Capital gains tax sparks ire of EGX chairman, raises concerns over tax evasion

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CAIRO: Egypt’s newly proposed capital gains tax instantly sparked criticism at the Egyptian Stock Exchange with the chairman slamming the decision as a deterrent to investment.

Mohamed Abdel Salam, chairman of the bourse, denounced the law for its “inappropriate” timing and vowed to fight its approval.

“I won’t give up,” said Abdel Salam, “If this law is going to damage the Egyptian market and its investors, I will continue to express my concerns.”

“The imposition of this new tax is going to be very harmful to the Egyptian market at this time,” he said. “It could have been applied later when the market is actually doing well, that way investors could stand to pay a little extra tax, but imposing it now is not good.”

The law — announced on Wednesday by Finance Minister Samir Radwan and expected to pass after Cabinet meets with the ruling army council — imposes a 10 percent tax on capital gains and a 5 percentage point increase in the income tax levied on finance firms and privately-owned companies.

The income tax increase applies to companies earning more than LE 10 million, Radwan announced.

Abdel Salam, who had just returned from an EGX promotional tour in the US and the Gulf, said at a conference Thursday that news of this law came as a shock.

“The Egyptian government did not ask for our advice regarding this law, nor did they discuss the idea with the Egyptian Financial Supervisory Authority,” said Abdel Salam. “It’s like I didn’t do anything at our promotional tour.”

Just 10 minutes into Thursday’s trading session, the benchmark index fell 3.3 percent, which analysts attributed to news of the law.

Mostafa Amin, head of Arafa Holding criticized the decision, yet he pointed out that it is not time to panic, as it is not officially passed yet.

“This decision should have been studied more and the government should have discussed it with several analysts and experts, however, it is not time to panic,” he said.

Alaa Ezz, secretary general of the Federation of Egyptian Chambers, said the law has its pros and cons and currently all of Egypt’s federations are reviewing it together.

While the new law may have a negative impact on current investments, he said that on the long run it might actually boost the market.

Radwan announced the set of measures as a way to raise revenues as Egypt faces a higher budget deficit for the coming fiscal year, forecast at 10.95 percent of GDP. The minister also set a minimum wage of LE 700 with a plan to raise it to LE 1,200 within five years.

“If you are talking about existing investors, you can see the impact this new law had on the stock exchange, it is negative, nobody can deny this,” said Ezz.

“Now I have a tax that’s slightly higher than neighboring countries, so some investors could say they’ll go invest there instead of Egypt, however, investments that are coming in now for sure or in 2012 are expected to be lucrative investors who can withstand the new tax,” he added.

Tax evasion

On the other hand, Ezz pointed out that more taxes may mean an increase in tax evasion.

“It’s an economic fact, when you raise taxes, there is more evasion and this brings down the revenue.”

Ezz added that there could be other remedies for financing the country’s deficit rather than raising capital gain taxes.

“A couple of years ago when the state reduced taxes by 50 percent, the revenue increased and there was less evasion, no doubt if you actually decrease the taxes there will be more revenue.”

Ahmed El-Emam, owner of Tour Egypt, criticized the new law labeling it as a “façade” as it may seem like it will bring in revenue, but might rather deter 20 percent of foreign investors at this time who might opt to enter other markets in the region such as Qatar or Dubai, for example.

“This is not a real solution, it is fake,” he said. “Show us where we stand on the capital gains tax on an international level, if this new tax will help us compete in the market, then put it, if not we should not have it.”

He added that if the country loses these investments, then the tax might not be worth it.

El-Emam shared Ezz’s concern regarding the possibility of tax evasion as a result of a high tax at a time when neighboring markets have lower tariffs.

Taking into consideration the nation’s recent revolution and the political turmoil, El-Emam added that keeping money with the government during this time might not be a good idea.

“We shouldn’t keep the money with the government at this time, they don’t spend smart,” he said. “I personally don’t like it when government intervenes in businesses a lot, especially when they already have problems they need to deal with.”

Amin said, “Investors are still coming to the Egyptian market and they also know this is a preliminary stage, the law hasn’t passed yet.”

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