The government’s recent decision to cut the maximum tax rate and unify individual income and corporate profit taxes at 22.5 per cent came out of the blue.
The decision, taken only days before the Egypt Economic Development Conference last month, took everyone by surprise. While the investor community had been expecting legislation that ameliorated the investment environment, no one had been expecting tax cuts.
Nonetheless investors are not complaining. “Paying 22.5 per cent is certainly better than 25 per cent or 30 per cent,” Mohamed Kassem, chairman of the World Trading Company, a major textiles exporter, told Al-Ahram Weekly.
Only months before, during the summer of 2014, an additional five per cent tax had been imposed temporarily for three years on individuals and corporations earning more than LE1 million annually, a move which had increased the maximum tax rate to 30 per cent from 25 per cent in an attempt to procure additional revenues to prop up the government budget.
The Ministry of Finance’s March figures show Egypt's budget deficit reached eight per cent of GDP during July-February 2014/2015, compared to 6.2 per cent during the same period last year.
The new tax, already part of the government’s calculations for the 2015/16 budget, is being marketed as one of the measures meant to improve the investment climate.
But as Kassem put it, “the tax rate alone is not enough to attract investments. Rather, the overall investment environment and the ease of completing the tax procedures will be most important.”
The new unified tax will be applicable on 2015 tax returns, and the government has said that it will remain unchanged for 10 years. It will also apply across the country, including in the Special Economic Zones which previously enjoyed a 10 per cent tax rate.
It includes businesses that will be set up in the Suez Canal Area Development Project (SCADP), which is being developed as a major logistical and industrial hub.
The Ministry of Finance has said that the law will provide a degree of progressiveness for various tranches of individual incomes but has not disclosed details.
The current personal income tax levies a 10 per cent tax on incomes between LE12,000 and LE30,000, a 15 per cent tax on incomes between LE30,000 and LE45,000, and a 20 per cent tax on incomes between LE45,000 and LE250,000.
Salwa Al-Antary, former head of the National Bank of Egypt research department, wrote in an article in the daily Al-Ahram that she did not see the point of cutting taxes for the richest in Egypt while their counterparts in England and France paid 40 per cent tax and others in Denmark and Japan paid even higher rates.
Ashraf Hanna, president of Ashraf Hanna Accounting, Auditing and Tax Consulting, also believes that the government should have maintained the progressiveness of the income tax by imposing a higher tax on those earning above a certain threshold, just like in many developed countries.
Hanna does not believe that a reduced tax rate will be much of an attraction for investors as Egypt is signatory to treaties on double taxation. “If the investors do not pay the taxes here, they will pay them in their home countries,” he said.
Heba Khalil, a researcher with the Egyptian Centre for Economic and Social Rights, a non-governmental legal and research organisation, thinks the “new unified tax might be attractive to existing investors but not to newcomers.”
She added that if any tax cuts were to be granted they should be granted only to certain types of industries or regions that the country needs to develop.
Hanna meanwhile would accept tax incentives if they are tied to the condition that the companies concerned reinvest their profits.
But the government will not use the taxes as incentives, and instead it will give out land for free or pay the employers’ contributions to the pensions of employees in order to encourage investors to set up shop in areas such as Upper Egypt and the border zones, Ashraf Salman, minister of investment, told journalists during an event organised by the American Chamber of Commerce in Cairo this week.
According to Khalil, “Egypt’s tax base and the number of activities and individuals being taxed are weak.” Taxation, she said, “should be the main sustainable source of sovereign income for the government,” adding that proper tax revenues would mean that the government would not need to revert to borrowing, whether domestic or foreign.
Although corporate income tax represented 34 per cent of total tax revenues in fiscal year 2013/14, 70 per cent of this was collected from the Egyptian General Petroleum Corporation, the Central Bank of Egypt and the Suez Canal.
Corporate taxes collected from the private sector accounted for only around 10 per cent of total tax revenues in the same year.
Furthermore, Khalil showed in a 2013 paper that the percentage of tax revenues to GDP in Egypt was still lower than international ratios, standing at around 13 per cent compared to 43 per cent in Italy and 25 per cent in Turkey. This “means that the country does not collect enough taxes on yearly activities and transactions,” she said.
Khalil said not enough was being done to broaden the tax base and make the system fairer. She criticised the government for lowering the highest income tax bracket while going ahead with plans to apply a value added tax (VAT) to the sale of goods.
This will replace the currently applied sales tax but will be levied on goods as well as services. It “is bound to cause inflation that will affect people who are barely getting by and could cause them to become really poor,” she said.
Among the measures needed to broaden the tax base, Khalil said, was for the government to give the informal sector clear incentives to formalise. She said the informal sector was currently not interested in paying taxes because it was not receiving services.
“We need to link taxes to services,” she said.
In her 2013 paper, Khalil said that “tax amendments, broadening the tax base, and raising tax revenues should not happen at the expense of lower-income citizens and should not negatively impact their livelihoods.”
“Raising tax revenues should be accompanied by additional spending on various social services and bigger budgets for health, education, social housing, and social insurances,” she argued.