revenues and Accounting Net Profit:

When Revenues increase, then, ANP increases (addition)

When Revenues decrease,then, ANP decreases (deduction)

There is a negative relationship between Expenses and Accounting
Net Profit:

When Expenses increase, then, ANP decreases (deduction)

When Expenses decrease, then, ANP increases (addition)

3. Donations and exemptions (if any) will be deducted from the

adjusted net profit to determine Taxable Net Profit (TNP).
4. Taxable Net Profit will be subjected to tax at a 22.5% fixed rate to
calculate the annual due tax on legal persons Or 40%, 40.55%
according to the type of the institution
The Accrual Basis is being followed for every year expenses and revenues;
which means that :

- The recorded revenues should concern the financial year whether they
were received or not yet.

- The recorded expenses should concern the financial year whether they
were paid or not yet.
 Types of taxable income

There are 3 types of taxable income as follows:

1.The ordinary income.
2.The secondary income.
3.The capital income.
1. The ordinary income
Ordinary income can be defined as total
revenues realized from the daily operations
as:
• Production and selling of products in a
manufacturing industry.
• Purchasing and selling of goods in a
merchandising industry.
• Providing services to customers in a service
industry.
Remark: ordinary income is determined by the
amount of gross profit (gross loss), that is
derived as follows:

Net Sales Revenues

Xxx (sales- sales returns & allowances- sales
commissions)
(-) cost of goods sold:
Xxx Beginning Inventory
Xxx + Net Purchases
(Purchases- Purchases returns & allowances-
Purchases discount)
Xxx + transportation in & out
xxx (xxx) - Ending inventory
xxx = gross profit (gross margin)
a. Net sales revenues
1.Sales (revenues):

When reviewing sales item, the following provisions of tax law should be
applied:
• Recorded sales should concern the financial (fiscal) year of the tax return
not any other year .
• Sales should be recorded according to its selling price as:
Selling price = cost + profit margin (% of cost)
• Sales of fixed assets shouldn’t be recorded, as they are recorded in the
balance sheet.
• Sales must be recorded by its total (gross) value without excluding the
value of sales discount (permitted or allowed discount) only if this
discount is recorded as an expense in the income statement.
2. Sales returns and allowances (expenses):

When reviewing sales returns and allowances item, the following provisions
of tax law should be applied:
• Sales returns and allowances should concern the financial (fiscal) year of
the tax return not any other year.
• Sales returns and allowances should be recorded according to its selling
price.
• Sales returns and allowances should be recorded according to its actual
amounts.
Problem (1)
ABC is a merchandising firm reported Net Income (profit) of L.E 250,000 for
the year ended December 31, 2015. On the tax inspection of the
company, the following has been noted:
1.Recorded sales of L.E 26,000 concerning year 2014.
2.The actual amount of sales returns and allowances is L.E 4900, but it has
been recorded by L.E 4200 only.
3.Recorded sold items by its cost amounting to L.E 50,000 noting that profit
margin is 10% of cost.
4.Recorded sales of L.E 23,000 concerning year 2015.

Required: Determine the taxable net profit of ABC firm for year 2015 in
accordance to provisions of law 91/2005.
Problem (1)
ABC is a merchandising firm that reported Net Income (profit) of L.E
300,000 for the year ended December 31, 2022. On the tax inspection of
the company, the following has been noted:
1.Recorded sales of L.E 30,000 concerning year 2021.
2.The actual amount of sales returns and allowances is L.E 4900, but it has
been recorded by L.E 4500 only.
3.Recorded sold items by its cost amounting to L.E 50,000 noting that profit
margin is 10% of cost.
4.Recorded sales of L.E 25,000 concerning year 2022.

Required: Determine the taxable net profit of ABC firm for year 2022 in
accordance to provisions of law 91/2005.
 Tax return for year 2022

Deduction Addition Items

300,000 Accounting net profit ANP (as stated in the income statement)

Adjustments:

30,000 1. Sales concerning year 2021 shouldn’t be recorded

400
2.Sales returns and allowances should be recorded according to its actual amounts
Difference = (4900– 4500) = 400
3.Sales should be recorded according to selling price as:
5,000 Selling price = cost + profit margin (% of cost)
= 50000 + (50000 X 10%) =55000
Difference = (55000 – 50000) = 5000

------ ------ 4.Sales concerning year 2022 should be recorded (no adjustment)

30,400 305,000 Total

(30,400(

274,600 Taxable Net Profit (TNP)

TNP x 22.5% = 274,500 x 22.5% = 61,762.5

Secondary Income
2- The secondary income
If revenues came from a secondary activity, they
are considered to be non – operating
revenues. Secondary revenues include
revenues as:
:Received Commissions (revenue)
Fees charged for the service in facilitating a
transaction as buying or selling real state
commission.
Tax provision: recorded as taxable revenues of
.the legal person
 Received Donations and Grants (revenue):
obtained from government, local authority
… ,units
Tax provision: recorded as taxable revenues of
.the legal person
Received rent (revenue): Accrual Basis is
applied. Amounts received from leasing the
company’s owned assets as buildings, land
.and machinery to others
Tax provision: recorded as taxable revenues of
.the legal person
 :Received compensations (revenue)
Amounts that the firm received from others as a
compensation for the occurrence of any
damage as: compensations due to damage of
goods and inventory (not fixed assets), or for
not executing contracts or performing them
late.
Tax provision: recorded as taxable revenues of
the legal person by the total amount of
.compensation
Participation revenues:
Sometimes a firm could participate in conducting a
contract with another firm. Thus, each of them will
participate in the resulting revenues.
Tax provision: recorded as taxable revenues of the legal
.person
Revenues of securities issued by listed (registered)
:companies in the Egyptian stock market (revenue)
Gains from investment in securities issued by companies
listed (registered) in the Egyptian stock market as:
dividends, profits and returns obtained from
investment in stocks. Interest and returns received
.from investment in bonds
Tax provision: non-taxable revenues not recorded as
.taxable revenues of the legal person
Non-taxable revenues that are not Taxable revenues that are recorded
recorded

Revenues of securities issued by listed Commissions

companies in the Egyptian securities
(stock) market

Donations and grants

Received Compensations

Recovered (collected) bad debts

Received (Credit) interest

Participation revenues
Stop here