Beruflich Dokumente
Kultur Dokumente
Part One
Income tax of Natural Persons
Edited by:
Pro.Said Abd El-Moniem
2014
1
Lecture Nine
Chapter Five
Revenues of Commercial and
Industrial Activity
This revenue results from the utilization of work and capital in the
pursuit of gain.
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3-Scope of Tax
1-Profits of Commercial or Industrial firms
The tax legislator did not define the commercial firms so we should refer to the
Egyptian code of commerce of 1999 that provided some examples of certain
commercial acts.
Industry is one of the commercial acts but the law distinguished between two
types of industry: A) Conversion industry (converts some materials to things in
another shape for another party in a regular manner or for selling them after
conversion for himself even once will be considered as commercial)
B)Extracting industries (extracting natural recourses as oil, gas for selling them
provided that this act is carried on regularly. 6
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Prescribed Tax Exemptions
Accounting profit (loss) is net profit (loss), for a period before deducting income tax expense.
This profit is determined according to accounting principles and standards generally accepted in
But, taxable profit (loss) is the profit (loss) for a period, determined in accordance with rules
established by the tax law and rulings issued by the tax authority in each country, upon which
Thus, Accounting profit is usually different from that determined for tax purposes.
Differences between accounting profit and taxable profit are either permanent differences or
temporary differences.
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Permanent Differences
These differences arise because the income tax regulations treatment for certain transactions
differs from their accounting treatment. Permanent differences will not reversed in subsequent
1- Revenue recognized for accounting purposes that is not taxable, such as returns of deposits
2 -Expenses recognized for accounting purposes that are never deductible for income tax
purposes.
3 -Income tax deductions that do not qualify as expense for accounting purposes.
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Temporary Differences
1- Timing differences:
These differences arise when taxable revenues or gains, or tax deductible expenses or losses, are
recognized in one accounting period for accounting purposes, and in different period for income tax
purposes. The resulting tax consequences affect current and future accounting periods.
These timing differences result in assets and liabilities having different bases for accounting
purposes than for income tax purposes at the end of a given accounting period.
specific provisions of the tax law create different bases for depreciation or for gain or loss recognition
for income tax purposes than are used for accounting purposes.
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The effect of such differences:
Accordingly, such differences cause current tax profit to be less than current accounting profit, which
in turn, cause future taxable profit to exceed future accounting profit. This difference is taxable in future
The opposite occurs for originating differences that cause current taxable profit to exceed current
The existence of future taxable or deductible amounts implies that temporary differences have future tax
consequences.
The future tax consequences argument rests on the inherent generally accepted accounting principles (GAAP)
assumption that reported amounts of assets and liabilities will be recovered or settled, respectively.
For example, GAAP requires lower- of- cost- or market for assets when full recovery of cost is not expected.
This assumption implies that reversals of temporary difference occur when reported amounts of assets are
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1 Revenues or gains are included in accounting profit prior to the time they are included in taxable profit,
such as, compensations received from insurance company as a result of damages suffered by the firm
from un-implementation of contracts, are included in accounting profit on accrual basis as it is earned as it
is earned, but is generally reported for tax purposes on cash basis. (compensation received taxable when
it is received)
2 Expenses or losses are deducted to compute taxable profit prior to the time they are deducted to
compute accounting profit, such as, a fixed asset may be depreciated by accelerated depreciation for
income tax purposes and by the Straight line method for accounting purposes.
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3- Expenses or losses are deducted to compute accounting profit prior to the time they are
deducted to determine taxable profit, such as, product warranty costs are estimated and
recorded as expenses at the time of sale of the product for accounting purposes, but
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Determination of tax base:
The accounting net profit (loss) should be adjusted to be adjusted taxable net profit(loss) as follows:
Net profit (loss) according to the income statement L.E XX
Add:
2- Revenue not credited in the income statement but taxable under tax law XX
Deduct:
1- Expenditure not charged in the income statement but allowable for tax purposes XX
2-Revenue included in the income statement but not taxable under tax law XX (XX)
3-Contributions and subsidies paid to the Egyptian societies and institutions registered, educational institutions XX
and hospitals, and the Egyptian scientific research institutions
4-Losses carried forward XX (XX)
Tax base XX
Revenues of Subsidiary
Capital gains
current activity revenues
of dealing in securities
Revenues of Commercial and Industrial firms:
The tax treatment of operating revenues.
