In January, Vodafone announced it had signed a memorandum of understanding with Egypt for a deal worth $2.3 billion, as part of which it would sell a 55-% stake in its Egypt operation to Saudi Telecom (فاروق، 2020).
Such billion-dollar agreements should represent a windfall for Egypt&rsquo;s public treasury: the income tax law imposes a 22.5-% tax on capital gains from acquisitions like this, calculated as the difference between the purchase and sale price of the shares (عبد الرزاق وعبد الوهاب، 2020).
But unofficial reports soon emerged that the multinational corporation would not pay a tax on the deal because the two companies that own Vodafone&rsquo;s stake in Egypt are domiciled in the Netherlands, and Egypt has a double taxation treaty (DTT) with the Netherlands. Under that treaty, if a Dutch firm undertakes a transaction in Egypt, it pays taxes in its home country (حجاج، 2020). The rub is that the firm will pay no tax at all if the deal goes through because the Netherlands does not levy a capital gains tax.
This could be seen as a coincidence&mdash;it just so happens that the firm operating in Egypt is owned by two companies domiciled in a state that does not impose this kind of tax. But it could also be seen as an example of tax avoidance, whereby a corporation is structured to avoid paying taxes. This practice is not illegal, but instead exploits tax loopholes identified by the legal teams working for multinational corporations.
<h3 style="text-align: justify;">Recurring conflicts with tax avoiders</h3>
Tax avoidance is a major challenge currently facing Egypt. An edited volume recently released by Dar al-Maraya, titled&nbsp;Taxes for Whom?, focuses on the issue as a primary factor to explain low tax revenues in Egypt, where revenues constitute 12.5% of the GDP, compared to 15.4% in OECD countries (World Bank data).
Egypt has painful experience with this issue. Perhaps the first major blow came in 2007, when Orascom Construction sold its cement holding to the French Lafarge.
The Egyptian Tax Authority assessed a capital gains tax on the LE14.4-billion deal, but Orascom protested that the sale was conducted through the stock market and that when it was concluded, Egyptian law exempted such transactions from capital gains tax (Law 91/2005 on income taxes, Article 50/8).
Orascom&rsquo;s view won the day; but in 2014, stung by the practice and prepared, the state amended the law to include an extremely broad provision designed to close that loophole.
Article 92(bis) was added to the income tax law stating, &ldquo;No tax implication shall be reckoned for any transaction when the, or a, primary purpose is to avoid or delay taxation&hellip;As a rule, tax shall be assessed as relates to the true economic essence of the transaction.&rdquo;
In addition, sales involving foreign firms were made subject to capital gains under the tax law, but corporations have exploited DTTs to avoid taxes nonetheless. Many multinational corporations register in Egypt as subsidiaries of parent corporations in the Netherlands, the UAE, or Mauritius because treaties with these states allow companies established there to avoid paying capital gains taxes in Egypt when they divest of holdings in Egypt, and these countries do not levy capital gains taxes.
This is but one of many avenues for tax avoidance, all of which involve transferring profits to countries that assess little or no tax on capital gains or other sources of income (such as royalties on intellectual property). These states have come to be known as &ldquo;tax havens.&rdquo;
<h3 style="text-align: justify;">How does legislation limit tax revenue?</h3>
Property tax
The property tax met with strong resistance from groups who use real estate investment to maintain and grow their savings, often at rates of return that exceed investments of the same risk level.
The current property tax law actually alleviates the tax burden on these groups. Most significantly, the law states that when residential properties are re-assessed every five years, the value may not increase by more than 30%. This means that the value of residential property can increase on average 6% a year&mdash;much less than the annual increase in property prices. From 2015 to 2018, for example, some properties increased in value by 60% and others by nearly 100% (كساب، 2019).
We therefore need to resist interest groups and their ability to influence and draft tax legislation to reduce their own tax burden.
Decline of progressive taxation
In addition, income and wealth taxes on the richest classes are relatively low, which not only undercuts tax justice but also compromises the system&rsquo;s ability to collect revenue.
Income taxes in Egypt began as a tool to mobilize resources before becoming a way to redistribute income in the late 1940s with the issuance of the income tax law (Law 99/1949 on the imposition of a general tax on earning). The then-new tax was graduated to increase the burden on the highest income groups.
