Reform of Income Taxation in Egypt

Abstract

An integral part of Egypt's early 1990's structural reforms were the tax reforms. Among the new laws passed was Income Tax Law (187/93). While this law, among others, brought the Egyptian tax system much closer to that of a modern one, there were still various elements lacking. Recently the Egyptian government is debating changes to the income tax laws as part of further reforming the tax system. The proposed changes are intended to bring more equity into the system, lower the income tax burden, simplify the administration of and compliance to the law, rationalize penalties, and speed up the appeals process; and indeed most of the proposed changes will most likely do that. The fact that personal and corporate income taxation are addressed under one law and that the highest marginal rate for personal taxation is equal to that of business taxation demonstrates a systemic view to income taxation. The highest marginal rate of 30% is reasonable and places Egypt in a competitive situation compared to many other developing countries. Among the proposed changes are the elimination of a few exemptions and deductions, the most notable of which are the interest equivalent on paid-up capital for listed joint stock companies, the imputed rental value of buildings and land owned and used by a company in its business, and the 5-year tax exemption for the income of industrial companies employing 50 workers or more. While the proposed elimination of the exemptions and deductions is indeed sensible, it is insufficient, as there continues to be many more that violate equity, erode the tax base and may generate pressure for additional incentives. Generous tax holidays and incentives should be reconsidered in light of their minor impact on enhancing investment and their heavy cost in forgone taxes. Favoring businesses based on the type of legal establishment should be eliminated; favoring public sector banks should be ended; exempting or giving preferential treatment to official dues and certain board distributions should be terminated. The proposed changes would strengthen the income tax law. However most of the problems with the current tax system are not with the laws but with the way they are administered. To cope with and limit outright tax evasion, the proposed changes in the laws stipulate that tax clearance be required before carrying out one's business in a government office. While in principle, this is acceptable, it carries the risk of further delays in carrying out business in a system that is already known for its bureaucratic entanglements and lengthy processes. The proposal would change the appeals system to reduce the probability of disputes lingering for years. This will only succeed if the tax authority and the courts are capable of handling a large number of appeals in addition to the existing backlog of cases. The proposed changes to the income tax laws are all in the right direction but they need to be further expanded and more importantly to be complemented by a serious reform of the administration.