Operating revenues are increases in O.E resulting from business main activities
(sale of merchandise or performance of service). In Commercial and Industrial firm
The tax treatments of the factors of the above equation are explained under the
following titles:
2- The withdrawals of goods by the owner for his personal use are recorded at the
cost of the goods which were withdrawn as this transaction does not derive real
profit.
3- The delivery of goods to local branches or selling agencies does not also derive
real profit because these profits are not realized until the goods sold. They should
be are recorded at the cost
4- When goods are exchanged for a fixed asset, it is deemed a sales transaction.
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The price of sales represents the fair value of the received fixed assets.
B- Tax treatment of cost of goods sold:
Cost of goods sold= beginning inventory + net purchases (or COGM) - ending
inventory
Where:
Net purchases= gross purchases purchases returns and allowance+ freight-in
expenses (any purchases costs).
COGM = Direct Material +Direct Labor+ Overhead +beginning WIP-ending WIP
Note: Purchases of goods for personal use is not included.
You must consider the following points related to costs items:
1- Ending inventory should include all goods owned by the taxpayer regardless of
the location. They include consigned goods (not sold by sales agents) and goods in
transit (held for sale by local branches and recorded as purchase).
2-Ending inventory should be recorded at cost.
Inventory valuation methods (FIFO, LIFO, WEIGHTED AVERAGE)are all accepted by
the Tax department but once one method is adopted it should be used in subsequent
Example 5-1
The net profit of sole-company for the year ended December 31, 2014 was L.E.
12,000. The tax examination revealed the following information:
1. There were sales invoices amount of L.E.1,500 which were not recorded at all in
sales account. The cost of these sales was L.E. 1,200.
2. Purchases include an amount of L.E 2,100 for a purchase invoice recorded twice
in the books
3. Goods in trust of agents were recorded, as sales, at 150% of their cost, though it
is proved at by year end that part of them costing L.E 1,500 still unsold by
agents.
4. The owner withdrew goods for his personal use. This transaction was not
recorded in the books. The cost of these goods is L.E.600 while its market value
is L.E. 750.
Required:
Make the necessary adjustments to measure the taxable net profit of the firm for
the taxable period 2014.
L.E. L.E.
Accounting net profit 12,000
Add: (any reductions made in taxable profit by recording any cost
decreases and revenue increases found)
1-Gross profit on goods sold, which are not recorded (1,500 -1,200) as 300
the unrecorded sales invoices reduces the taxable net profit by its gross
profit
2- Invoice recoded twice, because such double recording reduces the 2,100
taxable net profit by its value
14,250
Example 5-2
Net profit of industrial sole proprietorship from the income statement for the year 2014 was
L.E 50000. So, if you know that:
1- Transport expenses of purchases of raw materials include L.E 700 paid in advance.
2- Manufacturing salaries and wages not include L.E 2400 salaries for month of December.
3- The cost of raw materials inventory at the end of the year was L.E 5000 and its market value
was L.E 6200. The firm currently values inventory on the basis of cost, but the firm appraised
these raw materials at 10% below their cost.
4-The cost of raw materials in transit was L.E 9000. These raw materials were recorded as
purchases but not including in ending inventory.
5-Sales figure includes a sum of L.E 2000 the value of goods withdrew by the proprietor for his
personal use. These goods were purchased for L.E 1500.
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Required: Make the necessary adjustments to determine taxable net profit for the year 2014.
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L.E L.E
1- The beginning inventory of finished production is 3,000 units at cost L.E 9,000.
4- The overhead cost was L.E 94,000 variable and L.E fixed.
Required:
Compute the difference resulting from changing the inventory valuation method for
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tax purposes.
1- Quantity of ending inventory:
Units
beginning inventory 3000
Finished production during the year 47,000
Total available 50,000
Less: Net sales (40,000)
Ending inventory 10,000
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3- The difference resulting from changing the inventory valuation
method:
According to the LIFO method with full costing method: L.E
Beginning inventory (3000 units*3) 9,000
From production (10,000 units ending-3000 beginning units) = 21,000
7000 units from production * L.E 3
Total 30,000
According to the FIFO method with Variable costing method: