Egyptian government seeks to increase tax revenue

Egypt’s attempts to boost its taxation revenue began to pay off in 2017. In the first quarter of FY 2017/18 total tax revenue expanded to LE88.6bn ($5.8bn), according to the Ministry of Finance (MoF), a significant advance on the LE57bn ($3.8bn) of the same period in the previous year and 1% more than the ministry’s target for income growth. In the first half of FY 2017/18, tax revenue reached LE249bn ($16.4bn), a year-on-year increase of 66%. Some of the gains were made in the taxation channels which have traditionally buoyed government coffers, such as income tax and Suez Canal levies. Egypt’s strong revenue performance in early 2017 was, however, greatly aided by the addition of new income streams, including real estate tax and a recently introduced value-added tax (VAT) framework. Egypt’s taxation landscape is in a state of flux, as the government attempts to boost revenue and reduce what has become a stubborn fiscal deficit. Recent years have seen some important advances in this process, but a number of setbacks have also illustrated how challenging the introduction of new taxes can be.

Vat Advance

The replacement of the old sales tax with a new VAT framework in 2016 is widely viewed as one of the government’s taxation successes. As it is levied at each stage of value addition – from manufacturing to sale – the new system has widened the tax base and made it more difficult for distributors and traders to use loopholes to lower their tax bills.

Facing a large deficit, the government has also been able to use its new taxation tool to ease pressure on its finances. In early 2017 it announced that it would bring forward by three months, to July 1, 2017, the scheduled VAT rise from 13% to 14%. A number of important clarifications concerning the framework were also made, most notably in the previously ill-defined area of “professional services”. Elsewhere in the wide-ranging document released by the MoF, more details emerged as to how still-active contracts for goods and services signed before the implementation of VAT are to be updated, as well as how VAT is to be calculated for used goods, sales on instalments and bartering. In some areas of the economy the government provided relief in the form of additions to the VAT exemption list, including financial transactions between subsidiaries and parent companies, stock market transactions and work carried out by companies’ overseas representative offices. VAT evasion has now been classified as a felony involving a breach of public trust, and carries a five-year prison sentence and an LE50,000 ($3290) fine.

The government hopes to increase its VAT revenue by LE7bn-8bn ($461.2m-527m) in FY 2017/18, according to the MoF. The new framework has already shown itself to be a more effective revenue-raiser than the sales tax that preceded it. Between September 2016 and May 2017 it brought in a total of LE130bn ($8.6bn), according to local press reports, compared to the LE96bn ($6.3bn) received during the old framework in the same period the previous year.

Rebalancing

When it comes to taxes that most visibly affect the public, the government has undertaken a cautious recalibration. In June 2017 the Planning and Budget Committee in the House of Representatives approved a raising of the income tax threshold from LE6500 ($428) per year to LE7200 ($474) per year. A 10% rate is applied to the lowest income tax band (LE7200-30,000, $474-1980), while the highest rate, for those earning over LE200,000 ($13,200) per year, stands at 22.5%. However, while the new framework may provide a measure of relief for the low-income segment, a new taxation regime applied to cigarette sales will raise the expenditure of many households. In November 2017 President Abdel Fattah El Sisi signed the new tax rates on cigarettes into law. The nation’s biggest tobacco merchandisers raised their prices accordingly. The cheapest brand offered by Eastern Company now costs LE14 ($0.92), up from LE11.50 ($0.76). In the case of Egypt, the government is able to make a strong case for increasing the cost of smoking. According to the World Health Organisation (WHO), Egypt is a “high-burden tobacco-use” country in which around 40% of men and 20% of the general population are daily smokers. The consequences of tobacco usage on public health are significant, and by increasing the tax on cigarettes the government is taking another step in a tax-based deterrence policy which has been undertaken in cooperation with the WHO since 2010.

Mixed Success

The changes to income tax and the new taxation levels for cigarettes have been implemented without significant opposition. Elsewhere, the government has been compelled to fight harder to implement its taxation reforms. One of the longest-running taxation struggles of recent years arose from the implementation of a real estate tax, which was finally introduced in late 2014. An annual tax on real estate was first proposed in 2008, during the tenure of Youssef Boutros-Ghali, the minister of finance. Public opposition prevented the tax’s introduction, however, and the political unrest which began in 2011 brought more false starts. In the wake of the revolution, the Supreme Council of the Armed Forces (SCAF) proposed a new version of the tax to be implemented in 2013, but in December 2012 a new government brought forward fresh legislation as an alternative to the SCAF proposals, which it aimed to have in place by July 2013. Another change of government and fresh presidential elections further delayed the tax’s implementation.

The final implementation of the tax, however, is starting to make a positive difference to the government’s revenue statements. Real estate tax revenue increased by 71% to LE804m ($53m) in the first quarter of FY 2017/18 from LE469m ($30.9m) the previous year.

Policy Reversal

However, in some cases the government’s attempts to introduce new tax measures have not succeeded. A capital gains tax promulgated in July 2014 and implemented in April 2015 was postponed as a result of objections from traders and brokers – a decision which prompted the IMF to publicly state its disappointment. While most developed economies apply a capital gains tax of some form on the gains made from stocks, bonds, precious metals and property, in the MENA region this is not the case. Where it does exist, it is generally not applied to the domestic population – as is the case with the 20% capital gains tax applied to non-residents in Saudi Arabia on the sale of shares where a double taxation treaty is not in place.

The government argued that the proposed tax would play a part in addressing the stubborn fiscal deficit in a manner commensurate with a rising demand for social justice, as only the wealthiest decile of the population would be affected by it. However, opponents of the measure pointed out that implementing the tax at a time when investment activity is still recovering from the economic and political turbulence which followed the 2011 revolution would be damaging to economic growth. Ultimately, their argument was persuasive. In March 2017 the government agreed to delay the implementation of capital gains tax for a further three years – effectively moving the issue into the next presidential term. Of the initial proposal, only a levy on dividends remains. These are taxed at 10%, or 5% if a person holds more than 25% of the distributing company’s capital or voting rights, or if the shares are held for more than two years. While this revenue is positive for the government, it falls far short of the original ambition.

Nevertheless, the government did succeed in introducing what might be described as a compromise measure which allows it to tap into investment activity for revenue. In March 2017 the Cabinet approved an amendment of the income tax law which allows a new stamp tax to be imposed on trades made in the capital markets. The implementation started in May 2017 with a 0.125% levy on both the buyers and sellers of shares, whether the securities are Egyptian or foreign, listed or unlisted. This rate will rise by 0.15% in May 2018, and in the third and final implementation phase – scheduled for 2019 – it will reach its targeted rate of 0.175%.