The Economy’s Plague

24 November 2017: With the absence of a legislative frame- work that imposes taxes on certain revenue sources, and a huge infor- mal sector, tax evasion is a widespread practice among businesses of various scales in Egypt. It isn’t uncommon for consumers in Egypt not to receive receipts for their payments in independent pharmacies, clinics, small grocery stores, outlets and car dealers, among others.

Hala, a housewife, says she paid LE 30,000 for surgery at a private hos- pital that refused to give her a receipt. The same incident was repeated with Magda, an engineer who paid LE 120,000 for a surgercical procedure at a private clinic. The practice isn’t only widespread among the clinical sector; Soha, a public relation specialist, said that she paid LE 140,000 for a car and the dealership refused to give her a receipt.

Tax evasion is also commonly carried out by issu- ing receipts with less value than what’s been actu- ally paid. For instance, Emad, an accountant, had an open-heart surgery at a private hospital where he was given a receipt for LE 27,000 instead of the LE 67,000 he actually paid. Meanwhile, Assem, a university professor, said that he had to threaten the dealership that he would not buy the car if he did not get the receipt for the full sum paid.

The state has been trying to set laws and regula- tions to combat that practice, which does not only affect the state budget, but also consumers when they do not get receipts for the goods and services they pay for, so end up without proof of the transac- tion that occurred.

Such incidents are rarely reported to Consumer protection Agency (CPA), partially due to the con- sumer’s unawareness of his rights, and also because it can be difficult to find other accessible outlets that abide by law. But with recent reforms and initia- tives, the state is hoping to collect LE 70 billion in outstanding taxes.

Budget deficit and tax collection

The Egyptian government is targeting a budget deficit of 9.1% of GDP and 100% of tax collection rate in the fiscal year 2017/18, Deputy Minister of Finance for Budget Affairs Mohamed Moeet said in May. Egypt’s budget deficit had hit 8.2% of GDP at LE 322 billion ($12.4 billion) during the fiscal year 2016/2017, compared to the LE 222.9 billion defi- cit registered in the previous fiscal year, according to a statement released by the Ministry of Finance in the same month.

There has been also an expansion in tax base; a report by the Central Agency for Public Mobiliza- tion and Statistics (CAPMAS) indicates that there was a 90% increase in net foreign direct invest- ment (FDI) during the first quarter of the fiscal year 2016/17, compared to the same quarter last year, recording $1.9 billion during this period.

The report also pointed out that Egypt witnessed an increase in the proceeds of commodity exports by 15.9%, recording almost $21.7 billion in the fiscal year 2016/2017, compared to $18.7 billion in the previous fiscal year. This increase came as a result of the high competitive advantage of Egyptian ex- port prices following the flotation of the Egyptian pound, as well as the rise in petroleum exports by 15.4%.

Reform measures to combat tax evasion

A statement released by the Tax Authority in July indicated that, “with the shift from sales tax to value-added tax (VAT), the authority collected an additional LE 50 billion ($2.7 billion) and is trying to go beyond target.” Deputy Minister of Finance for tax policies Amr al-Monayer announced in August that tax collected during fiscal year 2016/17 surpassed initial targets for the first time, recording LE 433 billion ($24.37 billion), 30% more than that collected in the previ- ous year, according to official figures. After ratifying tax disputes’ settlement law, around 4,000 disputes were resolved, bringing LE 2 billion in revenues, Monayer says.

“Between 2015 and 2017, tax revenue contribution to the budget increased to 75%, up from 72%,” he adds. The Head of the Egyptian Tax Authority, Com- missioner Emad Samy, notes that the authority is working on streamlining the informal economy into the taxing system, primarily to collect outstanding taxes worth LE 70 billion, identify evading activities and issuing a law for simple accounting and book- keeping by small enterprises. As part of the authority’s development policy, two units were established, one to follow up on the de- velopment of the non-commercial occupations and the other for automated tax assessment.

To benefit from international experience in profit transfer and tax base manipulation, Egypt signed in June a multiparty agreement on inter- national anti-tax avoidance. This agreement is an extension of the Base Erosion and Profit Shifting (BEPS) initiated by the G20 in 2012 and is led by the OECD. BEPS refers to tax-planning strategies used by multinationals to exploit gaps and mismatches in tax rules to artificially shift profits to low or no-tax locations where there is little or no economic activity.

Furthermore, Parliament Member Hassan El Sayed said in September that he would add articles in the draft of Cybercrime Law, which will be re- viewed and voted upon by the parliament in Octo-ber, to impose taxes on the revenues of social net- works from advertisements and business accounts.

Analysis of recent reforms

“The VAT is an indirect tax that cannot be evaded, unlike income tax. However, it is regressive as it affects both citizens of high income and low income,” Adel Beshai, professor of economics and former department chair the American University in Cairo (AUC), says.

Commenting on aforementioned cases of tax eva- sion, Beshai says that there must be an estimation of taxes for lawyers, private clinics and doctors, account- ing firms as well as shops. “To combat tax evasion, there must be real control and law enforcement. Hire serious, highly paid employees who do right estimates by visiting for instance clinics and companies, and observing the number of clients and patients,” Beshai explains.

Samer Atallah, an economics professor at AUC, says that the biggest number of businesses that do not pay taxes is in the informal sector, which is difficult to formalize. Financial inclusion through soft loans has been among the suggestions to give an incentive for the formal sector to formalize. “Credit is very high to get,” Attalah comments, suggesting that issues like bureaucracy and corruption faced by business owners when issuing licenses “have not been attempted yet.

” Beshai views the formalization of the informal sec- tor as a step that can be postponed, emphasizing the importance of facilitating the legal and administrative processes the formal sector goes through. “Leave the informal sector alone. Fix the formal sector first. There are many who are operating in the formal sec- tor and have started to switch to the informal because of the difficulties they encounter,” Beshai says, high- lighting how wrong policies can push business owners to the informal sector.

“Even the banking sector had become informal due to wrong policies. When we did the floating, the black market of foreign currencies, which belongs to the informal sector, almost disappeared,” Beshai adds. “Are we serious [about eradicating tax evasion]? That’s the question. If we want to do it, we will do it.”