Income tax law: inside the debate

There have been divergent views on the postponement of tax on the profits of the stock exchange, which came about as a result of the amendments to some provisions of the Income Tax Law.

Those opposing the application of the tax cheered the postponement, arguing that Egypt needs to wait until the stock exchange is revitalized and is able to compensate for the great losses it has incurred over the last few years; hence, the exchange transactions cannot be charged with any additional financial burdens at a time when more support and incentives are needed. In addition, the application of the exchange tax will result in foreign investors abandoning the Egyptian stock exchange. In turn, this will affect the volume of investments in Egypt and the volume of foreign exchange flow while the government is trying to consolidate and increase the state’s foreign exchange reserves.

Furthermore, proponents of the delay argue that the implementation of this tax will negatively affect the state budget because many of the institutions dealing in the stock exchange are state institutions, such as public sector entities, holding companies, public banks, postal authorities and social insurance funds. They also expect that the application of this tax will have a negative impact on government company proposals in the future.

Others calling for the tax to be levied see the delay as a bias to the rich, who make billions in profits through their transactions on the stock exchange and pay no taxes, at the expense of the poor, who bear the burden of taxes. They also accuse the government of not being able to levy taxes on the rich and on stock exchange investors. They argue that the tax on capital gains and securities’ transactions are the lowest in comparison to most countries that apply this type of tax.

Additionally, on a recent visit to Egypt, IMF experts also argued for the tax to go into effect, noting that its postponement goes against tax justice and will deprive the state budget of much-needed revenue.

A personal viewpoint

My personal assessment of this issue is the need to abolish the tax on dividends and capital gains of the stock exchange, not to postpone it, and to be sufficient—at least during this phase—with the stamp tax established by Law No. 111 of 1980 and its various amendments. This position is not biased towards the rich or the movers and shakers of the stock market, nor is it ignorant of the chronic deficit suffered by the general budget. Egypt has been unable to implement the program of economic reform initiated at the beginning of the 1990s, and has not made remarkable progress until now.

Stock exchange stability and activity mirrors the national economy, playing a very important role in the gross output level by collecting savings and directing them to investment activities at the highest possible return, and producing concessional sources of financing on the basis of participation. Above all, it helps people find a systematic way of employing their money and savings, to achieve an average return above what they may receive from other investment means, such as bank deposits and real estate.

As for the Egyptian stock exchange, a tax on transactions—especially for the time being—will lead to more losses and instability, driving foreign investors to other countries that do not impose taxes on profits earned. This tax will lead to the reluctance of small savers to invest in the stock exchange and prefer banks. As a result, deposits accumulate in banks while projects are in dire need of financing. Moreover, comparing the Egyptian Stock Exchange to global stock exchanges is unfair, because stock exchanges in developed countries are highly efficient. Past experience demonstrated that not all IMF expert recommendations apply to all countries.

The activation of the stock exchange and granting more support and incentives are more important now than imposing a tax on transactions. In addition, the revenue generated from the stamp duty actually applied is not little. The Egyptian Stock Exchange needs to combine all efforts to overcome obstacles in its way, ensuring the use of valid securities—no cheating, fraud, exploitation or scams. The stock exchange needs to eradicate investment illiteracy in a large segment of Egyptians, and erase the negative image established by the Egyptian cinema which long portrayed investment in the stock market as a gamble and risk often ending with the death of the investor of a heart attack immediately after receiving the news of losing all his money. This has been proven untrue after legislators worked hard on drafting legal frameworks that guarantee the integrity and feasibility of this investment and savings means. Legislators also authorized the establishment of many companies working in the field of securities to ensure seriousness and reduce losses to the lowest level possible.

The Egyptian Stock Exchange also needs to activate the role of investment funds and increase corporations’ interest in establishing many investment funds, which play the role of the financial intermediary between individual investors, especially the small savers, and the various investment fields.

Achieving this, real economic and social development would take place, and the Egyptian Stock Exchange would become strong and highly efficient, serving a strong economy. Meanwhile, taxes on stock market transactions could be levied, not only at a 10% rate, but at a much higher amount.

Background

The May Income Tax Law amendment stated in its first article that, “Suspension of Law No. 53 of 2014 amending certain provisions of the Income Tax Law promulgated by Law No. 91 for 2005 with respect to capital gains tax due to the transaction of securities credited to the stock exchange for three years and beyond the collection of the tax referred to in the preceding paragraph, from May 17, 2017 continues until the date of implementing the act.”

The idea of a tax on the profits of the stock exchange dates back to 1992, when this tax was imposed by Article 14 of Law No. 95 of 1992 on the Capital Market, at 2% deduction at the source. The article was implemented for four years before being canceled due to pressure exerted by a number of heavyweight dealers in the stock market at the time. In 2013, Law No. 9 of 2013 was issued amending the 1980 Stamp Tax Law which “imposes a proportional stamp tax of 1/1,000, borne by the buyer, on all purchases or sales of Egyptian or foreign securities. The entity responsible for settling these transactions is in charge of collecting this tax and supplying it to the Tax Authority within the first 15 days of the month following the transactions. The executive regulations determine the tax collection and supply rules.

In 2014, the tax was cancelled upon the application of Law No. 52/2014, which imposed a 10% tax on dividends and capital gains registered at the Egyptian Exchange. Given the situation at that time, the House of Representatives approved the delay of the law in May 2015 for two years; however, it was further suspended for three years, ending in May 2020.