In promised dialogue on tax laws, serious discord

A government-sponsored dialogue on Egypt’s controversial tax law changes turned into an airing of grievances by political party leaders, industry representatives, and economic experts on Wednesday, with participants demanding a new draft of the tax laws.  

The conference, hosted by the Egyptian Business Development Association (EBDA), was meant to start a dialogue with civil society on the recently issued tax law and the suggested amendments to the law, and to discuss the laws’ effects on the business and investment environment in Egypt.

But the day-long conference left many participants with more questions than answers, with many voicing concerns about the proposed laws.

“We actually need, instead of having amendments here and there, we need to revamp the whole taxes system,” Former Prime Minister Ali Lotfy, who served under former President Hosni Mubarak during the 1980s, said during the conference.

Some participants said there were fundamental errors in the tax code that gave the government too much power.

“The new law gives the Minister of Finance the authority of legislation, which is the People’s Assembly’s duty,” said Osama Abdel Khaleq, a professor of finance at Cairo University. “He is left with many powers that could severely affect people’s living.”

Death by taxes

On 9 December, Egyptians learned that Morsy had signed off on a large restructuring of the country’s tax system three days earlier without notifying the press, as part of what officials said were IMF-sanctioned economic reforms.

The extensive changes increased taxes on cigarettes, soft drinks, alcohol, cooking oil and energy. In addition, the new laws would have levied licensing and property taxes, and increased the tax rate for higher-income brackets.

The response, across society, was largely of outrage. Citizens balked at the price increases, and even leaders from Morsy’s Freedom and Justice Party voiced their disapproval.

In response, the government delayed the laws’ implementation, and promised to launch a “societal dialogue,” in which experts could offer their amendments to the laws.

Planning Minister Ashraf al-Araby told Al-Mal newspaper on 26 December that the government would not move forward with the new laws until it had reached out to various sectors of society, which would be at least two more weeks.

Then, Araby said that the government had just begun meetings with businessmen, trade unions, non-governmental organizations and other groups. He said officials would be attempting to convince their civic counterparts of how necessary the austerity measures are to helping the government out of its financial crisis.

Wednesday’s conference, though, was the first government-sanctioned dialogue made open to the press and the public, though, and the general air of frustration was palpable.  

The conference was divided into two sessions. During the first, experts discussed the proposed changes to the income tax law, and in the second, the officials fielded suggestions of changes to sales, stamp, and property taxes. The format was strict, government officials gave statements, and then civil society leaders were able to make two-minute statements, with most of them being forced to stop mid-speech due to the time restraint. Then, a few questions were fielded from the audience. In the information packet at each seat, there was a worksheet on which participants could mark “agreed” or “not agreed” to several of the most significant tax law changes.

The conference was attended by a number of government officials and political leaders, including the minister of finance, head of the Taxes Authority, and representatives of the economic committees of eight political parties, including the Freedom and Justice Party, Wafd Party, Watan Party, Tagammu Party, Egypt Party, The New Hope Party, The Egyptian National Party and Wasat Party.

Also in attendance were representatives of business associations, major companies, tax experts and former government officials.

In his opening remarks, Hassan Malek, chairman of EBDA, said he hoped the conference would lead to a new tradition of societal participation in decisions and law making.

“Our real goal is to allow the business community to participate in decision making, so we will begin this tradition, so we can benefit from them,” he said. “We would like to look to the way of a real and correct democracy.”

Abdel Hameed al-Gamal, head of the Shura Council’s economic committee, said the government must convince the population of the necessity of the taxes, before tightening the belt.

“The people must be convinced and cooperative, if the government wants to apply any austerity measures,” he said.

Weighing the impact

When they were first released, officials claimed the tax plan was part of the economic program Egypt prepared for the IMF during its extended visit to Cairo in early November.

In late November, Egyptian officials released an economic plan, which they said had been the basis of negotiations. It included clauses on raising cigarette and mass-produced beverage taxes. But, the main tenants of the economic plan, of which the primary goal was decreasing the budget deficit from its current 11 percent of the gross domestic product to roughly 8 percent, were the lifting of fuel subsidies and the levying of a value-added tax, which acts like a higher sales tax paid by the end consumer.

Few steps have been taken towards lifting subsidies or imposing the value-added tax, and there is no mention of either was included in the 6 December tax amendments.

But the government’s fiscal situation appears to only be getting worse. The country is currently facing a currency crisis after using most of its foreign reserves to prop up the value of the Egyptian pound in the past two years, and in late December, Araby warned that the budget deficit could swell to LE200 billion if serious measures are not taken.

The current crisis, according to a number of experts at the conference, calls for a plan that will balance encouraging investment and social justice with increasing tax revenue.

Lofty, who deplored the way in which the state has gone about collecting taxes in the past, said a huge effort should be made to provide incentives for paying taxes, to help alleviate the country’s serious tax evasion problem.

He cited an amended property tax law, which was issued four years ago and still hasn’t been applied.

He also recommended that the government start adhering to a strict austerity program, such as Greece has adopted.

Khaled Zakaria Amin, professor of public policies at the American University of Cairo, worried that the new taxes would alienate foreign investors and stifle domestic business growth.

He said foreign investors might choose to go to neighboring countries, where energy prices are much cheaper. And the higher prices precipitated by the tax increases will only hurt small and medium-sized businesses, Amin said, the very sector which the government purports to be supporting.

He also said it was “bad timing” for the government to issue the amendments without consulting the people, business leaders, and other experts. The proposed laws, he said, demonstrate that the government doesn’t have a clear vision for the economy.

In particular, experts said the problematic wording of the property and sales tax laws leaves them open to interpretation.

According to the law, only housing units with a value of 2 million pounds or more are exempted from property taxes up to the maximum of 2 million pounds, while all commercial enterprises will be required to pay property taxes in full, which will constitute a large burden shops and other small businesses, Abdel Khaleq said.

Nasr Abu al-Abass suggested that Egypt should levy a universal sales tax of 10 percent, like many other countries.

Abdel Rasool Abdel Hady, a professor of accounting at Alexandria University, said that in their rush to issue the laws, legislators failed to take into consideration relevant constitutional and administrative court rulings.

He scoffed at Prime Minister Hisham Qandil’s suggestion that the taxes would not affect low income goods, pointing to the specific amendments that will raise prices on flour, potatoes and cooking oils.

A matter of business

Also in disagreement with the laws was PepsiCo representative Khaled Abu Zahra, who said the new taxes might force the company to cut jobs.

He told Egypt Independent that in 2005, soft drinks companies agreed upon a protocol with the government that allowed the companies certain tax exemptions, in exchange for job creation.

It was a “win-win” situation according to Abu Zahra, as even under the exemption, PepsiCo’s paid taxes grew from LE600 million in 2005 to LE1.8 billion in 2012.

Under the new laws, Abu Zahra said PepsiCo will be paying 46 percent higher taxes, but he also expects sales to dip by 15 percent, which might lead to a workforce reduction.

Mamdouh Omar from the Coca-Cola Company, told the conference that due to the new taxes the company will be paying an extra LE1 billion a year in taxes. The company, he said, plans to past on this cost to consumers. The higher prices, he said, will only lead to fewer drinks sold and less paid taxes. Omar also said the new taxes would force the company to limit its investments, which reach about $500 million annually, would hurt the fifteen feeder industries that rely on soft drinks in the local market.

He said the tax on soft drinks is a “discriminatory tax” because it doesn’t affect juice manufacturers.

 In their final statement, the conference participants called for a new law taking into account social justice, the business community and other factors to be drafted and put before the Shura council.

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