Private sector fears ‘wealth tax’ will repel investment

Daily News Egypt
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Egyptian cabinet imposes the Wealth Tax (Photo Courtesy of the Egyptian Cabinet)
Egyptian cabinet imposes the Wealth Tax (Photo Courtesy of the Egyptian Cabinet)
Egyptian cabinet imposes the Wealth Tax
(Photo Courtesy of the Egyptian Cabinet)

By Abdel Qader Ramadan

The cabinet has imposed Wednesday an additional “exceptional” tax of 5% on individuals with an annual income exceeding EGP 1m for a period of three years, known as the “wealth tax”.

Interim President Adly Mansour is expected to issue new legislation, including the wealth tax, in his role as representative of the legislative authority. It would come into force in July, at the beginning of the new fiscal year.

Minister of Finance Hany Kadry Dimian said Friday that he expects new revenues from the tax to amount to between EGP 3bn and EGP 3.5bn per year.

The government is permitted to direct revenues from the new tax to uses it sees fit within the framework of the state’s general plan and in coordination with the Ministry of Planning and International Cooperation, provided that it is directed primarily to development projects and public service, particularly in the areas of education, health, housing and infrastructure.

According to the finance minister, the tax will only be applied for a temporary period of three years – from 2014 to 2016 – and will take effect in January next year with the submission of tax returns.

Dimian said the tax seeks to achieve three key objectives. The first is the introduction of a new style of community participation in the creation of projects and the provision of public services that benefit all segments of society, especially low-income earners.

The second goal, according to Dimian, is to garner greater public resources to support public spending and reduce the budget deficit, which is one of the causes of increasing inflation, disproportionately hitting fixed-income earners and the poor.

The third goal falls within a broader vision of reforming the tax system in general by expanding the “tax community”, through the inclusion of new tax brackets without harming low income earners.

Dimian said that the factors in determining the tax base are the same as those of the general income tax specified by Law 91 /2005, pointing out that the most important characteristic of the new tax is that it gives the taxpayer the right to request that tax revenues are directed to finance a project of public or social interest in fields such as health or education.

The ministry will issue a detailed list of these projects after the agreement with the Minister of Planning and International Cooperation is completed, such that the taxpayer can request for their tax payment to be used in financing one or more of the projects included on the list.

After the 25 January Revolution, a new income tax of 25% was introduced on incomes over EGP 10m, while the rate for income less than this amount was kept at 20%.

The government is looking for sources to finance the growing deficit, which the Ministry of Finance expects to rise during the current fiscal year (2013 – 2014) to approximately 12% of GDP.

While the government has pointed out that the application will be limited to individuals, the private sector fears it will include private companies.

Hany Bizri, president of ITIDA Company for Food Industries, said the tax comes at an inopportune time and will be a factor that repels investment.

“The tax is a punishment for serious and committed investors… even if it is temporary… It is the first expansion of the tax base subjecting the informal sector to taxes instead of increasing the burden on companies,” Bizri said.

The Federation of Egyptian Industries did not specify its position on the wealth tax. The board of directors will hold a meeting next Wednesday to discuss the consequences for the sector and whether industries are able to absorb them in light of the current economic conditions.

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