Cablegate: Egypt Implements New Real Estate Tax

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DE RUEHEG #0026/01 0041440
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P 041440Z JAN 10
FM AMEMBASSY CAIRO
TO RUEHC/SECSTATE WASHDC PRIORITY 4660
INFO RUEATRS/DEPT OF TREASURY WASHDC PRIORITY
RUCPDOC/DEPT OF COMMERCE WASHDC PRIORITY

C O N F I D E N T I A L CAIRO 000026

SIPDIS

DEPT FOR NEA/ELA

E.O. 12958: DECL: 12/29/2014
TAGS: ECON ETRD EFIN PGOV SOCI EG
SUBJECT: EGYPT IMPLEMENTS NEW REAL ESTATE TAX

Classified By: ECPO Minister-Counselor Donald A. Blome for Reasons 1.4 (b) and (d).
1.(U) Key Points: - A new Egyptian real estate tax will come into effect in 2010, replacing a system in place since 1954. - The new tax system simplifies assessments, puts in place a flat tax rate, and for the first time applies to nearly all properties in Egypt. - Close to 90% of properties, including all of those value at LE500,000 (US$91,240) or less will have no tax liability. - Despite the small tax-base, the GOE expects improved compliance and increased revenue from this tax reform.

2.(U) Beginning in 2010, Egypt has a new real estate tax system. The implementation new tax is the culmination of a two-year effort by Egyptian Minister of Finance Youssef Boutrous Ghali. The new real estate tax law replaces a 1954 law which applied to only about a third of the properties in Egypt. The new law applies to almost all properties in the country. Under the old law, real estate was taxed at a 46% rate, but was unevenly applied and evasion was common. Over the last few years, Egypt has witnessed a real estate boom, and tens of billions of dollars of new development projects have sprung up, many in new bedroom communities outside of Cairo and along the northern coast of Egypt along the Mediterranean Sea. Under the new law, these new communities will be subject to taxation for the first time. ---------------------- Streamlined Procedures ----------------------

3.(U) The tax declaration forms are easily obtained at no charge from tax offices or they can be downloaded from the Ministry of Finance website. The declaration is 7-9 pages long, and there are seven versions of the form tailored for different types of property (residential, industrial, touristic, commercial, ports, petroleum, and social--including health, education, sports, and clubs). Failure to submit tax declarations will result in fines.

4.(U) Once the forms have been submitted, property valuations will be based on a number of factors including location, view, construction quality, utilities and services, and proximity to parks and emergency and social services. Once the assessments of each property have been made, property owners will have 60 days to appeal the valuation. Properties will be re-appraised every five years. ----------- Assessments -----------

5.(U) The new property tax will be assessed at a flat rate of 10% of "taxable value." Taxable value is equal to "rentable value" less 30% for maintenance costs (or 32% for non-residential properties) and less a flat LE6000 (US$1095) per property. Rentable value is defined at 3% of "capital value" which itself is defined as 60% of market value. Properties with a market value of less than LE500,000 ($91,240) will be exempt from this tax, according to the Ministry of Finance. Under the new tax regime, a property valued at LE500,000 (US$91,240) would pay LE30 (US$5.47) in tax and a property valued at LE3 million (US$547,445) would pay LE3180 (US$580) per year. Tax payments will be made either annually or on a semi-annual basis with payments in June and December.

6.(U) An important element of the new tax is that it will be levied not only against completed buildings but also against projects under construction to encourage completion of projects and the sale or rental of empty units. The prior real-estate tax exempted unfinished construction from the tax, and as a result, many buildings in Egypt have an unfinished top floor that has been "under construction" for decades which is used as justification for tax-exemption.

7.(U) Exempted from the tax will be the several million apartments that are "rented" under the Nasser-era rent control system under which renters pay a negligible (often less than $10) monthly rent.

8.(U) Despite the expanded tax base, the vast majority of Egyptians will be exempt from the tax. Tarek Farag, Chairman of the Egyptian Real Estate Tax Authority has been quoted in the press as saying that 90% of Egyptians will be exempt from the tax. ------------------------ Delays in Implementation ------------------------

9.(U) The new tax was supposed to have been applied retroactively to the beginning of 2009, but Finance Minister Youssef Boutrous-Ghali delayed the schedule by a year as a result of the economic slowdown brought on by the global economic crisis. The deadline to submit declarations was originally set for December 31, 2009. After widespread complaints of crowds and slow service at tax offices, the Finance Ministry extended the deadline until the end of March 2010. The Ministry also announced extended working hours at tax offices until 7pm with additional personnel being allocated to receive and process tax forms. ----------------------------- Complaints and Service Issues -----------------------------

10.(U) Complaints regarding the new tax have centered on poor service at the various tax offices throughout the city, and there have been isolated reports of fights breaking out in some tax offices outside of Cairo, including those in the Delta governorate of Dakahliya that were reported to be particularly understaffed. There is also discontent from owners of low-valued properties who feel that they should not be submitting tax forms, even though they will ultimately be exempted from the tax.

11.(C) Econoff visited the main property tax office in Cairo and witnessed crowds and long lines for service, but nothing that seemed atypical for the Egyptian bureaucracy. Alaa al-Din Abdel Hadi, General Manager for Planning for the Tax Authority, told us that though tax offices were busy and handling added volume they were not seeing exceptionally long waits for service. Rafaat Mahmoud, Director of the tax office in the Six of October governorate, told us that he welcomed the decision to extend the filing deadline and offer expanded office hours. Neither Mahmoud nor Abdel Hadi was aware of how the GOE would pay workers for their overtime work.

12.(U) Some opponents of the tax, including Ashraf Badr, an "independent" Member of Parliament affiliated with the Moslem Brotherhood, have suggested that the LE500,000 exemption is too low and that all individually-held residential real-estate should be exempt. Others, such as Magdy Henein, CEO of a large Egyptian tour company, have complained in the press that taxing hotels and tourism-related properties will drive up room rates and negatively impact tourism. ------- Comment -------

13.(SBU) Despite some fits and starts, it appears that the new real estate tax will come on line this year. As with the income tax, the new system is more streamlined, transparent, and universally applied. Despite the lower rates and relatively small tax base, the GOE expects improved compliance and increased revenue as a result. Tax revenues continue to be weak in FY2009-10 (July-June), as most tax receipts derive from trade and the Suez Canal. Though it has not published any projections of real-estate tax revenue, the GOE hopes that expanded income from the real estate tax along with improving global conditions will boost revenues in FY2010-11 and help trim the Egyptian fiscal deficit, which is expected to exceed 8% of GDP in the current year. Tueller

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