Bitter options for Egypt as tax evasion persists

CAIRO - A dispute about the Egyptian Finance Ministry seeking to punish companies that fail to pay taxes exposed the scale of tax evasion in Egypt and government’s problem in collecting corporate taxes.

Head of the Tax Authority Emad Samy said his agency would propose an amendment of the tax law to give the finance minister the right to obtain bank information about companies that submit unrealistic tax statements.

The amendment, he said, would only address tax evasion as a problem and the proposed access would only concern companies and individuals that submit tax statements believed by the authority not to match real income figures.

However, Central Bank of Egypt Governor Tarek Amer described the accounts of bank clients, including those of companies, as a “red line.” He said nobody has the right to obtain information about accounts in Egypt’s banks, noting that he would not allow anybody to compromise the independence of the central bank.

Amer, economists said, was trying to stop a potential confidence crisis in the Egyptian banking system, even though Article 99 of the income tax law gives the Finance Ministry the right to information about banking accounts after getting permission from the Court of Cassation.

The Finance Ministry’s and Tax Authority’s move exposes concerns regarding the drop in tax revenues because of rampant evasion.

“The extent of tax evasion in our country is enormous and this is a problem that needs a radical solution,” said Rashad Abdo, an economics professor at Cairo University. “Nonetheless, revealing the bank accounts of clients is not a solution.”

In the fiscal year 2016-17, the country lost $22.3 billion because of tax evaders, Samy said.

He said the Tax Authority only collected 40% of the taxes that should be paid by individuals and businesses, which is having massive repercussions on the national budget and the performance of the economy.

One of the main problems lies in Egypt’s informal economy, which analysts said was almost three times the size of its formal economy. Many in Egypt work in informal industries and without a formal contract, arrangements that are difficult to tax.

“This means that almost two-thirds of those who should pay taxes do not pay them,” said Ashraf al-Arabi, a member of the Economic Affairs Committee in the Egyptian parliament.

Tax evaders allegedly include some of the country’s celebrities. A famous singer and actress reportedly paid 5 Egyptian pounds (about $0.28) in taxes last year even as her earnings were believed to be in the millions of pounds. A Lebanese singer also paid 5 pounds in taxes, local media reported.

Likely seeking to pacify Amer and a worried business community, Finance Minister Mohamed Moiet said, only hours after Samy proposed an amendment to the tax law, that the head of the Tax Authority had been misquoted.

He confirmed the independence of the Central Bank and the sanctity of the accounts of bank clients. Despite this, few say the issue has been resolved.

Taxes are the largest single revenue source in the Egyptian budget. Although they were only a fraction of what should have been collected, tax revenues in the 2016-17 budget amounted to $21.2 billion, more than one-third of revenue.

In the current fiscal year, the government hopes to collect $43 billion in taxes. Overall spending in the budget is projected at $78 billion.

Financial planners hope the budget deficit in this fiscal year, which started in July, will not exceed 8.4% but failure to collect all due taxes means that those hopes will likely be dashed, economists said.

Despite improving economic indicators and optimism, thanks to successes of the country’s economic reform programme, Egypt’s overall debts have reached $211 billion, including $88 billion in foreign debts.

Those debts are expected to rise if tax collection staggers and tax evasion persists.

Lawmakers plan to question the finance minister and the head of the Tax Authority on the reasons for failures to adjust the tax system.

“The Tax Authority should not treat its failure in tax collection by demanding access to secret bank accounts,” said MP Bassant Fahmi, another member of the Economic Affairs Committee. “Such statements are catastrophic because they shatter confidence in the national banking system.”

Hassan Abdel Zaher is a Cairo-based contributor to The Arab Weekly.

This article was originally published in The Arab Weekly.