Reforms boost revenues, but distrust runs deep among Egyptian taxpayers

Alex Dziadosz
8 Min Read

CAIRO: In 2005, Egypt replaced its nearly 24-year-old tax law, trimming red tape and slashing corporate income taxes by as much as half. As well as attempting to lure foreign firms, the new law was intended to revamp the adversarial relationship between authorities and citizens – an attitude some officials say dates back centuries – by allowing taxpayers to assess their own returns and granting amnesty to those who had never filed before.

According to officials, academics and businesspeople, Egypt’s tax system has improved markedly since then. But some issues linger, experts say, particularly in getting authorities to rule on “transfer pricing, a process by which branches of multinational firms secure financing from their home offices, and in overcoming a deeply-rooted culture of tax evasion.

Businesses and bureaucrats

Sherif El-Kilany, senior partner at Ernst and Young Egypt, has helped firms and citizens pay taxes under both Egypt’s old and new laws. Five years ago, regulations were vague, bureaucracy rampant, penalties low and tax inspectors under-trained or overworked, he said.

“In the old days, during the old cabinet, there was a lot of confusion, misunderstanding and a lot of disputes among taxpayers against the Tax Authority, he said. “It was very, very common that taxpayers would receive a significant tax bill just because they had been wrongly handled by the Tax Authority.

Egyptians were “completely frustrated, El-Kilany said. And multinational firms, who now account for 95 percent of his business, were skeptical that they could invest profitably in a country with such byzantine policies.

Nowadays the process is smoother, El-Kilany said. According to the Ministry of Finance, annual collections have jumped by LE 6 billion since 2005, even though the tax rate has been more than halved.

But getting the Tax Authority to give timely rulings on transfer payments still poses a significant problem, El-Kilany said.

Transfer payments, vital to many international businesses, work like this: If a local branch of a foreign firm wants money from their home office for, say, technical assistance worth $10 million, the Tax Authority must review and approve the payment. This is mostly to control risk; if a foreign company is not sure how or when their payment will be taxed, they will be reluctant to sign off on it.

According to El-Kilany, the Tax Authority has been late in ruling on transfer payments. “This has been going on for the last two years, and there is a lot of frustration, he said.

The problem persists in developed countries as well, El-Kilany said. When he traveled to the United Kingdom for advice on improving the process, authorities there told him they usually wait 18 months to issue their rulings.

“I was shocked with this answer, because 18 months is too long, he said.

Unable to tax

Apart from bureaucratic snags, other, older issues lurk. Perhaps most daunting are Egypt’s massive shadow economy, often estimated to total nearly one-third of the nation’s gross domestic product, and a wide acceptance of tax evasion among citizens.

Egypt’s ability to tax its citizens began to deteriorate after the 1952 revolution, said Monal Abdel Baki, economics professor at the American University in Cairo.

The confiscation of property and businesses under Gamal Abdel Nasser’s new regime provided the state enough cash to avoid seeking other sources of income, she said.

“There was no need to maintain a tax authority and most of government revenue was earned by the state-owned enterprises and forced savings (the percentage of salaries and wages deducted in the form of pensions and social security contributions), she said.

New capitalist classes joined the legislature, pushing the state toward ever-more lenient tax laws, while corruption soared, reaching an apex under President Anwar Sadat’s liberalizing “Open Door policies, Abdel Baki said. Fraud combined with a general decay of tax-collecting knowledge pushed tax revenues to a new low.

To combat widespread evasion, Sadat continued Nasser’s policy of forced savings, raising them from 27 percent to 32 percent by 1981. Alongside energy subsidies that benefitted the rich, this led to an unbalanced tax burden, Abdel Baki said.

The “paternal state

Government subsidies ballooned to 58 percent of state expenditure under Sadat, as he tried to “reward Egyptians during the low-morale years before the 1973 war, Abdel Baki said. Egyptians grew so dependent on these subsidies that when Sadat tried to scale them back in 1977, riots broke out.

Many of these subsidies, mostly for food and energy, exist in some form today, despite repeals and restructuring since the International Monetary Fund’s entry in the early 90s.

The situation has led to a general expectation that Egypt will act as a “paternal state, Abdel Baki said. “People are expecting to get paid from the government, instead of paying to the government.

Large-scale privatization only worsened public opinion toward taxpaying, she said. “People were asking, where is the benefit of privatization? Where is the money going? Where is the Suez Canal income going? she said. “They think that this money is not being properly utilized, so they ask, ‘why should I pay it?’

In an interview with Business Monthly after the updated tax law passed, Tax Authority chairman Hosny Gad suggested that Egyptians have associated taxation with oppression since Pharaonic times, when those who could not pay were sold into slavery. More recently, he noted, a cycle of mistrust prompted taxpayers to underreport and tax collectors to over-assess their returns.

“It was Egyptian culture to simply evade taxes, Abdel Baki said. “And you know about Egyptian culture – it’s very difficult to change.

In recent years, the state has launched media campaigns to explain that taxes pay for bridges, schools and other public services. While the campaign has garnered praise from the World Bank and other observers, many are doubtful that it is enough to reverse Egyptians’ suspicion.

El-Kilany said he had seen the advertisements and supports them. But “it’s not going to work overnight, he said.

“There are other issues apart from taxes, like services, he said. “The majority of people aren’t happy with the level of services they are getting from the country.

Local press such as the daily newspapers Al-Masry Al-Youm and Al-Alam Al-Youm provide him a barometer of public opinion, he said. “If you go through [the newspapers], you see that people are not happy.

Still, El-Kilany said, he has seen big improvements in the attitudes of Egyptians and foreigners. “They are late in addressing some [problems], he said, “but I’m sure they cannot afford to delay any more.

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