Chapter 4

Tax on Profits from Commercial &

Industrial Activities – Part 2
 Deductible Expenses by Law
3 – Bad debts:
Bad debts are those debts which the firm ascertains the
impossibility of collecting them.
Amongst factors which ascertain the impossibility of
collection are the declaration of bankruptcy of the debtor
and insufficiency of liquidation funds to repay his debts,
death of debtor without having left a legacy sufficient to
cover his debts, confiscation of his wealth, or his
disappearance without leaving adequate funds repayment.
 Bad Debts
• Bad debts are considered as a loss for the firm. Accordingly,
there must be no objection as to that, on part of the tax
administration, as long as the evidence confirm the
impossibility of collection of these debts, through a report
from one of the accountants registered evidence satisfaction of
the following conditions:
1. The firm maintains regular book.
2. The debt is related to the firm's activity.
3. The debt has been recorded in the accounts of the firm.
4. The firm took all serious procedures to recover such debt,
but it has failed to collect it within 18 months after the due
date.
 Bad Debts
• Serious actions to recover the debt include the following:
 Obtaining a writ for payment in cases where this is possible.
 Issue of a judgment by a court of first instance obliging the
debtor to pay the amount of the debt.
 Claiming the amount of the debt during procedures of
implementing a court judgment for the debtor's bankruptcy or
concluding a conciliatory agreement preventive of
bankruptcy.
• If the debt or part, is collected, the amount collected must be
included in the firm's revenues in the year in which the collection
took place.
 Bad Debts - Example
Sadat Company had net income EGP 300,000 but it has
calculated the following:
• Bad debt expenses EGP 20,000 but it did not take legal
action to collect it.
• Recovered bad debt 5,000 as revenue but the government
did not approve.
• Required:
Prepare the necessary adjustment
 Bad Debts - Example

Solution
Net Income 300,000
Add: Overstated bad debt expense 20,000
Less: Overstated Revenue (5000)
Adjusted Net Income 315,000
 Deductible Expenses by Law
4 – Taxes and Duties:

"Direct taxes paid by the tax-payer with the exception

of the tax which he disburses according to this law".

• The concept, at present, is that all taxes which are paid by

the firm, a part from the tax on commercial and industrial
activity profits, are amongst costs.
 Deductible Expenses by Law
5– Donations and Subventions
▫ Donations paid to the Government, local administration
units, and public authorities whatever may be their
amounts.
▫ Donations and contributions paid to charitable institutions,
and to Egyptian social organizations notarized and
publicized as per the provisions of their regulating laws, as
well as to the scientific institutes and hospitals under
governmental supervision and control, not exceeding 10%
of the net taxable annual profit of the firm.
 Deductible Expenses by Law

6– Social Security Installment

The social security installments imposed on the owner of
the firm in favor of his employees and in his own favor
and which are paid to the general social security
authority or to insurance and pensions general authority
can be deducted as expense.
 Deductible Expenses by Law

7– Insurance Premiums Related to Tax payer

Article (23) in its item (6) stipulated that insurance
premiums concluded by taxpayer against his
disability or decease, or for obtaining an amount or
revenue providing the value of premiums shall not
exceed L.E. 3,000 a year.
 Deductible Expenses by Law
8– Penalties and Indemnifications:
Financial penalties and indemnifications payable by the taxpayer as a
result of his contractual liability are considered deductible costs with
some conditions, they are as follows:
 They originate from professional work. As for legal expenses incurred
such as law suits fees, lawyers fees and others, which are connected
with the taxpayer's personal expenses, they may not be considered as
costs, because they are not considered related to practice of the
profession, and have no relationship with profit realized or its upkeeps.
 They are not applied to criminal violation and the personal fines or
contraventions sentenced on the taxpayer such as the contraventions or
violation the provisions of tax law, mandatory pricing or fraud.
 Deductible Expenses by Law

9- Wages and Salaries:

