In the years leading up to the 2011 revolution, Egypt maintained a policy of limited taxation, purportedly to encourage investment and entrepreneurial activity. Only earned income was taxed, with a 20 percent cap on both payroll and corporate levies. More recently, though, Egypt's dire fiscal crisis combined with a changing social contract inspired by the revolution has prompted the government to rethink its tax scheme.

After months of discussion, on April 14 the Shura Council approved Law 101 for 2012, ushering in the most substantive changes to Egypt's tax policy since 2005. At first glance, they appear to be a mixed bag, with some measures clearly aimed at establishing a more progressive taxation scheme, some designed to cool down capital markets, and others that, frankly, defy explanation. Questions remain as to how and when the legislation will be implemented, with many details left to be determined by official regulations. At press time, the new law was not yet published in Egypt's Official Gazette, so the following analysis is based on advance copies obtained by tax experts.

Tax evasion

While the new law acknowledges that companies have the right to operate with an eye to tax efficiency, it gives the state broad powers to intervene in business decisions the Tax Authority deems motivated primarily by the desire to avoid taxation. This provision seems to be aimed squarely at firms seeking to reap tax-free windfalls by issuing new stocks (Egypt does not tax initial public offerings), says Ashraf Abdel Ghani, head of the Egyptian Tax Executives Society. If the money from such a sale is reinvested in the company, it remains tariff free. However, if the Tax Authority determines that new shares were issued simply to bring in non-taxable revenue, the company is subject to sanctions.

This section of the law also applies to mergers and acquisitions. For example, explains Abdel Ghani, if a profitable company merges with an unprofitable one, the Tax Authority has the right to weigh in on whether the merger was part of a legitimate growth strategy or motivated primarily by a desire to reduce the successful company's tax liability.

The legislation states that whenever a transaction with tax implications is initiated, the companies involved must submit paperwork to the Tax Authority explaining the rationale for the deal. If a transaction is deemed questionable, the burden of proof falls on authorities, who must show that the companies in question acted with malice. If officials prove the players were deliberately aiming to dodge taxes, the authorities can recalculate the value of the original agreement or change its format. The law does not make clear what specific penalties would apply or how; nor does it mention a right to redress in court. The details of exactly how this would work in practice and the nature of sanctions will depend on regulations established by the financial supervisory authority.

Corporate income tax

Companies are to be taxed at a uniform rate of 25 percent of their profits, regardless of size. Only small startups qualify for exemptions. Companies earning below LE 50,000 a year can operate tax free their first three years, unless the owner has been out of college for 15 years or more, in which case the exemption is valid for just one year. However, regardless what year the business owner finished school, the exemption is extended to five years if an enterprise receives up to 50 percent of its start-up capital from the National Fund for Development. (Companies that qualify for NFD funding have already been screened for sustainability.)

Stock market tax

After months of speculation and confusion about how markets are to be taxed, the Shura Council elected to apply two measures. The first is a so-called Stamp Tax, in which both buyer and seller pay LE 1 for every LE 1,000 of stocks traded, regardless of how long they held the stock or whether the transaction represented a profit or a loss. A recent statement

by the head of the Tax Authority explained that this levy is intended to slow down the market and discourage speculation.

A more complicated measure relates to stock market capital gains, which are taxed only if the shareholder sells stock within three years of realizing a gain. This is defined as a positive change to the "fair market value" of a stock while he or she holds it. Who determines this fair market value for legally binding tax purposes is not clear; nor does the law indicate the amount of the tax. The measure appears to be intended to encourage people to hold onto stocks for long periods of time rather than seeking to turn quick profits.

Individual income tax

The law raises the exemption threshold for income tax to LE 12,000 per year per person, up from LE 9,000 previously. It also legally enshrines a 25 percent tax bracket imposed in 2012 and adds a new 30 percent bracket for the highest earners. The marginal tax brackets for individuals are as follows:
• up to LE 30,000 of earned income is taxed at 10 percent.
• from LE 30,000 up to LE 45,000 is taxed at 15 percent.
• from LE 45,000 up to LE 1 million is taxed at 20 percent.
• from LE 1 million up to LE 5 million is taxed at 25 percent.
• any income exceeding LE 5 million is taxed at 30 percent.
(By contrast, in the United States, income over $183, 250, or about LE 1.28 million, is subject to a 33 percent federal tax, in addition to state and local levies; the top U.S. tax bracket, 39 percent, kicks in for income above $400,000, or LE 2.8 million.)

Debt tax

A completely novel portion of the tax code is a tariff on debt to banks and other formal lenders at a rate of LE 1 for every LE 1,000

borrowed, to be split equally between debtors and creditors. If debt increases--due to a debtor racking up interest by falling behind their payment schedule, for example--the tax bill also goes up. The tax is to be paid annually and reviewed quarterly by authorities. Experts couldn't explain the rationale for this tax, but they noted that it would increase the price of loans for companies and individuals.

Property and advertising

In addition to the approved, but yet to be enforced, real estate tax for property owners, the Shura Council approved a 2.5 percent tax to be levied on sellers of property. Exemptions apply to agricultural land, real estate that's seized by the state in the wake of bankruptcy and government-owned buildings designed to receive members of the public. (The Mogamma, for example, would be exempt, whereas buildings housing ministerial back offices would not.) Also exempt are assets that have been held by companies for more than five years and inherited property if the inheritor has not made improvements in an attempt to increase its value. This tax will be deducted from a taxpayer's gross income before his total liability is assessed.

Legislators also approved an increase on commercial advertisement taxes from 15 to 20 percent.

What isn't in the law

Several measures that have been widely discussed by the public and the press do not appear in the tax law. A tax on dividends was rejected by the Shura Council on the grounds that any distributed dividends have already been subject to tax as part of a company's income. Likewise, a much-talked about proposed tax on initial public offerings was scrapped. Nor are there any changes to sales tax--likely due to ongoing plans to overhaul the sales tax structure and implement a Value Added Tax in 2014.

© Business Monthly 2013