The highest income tax bracket on earnings increased from 50% in 1949 to 95% in 1965. This tax was coupled with an inheritance tax explicitly geared toward redistribution. Inheritance taxes began with the devolution of estates in 1944 (Law 142/1944 on the devolution tax) and the imposition of a tax on bequests in 1952 (Law 159/1952).
Although we have an important history of redistributive taxation, the main challenge was the ability to actually collect such taxes. By fiscal year 1971-72, income and inheritance taxes accounted for no more than 1&nbsp;&nbsp;&nbsp;&nbsp; % each of total direct tax revenues (الطيب، 1981).
The Egyptian authorities later reduced, then eliminated earnings taxes altogether. In 2005, it set a very low ceiling on income taxes at 20% (later increased to 22.5%), reasoning that higher rates incentivized tax evasion. Inheritance taxes were eliminated entirely in the 1990s on the grounds that the cost of tax collection exceeded revenues because of wide-scale evasion (Law 227/1996 on the abolition of the devolution tax).
Lack of data on the tax base
At the beginning of the 1960s, the public sector dominated the economy. This decade also saw a leap in tax revenue collected, although some scholars partially attribute this to the state&rsquo;s control of economic institutions (Reda and El-Edel, 1982).
To this day, the Egyptian state still largely relies on state-owned sectors for tax revenues although the state&rsquo;s role in the economy has declined markedly since the 1960s. The reliance on this sector for tax revenue reflects the state&rsquo;s enforcement inability in the private sector.
Looking at the 2019-20 budget, we find that Suez Canal taxes constitute nearly 10% of general tax revenue; petroleum taxes&mdash;a sector where the state is a major player&mdash;accounts for roughly the same percent. Another 14% of revenues are collected from taxes on wages, where taxes on government employees&rsquo; salaries make it easy to assess and collect.
The nationalization policies deprived our tax authority of years of experience and expertise in dealing with the business community. This, and a reliance on rents, has predisposed the state to search for easy revenues. For decades, petroleum rents were a guaranteed source for expenditure, along with increases in foreign grants in some years.
Since the adoption of the income tax law in 2005, the state has attempted to establish a new relationship with the private sector based on the right of self-assessment. That is, individuals report their own taxes, while the Tax Authority audits a random sample of reports rather than all reports.
But the huge range of informal transactions in Egypt has hindered this strategy. A massive proportion of tax statements were not supported by documentation (قطب،2015), and the Tax Authority was compelled to audit a broad segment of files given the relatively small number of statements accompanied by certified information (ضياء، 2015).
With growing inequality and limited tax revenue in Egypt, we need to reconsider the poor redistributive nature of our tax system. We need a genuine societal dialogue on the importance of a fairer tax system and how it could alleviate the hardship created for broad swathes of society by a shortage of public services. The goal should be a tax system of voluntary compliance rather a levy imposed by an authority that everyone resists by all available means.
<hr>
References
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Reda, A. &amp; El-Edel, M. (1982). Impact of taxation on income distribution: an exploratory attempt to estimate tax incidence in Egypt. In G. Abdel-khalek &amp; T. Robert (Eds.),&nbsp;The political economy Of income distribution in Egypt&nbsp;(p.132&ndash;164). Holmes and Meier Publishers.
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ضياء، م. (سبتمبر، 2015). "<a href="https://bit.ly/3aghAZ0">الضرائب</a><a href="https://bit.ly/3aghAZ0">"&nbsp;</a><a href="https://bit.ly/3aghAZ0">تتراجع</a>&nbsp;<a href="https://bit.ly/3aghAZ0">عن</a>&nbsp;<a href="https://bit.ly/3aghAZ0">الاختيار</a>&nbsp;<a href="https://bit.ly/3aghAZ0">بالعينة</a>&nbsp;<a href="https://bit.ly/3aghAZ0">وتفحص</a>&nbsp;<a href="https://bit.ly/3aghAZ0">كافة</a>&nbsp;<a href="https://bit.ly/3aghAZ0">الملفات</a>&nbsp;<a href="https://bit.ly/3aghAZ0">غير</a>&nbsp;<a href="https://bit.ly/3aghAZ0">الحسابية</a>&nbsp;<a href="https://bit.ly/3aghAZ0">لعام</a><a href="https://bit.ly/3aghAZ0">&nbsp;2013</a>. اليوم السابع.
