Egypt's largest fortunes unscathed by latest tax changes

CAIRO — Egypt’s parliament in the last week of May approved a raft of new tax hikes and reforms initially put forward by the government in an attempt to increase and diversify the state’s fiscal revenues away from debt. The move came as the country faces a dire economic crisis and the public coffers are under great strain to sustain expenditures.

The draft budget for the 2023/2024 fiscal year drawn up by the Cabinet foresees a rise in tax revenues of up to 31% to 1.53 trillion Egyptian pounds (about $49.5 billion at current exchange rates) compared to the fiscal year closing in June.

The first round of measures provides for a 5 to 20% increase in taxes on tickets to entertainment venues such as theaters, cinemas, parks and clubs, as well as a new 3% tax on products bought in duty-free shops.

A 10% tax was also introduced on imported luxury goods, including food, as well as on other products such as alcoholic beverages, chocolate and roasted coffee. Stamp taxes on a number of insurance premiums were raised as well.

The measures sparked criticism online and among members of parliament who believe the tax hikes will put even more pressure on the pockets of Egyptians, who are already grappling with rampant inflation. Some voiced criticism as well over the fact that vast public resources in the meantime continue to be spent on macro projects with dubious returns.

The government, however, expects that the move will hardly affect the bulk of Egyptians, who do not consume most of the targeted goods and services. And it does not expect the consumption of these items to be impacted as those who buy them tend to be well off.

“Fees and taxes on luxury and high-end goods were increased to fund the public treasury in a basic way,” Nabil Abd el-Raouf, a tax adviser, professor of accounting and taxation at El-Shorouk Academy, and former employee at the Egyptian Tax Authority, told Al-Monitor.

The other major change to pass through parliament was a reform of the income tax law. The amendments, which will come into effect in July, expand the exemption threshold from 24,000 to 36,000 Egyptian pounds (about $1,160), and those earning over 1.2 million Egyptian pounds (about $38,773) will now be subject to a 27.5% tax instead of 25%.

With this latest increase to the highest tax bracket, the government aims to bring in an extra 4 billion pounds (about $130 million), which will be directed to cover part of what it will lose from the increased exemptions, expected to benefit some 22 million employees.

These amendments were also slammed by some parliament members. They noted that after the recent devaluation of the local currency, the dollar value of 1 million Egyptian pounds is around 75% less than what it was in 2016, so they consider that the hikes to that bracket mostly impact the middle classes that bear the brunt and in return receive few state services. There was also criticism for failing to raise taxes specifically on Egypt’s largest fortunes.

Omar Ghannam, an economic researcher, noted that the amendments are greater than in previous occasions but are far from ambitious. “They raised the exemption threshold by around 50%, which is larger than what they usually do; but also, Egypt has had cumulative inflation over the past year of probably a little more than 50%,” he told Al-Monitor.

“[The increase applied to top earners] is a step in the right direction, but it’s a very small step because that’s our highest tax bracket,” he added.

Despite these latest tax reforms and hikes, the main rise in receipts for the next fiscal year is expected to come from an e-invoicing system whose registration deadline closed in April.

The new system, which was first introduced in March 2020, is intended to help integrate the country’s large informal economy and cut tax avoidance by requiring that both businesses and individuals offering services issue — with some exemptions — electronic invoices through a government portal.

Callee Davis, an economist at Oxford Economics, recently wrote that while these reforms aim to ease pressure on lower-income households, they risk driving up inflation.

Still, it is not yet clear how this latest raft of fiscal measures will affect the state’s tax revenues for the next fiscal year, as Egypt’s tax revenues over the past decade have been systematically lower than initial projections.

Ghannam also said that instituting a capital gains tax, raising the marginal tax bracket for personal income tax for the highest earners, and having a tiered system for corporate taxes are “some ways to try to raise tax revenues” that would be more ambitious.