Algeria: The 2017 Finance Law
1. The Algerian Finance Law for 2017 (the 2017 FL), which is effective as of January 1, 2017, attempts to make up for the shortfall in oil and gas revenues through a number of tax increases or new taxes.
2. Notably, the standard VAT rate increases from 17% to 19% (Article 21), while the reduced tax rate is now 9% instead of 7% (Article 23). Incidentally, the old rate will continue to apply to public procurement contracts whose performance began up to December 31, 2016 until the end of the works/services according to a statement from the Director General of Tax.
3. Moreover, the Algerian government will be adding new revenues as follows:
- The tax on alcohol increases by 10%;
- The internal consumption tax on beer and tobacco products, as well as SUVs and other leisure vehicles, is also raised;
- The tax on petroleum products goes up for gas and gasoil;
- The tax on prepaid telephone cards goes up from 5% to 7%;
- A specific tax is imposed on advertising production and dissemination contracts which are carried out abroad for products that are not manufactured locally; the rate of this levy is 10% and it is included in the tax base for VAT; regardless of the medium of distribution used, this tax is borne by the undertaking which requests the dissemination of the advertising of the products without the possibility of deduction of the charge from its taxable income;
- Capital gains on the transfer, for consideration, of real estate (developed or not) are subject to income tax at the rate of 5% subject to a number of exceptions, including transactions made in the framework of the liquidation of an estate for succession purposes, transfer of leasing contracts and transfer of goods held for more than 10 years;
- A tax on rental income is also withheld at source at the rate of 15% for the lease of commercial or professional premises, including for the lease of residential premises to a company; a lower tax rate applies to individual and collective dwelling;
- A progressive energy efficiency tax will be applied on products which do not meet the efficiency levels set by regulation;
- The tax applicable on each application for the registration of pharmaceutical products is increased.
4. The verification procedures for the indirect transfer of profits (whether through the increase or decrease of the purchase or sale price, the payment of excessive royalties or royalties paid without consideration, the grant of loans without interest or at a reduced rate, the renunciation of the interest stipulated in the loan agreement, the grant of an advantage that is out of proportion with the service obtained, or any other means) are reinforced under Article 43. From now on, the tax administration has, in principle, more time to conduct an audit of the transferred amounts.
5. Article 74 of the 2017 FL provides that "the amounts collected by foreign companies which do not have permanent professional installations in Algeria and which are part of a contract for the supply of services subject to the 24% withholding tax are subject to VAT when the basis of calculation benefits from a rate reduction or abatements." We note that this article does not seem to target defense projects or major means which benefit from an exemption of the 24% tax rather than a reduction or abatements. However, The Algerian tax administration has yet to clarify how this new measure will be applied.
6. In order to encourage participation to the recent bond debt launched by the government, subscribers will not be subject to corporate or individual income tax for a period of 5 years for the bonds with a due date of three and five years (Article 83).
7. Pursuant to Article 88, a new preferential tax regime is established for production companies which perform assembly and installation activities, provided that they make an investment and create employment, but also that they comply with the integration rate of the final product as set forth by joint Order of the Ministry of Industry and the Ministry of Finances (which is yet to be adopted). The same preferential tax regime applies to parts, accessories and components, imported separately by the foregoing enterprises which form an integral part of the collections intended for the assembly industries. The special regime is granted by the Minister of Industry by co-signing the commitment of the beneficiary enterprise to comply with the integration rate.
8. Among the measures taken to improve the recovery of judicial fines:
- Article 55 provides that when a tax has not been paid by the due date, the tax receiver must send a reminder letter to the debtor 15 days before the notification of the first prosecution notice;
- However, Article 61 authorizes the receiver to revive the collection procedure for an unpaid tax debt until a judicial decision has been taken; in that case the four year statute of limitations is suspended;
- Moreover, the 2017 FL introduces an Article instructing the services of the Ministry of Justice to recover these fines directly within six months of any judicial decision. In cases where the fine is not recovered by the Ministry of Justice after the expiry of this period, the file is then sent to the tax administration, which will be responsible for the recovery (Article 62);
- The 2017 FL newly allows "offsetting", whereby the tax receiver has the option of earmarking refunds, reliefs, duties, taxes or penalties owed to a taxpayer to the payment of the payment of taxes, duties or penalties due by said taxpayer upon notice to the taxpayer.
9. Concerning the efforts of the government to increase social security contributions, the 2017 FL doubles the monetary fines applicable to employers who failed to register their employees with the social security authority within the required timeframe, but no longer sanctions such failure with prison sentences of up to two years in case of repeat violations as set forth in the Supplementary Finance Law for 2015.
10. Contrary to expectations, the 2017 LF does not modify the 51/49% rule which requires that at least 51% of the capital of Algerian companies be held by Algerian resident nationals or Algerian companies whose shareholders are all Algerian resident national. The rule was moved last year from the Investment Code to the 2016 Finance Law for more flexibility.
11. Finally, the implementing regulations of the Investment Code, which were promised for the end of 2016, remain to be adopted.