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الطيب، م. (1981). سياسات الأسعار والأجور. جمعية إدارة الأعمال العربية.
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فاروق، إ. (فبراير، 2020).&nbsp;<a href="https://ara.reuters.com/article/idARAKBN1ZW06O">تحليل</a><a href="https://ara.reuters.com/article/idARAKBN1ZW06O">-</a><a href="https://ara.reuters.com/article/idARAKBN1ZW06O">المصرية</a>&nbsp;<a href="https://ara.reuters.com/article/idARAKBN1ZW06O">للاتصالات</a>&nbsp;<a href="https://ara.reuters.com/article/idARAKBN1ZW06O">لن</a>&nbsp;<a href="https://ara.reuters.com/article/idARAKBN1ZW06O">تلجأ</a><a href="https://ara.reuters.com/article/idARAKBN1ZW06O">&nbsp;"</a><a href="https://ara.reuters.com/article/idARAKBN1ZW06O">لحق</a>&nbsp;<a href="https://ara.reuters.com/article/idARAKBN1ZW06O">الشفعة</a><a href="https://ara.reuters.com/article/idARAKBN1ZW06O">"&nbsp;</a><a href="https://ara.reuters.com/article/idARAKBN1ZW06O">وربما</a>&nbsp;<a href="https://ara.reuters.com/article/idARAKBN1ZW06O">تبيع</a>&nbsp;<a href="https://ara.reuters.com/article/idARAKBN1ZW06O">حصتها</a>&nbsp;<a href="https://ara.reuters.com/article/idARAKBN1ZW06O">في</a>&nbsp;<a href="https://ara.reuters.com/article/idARAKBN1ZW06O">فودافون</a>. رويترز
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قطب، م. (أغسطس 2015).&nbsp;<a href="https://www.almasryalyoum.com/news/details/800465">رئيس</a><a href="https://www.almasryalyoum.com/news/details/800465">&nbsp;&laquo;</a><a href="https://www.almasryalyoum.com/news/details/800465">الضرائب</a><a href="https://www.almasryalyoum.com/news/details/800465">&raquo;&nbsp;</a><a href="https://www.almasryalyoum.com/news/details/800465">السابق</a><a href="https://www.almasryalyoum.com/news/details/800465">:&nbsp;</a><a href="https://www.almasryalyoum.com/news/details/800465">الفاقد</a>&nbsp;<a href="https://www.almasryalyoum.com/news/details/800465">الضريبى</a>&nbsp;<a href="https://www.almasryalyoum.com/news/details/800465">يصل</a>&nbsp;<a href="https://www.almasryalyoum.com/news/details/800465">إلى</a><a href="https://www.almasryalyoum.com/news/details/800465">&nbsp;٣٠٠&nbsp;</a><a href="https://www.almasryalyoum.com/news/details/800465">مليار</a>&nbsp;<a href="https://www.almasryalyoum.com/news/details/800465">جنيه</a><a href="https://www.almasryalyoum.com/news/details/800465">&nbsp;(</a><a href="https://www.almasryalyoum.com/news/details/800465">حوار</a><a href="https://www.almasryalyoum.com/news/details/800465">)</a>. المصري اليوم &nbsp;
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كساب، ب. (2019). الضرائب مصلحة من - الفصل الخامس. دار المرايا.
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&nbsp; &nbsp;محسن عبد الرازق وسناء عبد الوهاب. (فبراير، 2020).&nbsp;<a href="https://www.almasryalyoum.com/news/details/1469855">مصادر</a><a href="https://www.almasryalyoum.com/news/details/1469855">: &laquo;</a><a href="https://www.almasryalyoum.com/news/details/1469855">الضرائب</a><a href="https://www.almasryalyoum.com/news/details/1469855">&raquo;&nbsp;</a><a href="https://www.almasryalyoum.com/news/details/1469855">تنتظر</a>&nbsp;<a href="https://www.almasryalyoum.com/news/details/1469855">إتمام</a>&nbsp;<a href="https://www.almasryalyoum.com/news/details/1469855">صفقة</a>&nbsp;<a href="https://www.almasryalyoum.com/news/details/1469855">فودافون</a>&nbsp;<a href="https://www.almasryalyoum.com/news/details/1469855">لمحاسبتها</a>. المصري اليوم&nbsp; &nbsp;
</li>
</ul>

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