Cablegate: Egypt's New Tax Law

Published: Sun 21 Aug 2005 03:00 PM
This record is a partial extract of the original cable. The full text of the original cable is not available.
E.O. 12958: N/A
Sensitive but Unclassified. Please protect accordingly.
Ref: Cairo 04374
1. (SBU) In June President Mubarak signed into law a new
tax code that substantially reduces personal and corporate
taxes. The law also includes provisions to settle
outstanding tax debts and to encourage the informal sector
of the economy to begin paying taxes. The Ministry of
Finance (MOF) claims the new law will establish a new era of
trust between taxpayers and the tax authority. Taxpayers
will now begin assessing their own tax payments and audits
will be conducted on a sample basis. Although tax holidays
for new businesses have been eliminated and fines for tax
evasion have been increased, the business community has
responded positively to the new law. The MOF claims that
the cuts will not negatively affect GOE revenues, as lower
levels of tax evasion and increased payment of taxes by the
informal sector will offset the lost revenue from the
reductions. After signing the new law, President Mubarak
also increased the bonus of public workers, in what is seen
by many observers as an election year move. The increased
bonus, coupled with the tax cuts, is likely to push the GOE
budget deficit beyond the current projections of 9% of GDP.
End summary.
Tax rates cut in half
2. (U) In early June President Mubarak signed into law a
new income tax code that replaces Egypt's Tax Law No. 157 of
1981. The new law is designed to incorporate all income-
generating entities, using a territorial basis, and
eliminate loopholes. The law is a major step in the GOE's
plan to expand the tax base, eliminate irregularities and
improve regulation of the tax system. Under the new law,
personal income tax is reduced approximately 50% from the
levels in the 1981 law, effectively creating three new tax
- 10% tax on annual income of LE 5,000 - 20,000;
- 15% tax on annual income of LE 20,000 - 40,000;
- 20% tax on annual income > LE 40,000.
3. (U) Tax on natural persons (i.e., individuals) is
imposed on income derived from salaries, wages and in-kind
allowances, including from foreign sources for work
performed in Egypt, commercial and industrial activity
engaged in by individuals, vocational and professional
activity (including income from intellectual property
rights) and real estate wealth. Income from Egyptian
sources for work performed outside Egypt is also subject to
taxation. The new law applies to all income generating
individuals, including both partners in a married couple.
The previous tax law had treated families as a single unit
in which only one spouse benefited from tax breaks, even if
both spouses were working.
4. (U) Income from real estate wealth is divided into three
types: 1) income from agricultural land; 2) income from
built realties; and 3) income from furnished units. For
agricultural land, the tax base is the total rental value of
the land as determined by the Agricultural Real Estate Tax
Law of 1939. Income from cultivation in desert areas is
exempted for ten years from the date the land is considered
productive. For built realties, the tax base is the total
rental value as determined by the Built Realties Real Estate
Tax Law of 1954. Income from furnished units is determined
by the actual rental value, after a 50% reduction for
expenses. A 2.5% tax is also imposed on income from the
disposal of real estate located within town limits, except
where the real estate is disposed of as a gift to the
government, public juridical persons or public interest
5. (U) The annual personal tax exemption is set at LE 4000.
Other income exempt from taxation includes pensions and
severance pay, interest from savings accounts and deposits
in banks registered in Egypt, interest from government and
corporate bonds issued on the Cairo and Alexandria Stock
Exchange (CASE), dividends from stocks and mutual funds, and
profits from the Social Fund for Development. Commercial
activity involving land reclamation, poultry production, bee
and cattle breeding, animal fattening and fisheries is
exempt from taxation for ten years. For
vocational/professional activity, exemptions include income
from writing or translating scientific, cultural, religious
and literary works, income derived by professors for written
works, and income obtained by artists for photographic and
sculptural works and carvings. The income of professionals
registered in trade unions is also exempt for three years
from the date the individual begins exercising the
Corporate income tax
6. (U) The new law also reduces tax on juridical persons
(i.e., companies, corporations, partnerships, etc.) by
approximately 50% from the levels in the 1981 law, creating
the following tax brackets:
- 20% tax on annual net profits of all juridical persons
resident in Egypt, whether profits were derived from Egypt
or abroad, and for all juridical persons resident abroad,
with profits derived from an establishment in Egypt;
- 40% tax on annual net profits of the Suez Canal Authority,
the Egyptian Petroleum Company and the Central Bank of Egypt
- 40.55% tax on the annual net profits of oil and gas
exploration and production companies.
