VAT apportionment, payroll tax and income tax adjustments
Alexandria Trading LLC reports the following for 2025. Sales, exclusive of VAT: domestic standard-rated EGP 8,400,000; exports EGP 2,000,000; exempt sale of an old building EGP 1,000,000. Input VAT is EGP 1,100,000: EGP 500,000 directly attributable to taxable supplies, EGP 40,000 to the exempt sale, and EGP 560,000 common, including EGP 168,000 on a passenger car for the sales director. The company uses turnover-based apportionment for common input tax. Payroll includes three employees with annual taxable salaries of EGP 240,000, EGP 480,000 and EGP 1,200,000. Salary tax brackets: 0% to EGP 20,000; 10% on the next EGP 20,000; 15% on the next EGP 20,000; 20% on the next EGP 140,000; 25% above EGP 200,000. Accounting profit before tax is EGP 6,000,000, after charging a fine of EGP 50,000, a donation of EGP 100,000 to an unregistered sports club, and a stock provision of EGP 200,000 not approved by the tax authority, and after accounting depreciation of EGP 250,000 (tax depreciation EGP 400,000) and exempt dividend income of EGP 300,000. The corporate rate is 22.5%.
1. Compute the net VAT payable for 2025, showing the treatment of the car, the exempt sale and the apportionment.
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Output VAT: only the domestic standard-rated supplies bear output tax at 14%: 8,400,000 x 14% = 1,176,000. Exports are zero-rated and the exempt building sale bears no output VAT.
Input VAT: the EGP 40,000 directly attributable to the exempt sale is blocked. The EGP 500,000 directly attributable to taxable supplies is fully creditable because it supports both standard-rated and zero-rated supplies. The common input VAT of EGP 560,000 includes EGP 168,000 on a passenger car. Input VAT on a passenger car is not creditable unless the car is held for resale or rental, so remove it: 560,000 - 168,000 = 392,000. The turnover-based ratio is taxable turnover / total turnover = (8,400,000 + 2,000,000) / (8,400,000 + 2,000,000 + 1,000,000) = 10,400,000 / 11,400,000 = 91.228%.
Creditable common input = 392,000 x 91.228% = 357,614. Total credit = 500,000 + 357,614 = 857,614. Net VAT payable = 1,176,000 - 857,614 = 318,386. The blocked amounts are EGP 40,000 and EGP 168,000; the zero-rated exports do not block input tax.
2. Compute the salary tax for each employee and the total payroll tax.
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Employee 1, salary 240,000: 0% on 20,000 = 0; 10% on 20,000 = 2,000; 15% on 20,000 = 3,000; 20% on 140,000 = 28,000; remaining 40,000 at 25% = 10,000. Total = 43,000. Wait: 240,000 - 200,000 = 40,000, so tax = 0 + 2,000 + 3,000 + 28,000 + 10,000 = 43,000.
Employee 2, salary 480,000: 0 + 2,000 + 3,000 + 28,000 + 25% on 280,000 = 70,000. Total = 103,000.
Employee 3, salary 1,200,000: 0 + 2,000 + 3,000 + 28,000 + 25% on 1,000,000 = 250,000. Total = 283,000.
Total payroll tax = 43,000 + 103,000 + 283,000 = 429,000. The employer must withhold and remit the tax; the expense is deductible for corporate tax when paid or accrued according to the payroll records.
3. Compute taxable income and corporate income tax, explaining each adjustment.
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Start from accounting profit before tax of 6,000,000. Add back the fine of 50,000 because penalties and fines are not deductible. Add back the donation of 100,000 because it was made to an unregistered sports club; a donation to a qualifying registered body would be deductible within the statutory limit. Add back the stock provision of 200,000 because it was not approved by the tax authority. Deduct the depreciation timing difference: tax depreciation 400,000 less accounting depreciation 250,000 = 150,000. Deduct the exempt dividend income of 300,000.
Taxable income = 6,000,000 + 50,000 + 100,000 + 200,000 - 150,000 - 300,000 = 5,900,000. Corporate income tax = 5,900,000 x 22.5% = 1,327,500. The depreciation difference is a timing difference, not a permanent one; the stock provision may become deductible when the stock is written off or the provision is approved.