• Wages and salaries are amongst the cost elements which
there are no disputes as in considering them as cost, and
it is allowed to deduct all the remuneration, wages and
salaries which are paid by the firm to its employees.
 Deductible Expenses by Law
10- Expenses are not Supported by Documents
• By the term above it is meant all amounts paid by the firm to
facilitate performance of its operations, whether that has taken
place through offering amounts of cash as a grant, or tip or in
the from in- kind benefits, or free samples of their products for
the same purpose.
• on condition that they have been actually paid, and do not
exceed 7% of the total general and administrative document
expenses. Accordingly, as long as these gratuities are within this
limit, they are authorized and approved.
 Deductible Expenses by Law
11- Rent Value of Building and Real Estates
• The Value of rent of premises occupied by a firm is
considered a part of its cost elements.
• In the case of the premises or building rented from
others, there is no problem, for the rent is an expense
incurred in the process of generating of revenues and
accordingly have to be charged to the result accounts.
 Deductible Expenses by Law
12- Maintenance Expenses
• Maintenance, repair and renovation expenses include
different kinds of expenses, whether due to their nature,
timing or the purpose of spending.

13- Publicity and Advertisement Expenses

• The firm incurs several expenses on publicity and
advertisement, whose nature differs in quality, objective,
effective period, and the length of their expending
periods.
 Deductible Expenses by Law
14- Commissions Paid
• Commissions paid by a firm to external parties for
services obtained are considered one of the revenue
costs.
• As for commissions the firm may pay to its employees,
such as commission on sales, these are considered as
salaries and wages, and therefore added to them, and
take their nature and status as regards tax.
 Deductible Expenses by Law
15- Reserves
• Article 24 the law stipulated that, the following shall
not be considered among the deductible costs and
expenses:
1. Reserves and appropriations of all different kinds.
2. Financial fines and penalties, as well as,
indemnification’s ruled against the tax payer
because he or only his subordinates has committed a
crime or violation.
3. Income tax payable according to the present law.
 Deductible Expenses by Law
16- Losses:
• The firm may suffer some losses as a result of practicing
its activity such as the loss resulting from the deterioration
of goods, or the loss resulting from theft or robbery or
embezzlement of some of its assets and properties without
being in a position to retrieve the value of this loss either
in full or in part.
• If the final account of a year is closed in a loss, the loss
shall be deducted from the succeeding year's profits. If,
however, part of the loss remains, it shall be carried
forward to the succeeding years up to the fifth, after which
no loss can be carried forward.
 Exemptions under Commercial And
Industrial Activities.
Article (31) of law 91/2005 stipulated several exemptions which are
considered as a reflection of the legislator’s use of tax exemptions as
investment incentives. These exemptions are confined to the
following:
1- Profits of the land reclamation or cultivation establishments for a
period of ten years effective from the date of beginning the exercise of
activity;
2- Profits of establishments of poultry production, bees breeding,
cattle breeding and fattening pens, and fisheries projects, as well as
profits of trawlers projects, for a period of ten years from the date of
beginning the exercise of activity;
 Exemptions under Commercial
And Industrial Activities.
3- Interest obtained by the natural persons from deposits, saving
accounts in the banks registered in the Arab Republic of Egypt, the
investment, saving and deposits certificates issued by these banks,
as well as the deposits and saving accounts in postal saving banks,
and the securities and deposits certificates issued by the Central
Banks
 Exemptions under Commercial &
Industrial Activities.
4- Profits realized from the new projects established by
finance from the Social Fund for Development within the
limits of the ratio of this finance for a period of five years
from the date of beginning the exercise of activity or
beginning the production, according to each case. This
exemption shall not apply except to the profits of that who
concluded the fund loan in his name.
 Tax Bracket Determination

