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Viewing cable 10CAIRO219, Egypt: Tax Reform Continues As Revenues Meet Lowered

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Reference ID Created Released Classification Origin
10CAIRO219 2010-02-21 07:07 2010-11-28 18:06 UNCLASSIFIED//FOR OFFICIAL USE ONLY 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