Egypt: Tax Reform Continues As Revenues Meet Lowered Expectations

Reference ID 10CAIRO219
Created 2010-02-21 07:07
Released 2011-01-28
Classification UNCLASSIFIED//FOR OFFICIAL USE ONLY
Origin Embassy Cairo



VZCZCXYZ0030
RR RUEHWEB

DE RUEHEG #0219/01 0520751
ZNR UUUUU ZZH
R 210751Z FEB 10
FM AMEMBASSY CAIRO
TO RUEHC/SECSTATE WASHDC 0305
INFO RHEHNSC/WHITE HOUSE NATIONAL SECURITY COUNCIL WASHINGTON DC
RUEATRS/DEPT OF TREASURY WASHINGTON DC
RUEHEG/AMEMBASSY CAIRO

UNCLAS CAIRO 000219

SENSITIVE
SIPDIS

E.O. 12958: N/A
TAGS: ECON EFIN PGOV SOCI EG
SUBJECT: Egypt: Tax Reform Continues As Revenues Meet Lowered
Expectations

REF: 10 CAIRO 26

¶1. (SBU) KEY POINTS



-- Egypt's Tax Commissioner expects the implementation of the new
real estate law to proceed without significant alternations.



-- He claims that much of the public resistance to filing property
declarations is rooted in people's desire to maintain the secrecy
of their wealth, which has traditionally been held in real estate.



-- Egypt's tax revenue is down substantially from last year, but
appears to be on track to meet budgetary expectations.



-- No new tax laws are expected to be presented to the Parliament
prior to the upcoming parliamentary and presidential election
cycles, but the Tax Authority will continue working to automate its
systems and improve data collection in support of expanding and
deepening the tax base.



--------------------------------------------- -------------------

Real Estate Tax Law Unchanged

--------------------------------------------- -------------------



¶2. (SBU) In a February 7 meeting, Ashraf Al Arabi, Egypt's Deputy
Minister of Finance for Tax Policy and Commissioner of the Egyptian
Tax Authority, told us that he was confident that implementation of
the real estate tax would go ahead as scheduled (ref A). He
acknowledged the negative publicity surrounding the registration of
properties, which had "created anxiety" among taxpayers. Despite
this, he was confident that the plan would move forward with "no
official changes." Referencing President Mubarak's comments last
month, in which Mubarak suggested he might advocate for a
progressive tax structure or possible homestead exemption, Al Arabi
told us that the real estate tax situation had subsequently "been
clarified to the President" and that Mubarak supported leaving the
law intact.



¶3. (SBU) Al Arabi explained that there were a number of reasons for
the public outcry against the real estate tax: Since most income
tax is paid through direct payroll deductions, the vast majority of
taxpayers in Egypt have no experience dealing directly with the Tax
Authority (Note: for taxpayers who have income tax deducted by
their employer, there is no annual tax filing requirement. End
note). His office, Al Arabi said, deals directly with only about
3.1 million corporate and self-employed tax filers. The new real
estate tax registration requirement will now bring 40 million
Egyptians in contact with the Tax Authority. He added that part of
the outcry relates to people's resistance to disclosing their real
estate holdings. According to Al Arabi, Egyptians have
traditionally used real estate as their primary store of wealth,
and people do not want information on their assets disclosed to the
government or made public. This echoes his public comments
suggesting that once holdings are declared, some people,
particularly government employees, might find it difficult to
explain where they got the resources to buy the properties they
own.



--------------------------------------------- -------------------

Revenues on Track, But Reforms Have Slowed

--------------------------------------------- -------------------



¶4. (SBU) In Egypt's fiscal 2009/10 budget, tax revenues are
projected at LE 145.5 billion (US$26.5 billion) down 10.8% from
last year. Actual tax revenues during the first six month of the


fiscal year (July-December) are down 8.5%. Tax revenues from the
Egyptian General Petroleum Corporation (EGPC), the state-owned oil
company, which were budgeted to drop 45% due to lower world oil
prices are actually running about 6% lower than the already reduced
budget forecast. With the exception of the EGPC revenue, Al Arabi
asserted that revenues will meet projections and that the shortfall
from EGPC taxes could be made up by better than expected revenues
from taxes on treasury bills and bonds, which are taxable for the
first time this year.



¶5. (SBU) Al Arabi said that the onset of the financial crisis in
2008 stalled well-advanced plans to replace the sales and
consumption taxes with a unified Value Added Tax (VAT), and that he
did not envision much progress in that area until after the 2010
Parliamentary elections and the 2011 Presidential election. He
explained that some articles of the new law might still be passed
even if the complete reform could not yet be addressed.



¶6. (SBU) Al Arabi told us that tax collection procedures had
improved substantially, particularly for corporate taxpayers, and
that the GOE had made progress in closing loopholes and incentives
for tax evasion. Tax preparers are now jointly liable with their
clients for information provided in tax returns. This has removed
much of the incentive for accountants to evade rather than comply
with the law. He said that the Tax Authority still has major
compliance issues with small and mid-sized businesses, many of whom
deal strictly in cash and lack many of the formal legal and
accounting structures that would aid in tax collection. He
estimated that the government's tax revenues currently amount to
13-14% of GDP, but that by taxing the large informal economy, this
could rise to 20%.



--------------------------------------------- -------------------

Improvements in Data Collection Are the Key

--------------------------------------------- -------------------



¶7. (SBU) El Arabi, who has been in his current position for a
little less than three years, comes from a private sector
accounting and auditing background. He stated that the
reorganization he has done in the Tax Authority has proven
difficult. He pointed to the example of consolidating the 64 "tax
regions" that had previously existed into the 15 regions that exist
today. This consolidation removed a great deal of redundant
bureaucracy, but also limited promotion possibilities for Tax
Authority employees. He said successes in automation and
segmentation meant that the Tax Authority was "no longer a soft
administration" within the government.



¶8. (SBU) Al Arabi credited US assistance through USAID with much of
the progress in both automation and training within the Tax
Authority. He added that further progress in tax collection will be
reliant on the quality of information gathered and the proper
analysis of that data. He said he plans to create an "internal
inspection unit" and will build an "intelligence center" for data
collection and verification.



-------------

Comment

-------------



¶9. (SBU) Lower revenues and higher budget deficits remain a worry
both for Egyptian policy makers and the rest of the financial
community. Egypt does, however, appear to be on track to meet its
tax revenue projections for the year. As reported septel, the
spending side of the equation is less promising, as greater than
expected expenditures on subsidy programs and fiscal stimulus
packages continue to put a strain on the overall budget. Public
discontent with many of the measures proposed by Finance Minister
Youssef Boutros Ghali, including the real estate tax, continues to


be reflected in the press and among some members of the Parliament.
However, all indications are that Boutros Ghali continues to have
the support of the President, and the much needed fiscal reforms he
has been promoting will continue, though perhaps at a slower pace.



SCOBEY







Source: Wikileaks