• According to Article No. (17) of the Tax Law, it is

stipulated that taxation is imposed on the “net profits
….”. article No. (22) has also stipulated that tax is to be
determined annually on the basis of net profit during the
preceding year.
• The accounting profit figure may not always be the same
as the tax bracket for several reasons therefore, it is
necessary to perform an adjustment of the accounting
profit figure which is effected in the tax declaration of the
taxpayer.
 Tax Bracket Determination
Dissimilarity of the accounting net profit (ANP) and the
taxable net profit (TNP) may exist for one the following
reasons:
• Some Accounting revenues may be exempted from
taxation, such as returns on securities unrelated to
performing the firm’s activity.
• Some taxable revenues are not considered on
determining the accounting profits, such as the
revaluation gains resulting from assets or liabilities.
 Tax Bracket Determination
• Some accounting expenses, considered on determining
the accounting profits, are not approved by the tax law,
such as reserves made for probable losses and life
insurance premiums on employees.
• Some expenses are not considered on determining the
accounting profits but approved by the tax, such as the
rental value of building owned by the firm in which it
operates.
 Tax Bracket Determination
• To determining the taxable net profit (TNP), the accounting
net profit (ANP) is adjusted as follows:
Accounting net profit (ANP), as it appears in the income
**
statement
Add:
Accounting expenses not approved by the tax department + **
Taxable revenues not considered on determining ANP + **
Deduct:
Tax approved expenses not considered on determining ANP - **
Accounting revenues exempted by the tax law - **
Taxable Net Profit (TNP) **
 Examples
Example (1):
A taxpayer purchased one million square meters of land at a total price
of LE. 3 millions. The respective commission and brokerage amounted
to L.E. 100,000, with the registration expenditures amounting to L.E.
150,000. The expenses of leveling, paving, and division, and the paving
of the internal roads amounted to L.E. one million. The expenses
related to utilities extension leading to his land amounted to L.E.
700,000. He also paid the amount of L.E. 300,000 to some of the
lessees of this land against termination of the lease contracts.
If we know that the net surface offered for sale after exclusion of
internal roads is 750,000 square meters.
Required:
• Determine the cost per meter of the surface offered for sale.
 Examples – Solution 1

Purchase price L.E. 3,000,000

Commission and brokerage 100,000
Registration fees 150,000
Leveling and paving and preparation of the internal roads 1,000,000
Expenses of connecting utilities 700,000
Key money paid to the tenants, or lessees 300,000
The capital cost of the land 5,250,000

Cost per square meter = 5,250,000/750,000 = 7

 Example 2
• The following is the income summary of ABC industrial
firm presented to the tax department with their tax
declaration for 2022(Amounts in L.E)
Wages & salaries 5,800 Gross Profits 13,650
Depreciation of fixed assets 300 Recovered bad debts 100
Advertising expenses 1,600 Discount earned 300
Differences in taxation 200 Gains of machine sale 4,150
Donations 1,000
Bad debts 300
General expenses 4,000
Revaluation losses 2,000
Net Profit 3,000
18,200 18,200
 Example 2
On tax examination, the following facts were revealed:
1- Salaries included the following:
• A monthly salary to the owner of L.E. 150,
• L.E. 1,000 annual bonus to staff members, and,
• The remaining is the total annual salaries of staff
members.
2- A new machine was purchased and used in production
starting from Jan.1, 2022. Its cost was L.E. 4,000. The
firm did not record any depreciation for that machine.
 Example 2
3- Advertising expenses included L.E. 1,500, the cost of a
campaign that will last for 3 years starting from July 1 st,
2019, the balance represented the cost of greetings published
in newspapers when the owner came back from Pilgrimage.
4- Donations consisted of L.E. 500 to a poor family, and the
balance to an Egyptian charity association.
5- The firm did not take legal actions to collect the bad debts,
and recovered bad debts were not approved by the tax
department when they were wrote off.
 Example 2
6- General expenses included L.E. 1,200 as the firm`s car that
was also used by the owner for his private affairs, and L.E. 400
the cost of a present for his daughter on her marriage.
7- The cost of ending inventory recorded was L.E. 4,000, its
actual cost was L.E. 9,000 and its selling price was L.E. 13,000,
(the firm used to determine inventory value based on the cost or
selling price which ever is lower).
Required:
• Given the firm`s books were approved by the tax department
calculate the tax on the revenue of industrial activity for this
firm.
Accounting Net Profit (ANP) 3,000
Add: Examples Dr.Mohamed Eldeeb