7. (U) Exempted from corporate income tax are government
ministries; public educational institutes; NGOs established
under the NGO Law of 2002; non-profit organizations pursuing
social scientific, sporting or cultural activities; private
insurance funds; international organizations governed by a
treaty; profits from investment funds established under the
Capital Market Law of 1992; interest from bonds and profits
from securities issued/listed on the CASE, and profits from
securities issued by the CBE. Profits from land reclamation
and cultivation companies and from poultry production, bee
and cattle breeding, animal fattening and fisheries are
exempted from corporate tax for a period of ten years from
the beginning of the companies' activity.
8. (U) The new law eliminates the multi-year tax holidays
granted under the 1981 law for newly established commercial
and industrial activities. Sunset provisions are granted,
however, for companies currently benefiting from those
holidays. Minister of Finance Youssef Boutros Ghali (YBG)
has indicated in discussions with USG officials and in the
press that the tax holidays were eliminated because the
holiday system allowed new companies to simply dissolve at
the end of the holiday period and re-incorporate soon
thereafter to begin a new holiday period. Executive
regulations for the new law still have to be drafted, a
process likely to take six months, according to YBG.
New law taxpayer-friendly
9. (U) In addition to cutting the personal and corporate
income rates in half, the new law also contains provisions
to settle outstanding tax disputes and encourage Egypt's
large informal sector to begin paying taxes on a regular
basis. For all outstanding tax disputes, unless the
taxpayer requests continuation of the settlement process
begun before passage of the new law, the new settlement
procedures are as follows:
- all dispute on sums under LE 10,000 are forgiven;
- disputes on sums between LE 10,000 and 100,000 are abated
upon payment of 10% of the disputed sum;
- disputes on sums from LE 100,000 to 500,000 are abated
upon payment of 25% of the disputed sum;
- disputes on sums exceeding LE 500,000 are abated upon
payment of 40% of the disputed sum.
On the first day after the signing of the new law, the MOF
decided to drop 26,000 tax dispute cases, most of which were
disputes with companies and corporations.
10. (U) The new settlement procedures are also much more
taxpayer-friendly. Under the old system, a committee headed
by the Tax Authority reviewed all tax dispute cases, despite
the fact that the Tax Authority was a party to the dispute.
The committee usually rendered biased decisions against the
taxpayer. The new law has changed this system, allowing for
an impartial committee headed by a third party.
11. (U) The new law also contains provisions to encourage
formalization of informal economic activity. All unpaid tax
on income earned through informal economic activity prior to
passage of the new law will be forgiven, provided: 1) the
persons engaging in such activity have not previously
registered with the tax authorities, and 2) such persons
register with the tax authorities within one year of passage
of the new tax law.
New era of trust
12. (U) A huge media campaign accompanied passage of the
new law, with numerous TV, radio and newspaper ads
highlighting the new principles of the law, its taxpayer
friendliness and the fact that paying taxes improves living
standards and social services. In statements to the press,
YBG indicated that the new law was designed to streamline
procedures and eliminate bureaucracy, creating a new era of
trust between taxpayers and the tax authorities. According
to YBG, the new law gives taxpayers more rights, in exchange
for what he hopes will be a greater commitment to pay taxes
and share in the responsibility for Egypt's development.