• Solution: Determination of Taxable Net

- The annual salary of owner it is not an expense but a profit distribution. 1,800
- The staff members bonus is not expense. 1,000
Profit:
- The excess over the year`s share of the advertising campaign`s cost.
The year`s share = 1,500  1/3  6/12 = L.E. 250
 The excess = 1,500 – 250 = L.E. 1,250 1,250
The remaining advertising expenses are approved in full because they are periodical
advertising expenses. -----
- Donations to the poor family are not approved as expenses. 500
- Donation to the Egyptian charity association are to be added temporarily in order to
determine the taxable net profit. 500
- Bad debts are not approved as expenses because the firm did not take legal actions to collect
them 300
20% of the car expenses used by owner in his private affairs. 240
- The cost of the present to his daughter for her marriage is not an expense, it is a profit
distribution. 400
- The difference in the value of ending inventory that had to be valued on cost or selling price
which is lower. The difference = 9,000 – 4,000 = L.E. 5,000 5,000
- Revaluation losses are not approved as expenses because they are artificial
Dr.Mohamed Eldeeb losses 2,000
- Differences in taxation 200
Total Add 13,190
Less:

- Accelerated depreciation of the new machine (according to item 2 of (Art.no23) = 4,000

(1,200)
• Solution: Determination of Taxable Net
 30% = 1,200

Profit:
- Normal depreciation of the machine =
(4,000 – 1,200) = L.E. 2800
(2800)

- Recovered bad debts hat were not approved by the department when written off (100)
Net Profit Before Deducting Donations 12,090
Less:
Donations to the Egyptian charity association which are approved is not more than 10%
of the annual net profit.
Paid donations = L.E. 500

10% of profit = 12,090  10% = L.E. 1209

 The amount to be deducted is 500 (500)
Taxable Net Profit 11,590
 Example 3
• A Sole proprietorship presented the following profit and
loss account to the tax department enclosed for the tax
declaration of the year ended December 31, 2022
Wages & salaries 30,000 Gross Profits 162,300
Provisions 20,000 Recovered bad debts 20,000
Life Insurance Premiums 10,000 Discount earned 20,000
Deposit Interest 15,000 Dividend Revenue 30,000
Advertising Expenses 13,000
Taxes 17,000
General & Admin Expenses 22,300

Net Profit 105,000

232,300 232,300
 Example 3
Tax examination of the firm’s books revealed the following:
1. Wages, salaries and bonuses included L.E 10,000 an annual salary for the son
the firm’s owner. He actually manages the firm (equivalent manager’s salary
is L.E 7,000), L.E 3,000 to firm’s owner. And 5,000 bonus to the firm’s staff
members as a distribution of the firm’s profits, and the remaining is the staff
members’ salaries.
2. Provisions included LE 6,000 provision for fixed assets, L.E 6,000 provision
for doubtful debts, and the remaining is an emergency provision.
3. Life insurance premiums and deposits included: L.E 6,000 a deposit for a
governmental bid, and the remaining are fire and theft insurance on the firm’s
assets.
4. Advertising expenses included L.E 9,000 the cost of an advertising campaign
for a new product for 5 years, and the remaining are periodical advertising
costs.
5. From the recovered bad debts, the tax departments approved only L.E 15,000
in 2019 when these debts were considered uncollectible.
 Example 3
6. Taxes included L.E 3,200 tax on stock dividend revenue, L.E
5,800 tax on commercial and industrial activities revenues
deducted from the sales revenue that the firm earned from sales
to a governmental entity, and the remaining are custom duties for
imported goods.
7. Miscellaneous expenses included: L.E 7,000 gratuities paid by
the firm
8. Losses forwarded from previous years 2019 are not covered in
2020 and 2021 equals L.E 10,000.
Accounting Net Profit (ANP) 105,000
Add: Examples
• The excess in salary of the firm owner’s son over the salary of theDr.Mohamed
equivalent
Eldeeb
manager 3,000
•
• Solution: Determination of Taxable Net Profit:
Bonus to the firm’s owner is not considered as expense 3,000
• Bonus of the firm staff 5,000
• Provisions for doubtful debts 6,000
• Provisions for emergency 20,000 – (6,000 + 6,000) 8,000
• Bid deposit 6,000
• Overstated Advertising expenses
9000/5 = 1800 per year 7,200
Excess in the advertising expense = 1800*4 = 7,200
• Overstated Tax on stock dividend 3,200
• Overstated Tax on commercial and industrial activities (deducted from sale is not approved as
5,800
an expense)
• Overstated gratuities
7000
(22,300-7000 = 15,300) Non documented limit = 7%*15300= 1071
Less
• Overstated revenues (5,000)
• Non documented expenses (1071)
Net profit 150,129

- Losses forwarded from previous year (10,000)

Taxable net profit 140,129