13. (U) Under past procedures, the tax authority calculated
individual and corporate tax returns and informed the
taxpayer of the amount due. With the new law, the taxpayer
fills out the return and submits it to the tax authority,
which accepts a return as accurate until determined
otherwise. Auditing will be conducted on a sample basis and
an appeal mechanism is included in the law to settle any
disparities between the taxpayers' calculations and those of
the tax authority.
14. (U) To balance the increased confidence placed in the
taxpayer, penalties for tax evasion have become much
harsher. Tax evaders and their accomplices are subject to
prison terms of not less than six months and not more than
five years, in addition to payment of the evaded taxes.
Fines for not registering income-generating activities are
set at not less than LE 2000 and not more than LE 10,000 and
the fines are doubled for recurrences within three years.
Fines of 5%, 15%, and 80% may also be imposed for non-
payment of the full amount of tax due by the deadline of
April 1 for natural persons and May 1 for juridical persons.
The harsher penalties send the message that taxpayers should
not abuse the new trusting relationship with the Tax
15. (U) The business community has for the most part
reacted positively to the new tax law, though many business
leaders have complained about the elimination of the tax
holidays. Speaking to the press, Galal El Zorba, Chairman
of the Federation of Egyptian Industries, echoed YBG's views
that the new law will create a new relationship between
taxpayers and the government, one based on trust. Khaled
Abu Ismail, Chairman of the Federation of Chambers of
Commerce, noted that the new law increases the amount of
cash in the hands of investors, which will translate into
economic growth for Egypt.
Effect on GOE revenue
16. (U) According to contacts at the MOF, tax revenues for
the GOE will not be negatively affected by the cut in tax
rates, as the cut will be offset by an increase of LE 4.7
billion, annually, the amount MOF estimates is lost each
year through tax evasion. MOF is optimistic that tax
evaders and individuals operating in the informal economic
sector will respond to the provisions in the new law
designed to establish a trusting relationship with the
government and make paying taxes easier. MOF also projects
revenues will increase as overall economic growth increases.
The GOE currently predicts that economic growth will
increase to 5% annually by fiscal year 2006/07, stimulated
by macroeconomic reforms, of which tax cuts and customs
tariff reductions form the main components.
17. (U) The GOE budget for fiscal year 2005/06 estimates
revenues of LE 81.6 billion from taxes, which includes
personal and corporate tax, sales tax, customs revenues and
other taxes. The FY 2005/06 projection is a 14.6% increase
over projected tax revenues for FY 2004/05, and a 21.5%
increase over actual preliminary figures for FY 2004/05
(reftel). As noted in reftel, the GOE's projected growth
figures seem overly optimistic, considering the normal lag
time involved before macroeconomic reforms translate into
actual economic growth.
New tax law advances GOE reform effort
18. (U) At the signing ceremony for the new law, President
Mubarak cited it as the beginning of "phase three" of the
GOE economic reform program. The new law was the first step
towards creating an economic framework that would integrate
Egypt's economy into the modern global economy, stimulate
private sector investment and create 700,000 new job
opportunities annually. He noted that the income tax
reforms would be followed by reform of sales and real estate
taxes. Shortly after signing the new tax law, Mubarak also
announced an increase in the public sector bonus of 20% over
the next five years, effective in July 2005. Prime Minister
Nazif noted in a public statement that the increase, coupled
with tax cuts, would amount to a total increase of 30-40% in
net income for public workers.
19. (SBU) The increase in the public workers' bonus is
clearly an election year gesture, one that calls into
question the GOE's seriousness about controlling Egypt's
already large budget deficit. The bonus, coupled with the
new tax cuts and tariff reductions enacted last year, is
likely to increase the budget deficit in the short term
beyond its projected FY 2005/06 level of 9.3% of GDP. MOF's
prediction of increased tax revenue from the informal sector
also seems overly optimistic. It will take more than mere
reassurances from the MOF for individuals in the informal
sector to begin trusting the tax authority and paying taxes
regularly. End comment.
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