New Egypt Tax Law: Cuts for Poor, Business Hikes

By AYA BATRAWY Associated Press

CAIRO May 21, 2013 (AP)

Egypt's president signed a new tax law Tuesday that cuts the amount paid by poorer Egyptians in the latest move aimed at reforming the country's economy.

The changes, which are more favorable than the previous tax law for the country's most vulnerable, could boost Islamists in parliamentary elections slated for later this year.

The interim parliament, led by Islamist allies of President Mohammed Morsi, approved the measure last week.

Ahmed el-Sayyed el-Naggar, an economic expert at the Ahram Center for Political and Strategic Studies, argued that the tax reforms target an already struggling middle class, but leave the country's richest people untouched.

Lawmaker Mohammed Gouda, a member of Morsi's Muslim Brotherhood-affiliated party and a member of parliament's economic committee, told The Associated Press that the law was aimed at protecting foreign investments, fostering economic equality and bolstering revenues.

The new tax law may also help reduce a burgeoning budget deficit projected to reach $28.5 billion in the coming fiscal year, around $1.7 billion more than this year.

Egypt is negotiating a $4.8 billion loan from the International Monetary Fund that could restore confidence among foreign investors in the economy. The IMF is pushing Egypt to overhaul its tax and subsidy system as conditions for the loan.

The IMF loan is one measure that could increase foreign currency reserves, about $14.4 billion last month, a third what they were before Egypt's 2011 uprising. The country's currency has meanwhile lost more than 10 percent of its value since December.

The law signed Tuesday by Morsi stipulates that anyone who earns 5,000 Egyptian pounds or less a year ($716) will be exempt from paying income tax — as it was under ousted President Hosni Mubarak.

But the new law also takes into consideration everyday expenses, allowing up to 7,000 pounds ($1,000) in tax deductions. This technically expands the bracket of those exempt from paying income tax to include those who earn salaries up to 12,000 pounds ($1,700) a year.

The second, third and fourth tier tax brackets have also been expanded, lowering taxes by around five percent on a range of annual incomes up to 250,000 Egyptian pounds ($35,000).

The new tax law will benefit the country's poor and could help improve their living conditions, according to economist Wael Gamal.

It could also help bolster the popularity of Islamist parties eyeing elections expected to take place sometime this year, though no date has been set.

The uprising that toppled Mubarak was fueled in large part by poorly paid civil servants and impoverished Egyptians tired of rampant corruption and striking social inequities.

Around 40 percent of Egyptians live near or below the international poverty line of $2 a day. In a sign of the worsening economy, the percentage of people living on under $1 a day rose to 25 percent in 2011, up from 21.6 percent in 2009.

Among the other changes approved by parliament are assessing small and medium-sized businesses the same tax rate as multi-million dollar concerns.

The bill raises taxes by five percent on companies earning $1.4 million or less a year. They previously paid 20 percent.

Gouda said a unified 25 percent tax levied on all companies would discourage business owners from evading taxes and underreporting income.

"Where will a person go to hide from the government if all are paying the same," he said.

Many smaller companies are already reeling from economic fallout after the 2011 uprising and are suffering from the depreciation in the Egyptian pound.

A proposal that would have added a progressive layer to the law by raising taxes to 30 percent on people who earn 5 million Egyptian pounds (almost $720,000) or more was not included in the bill.

El-Naggar, the economist from the Cairo think tank, said the new law, while alleviating tax burdens for the poor, makes no changes to what the wealthiest pay.

"This is a corrupt approach that benefits the rich businessmen that support Morsi," el-Naggar said. "Taxes should increase with an increase in income. It is the basic philosophy for taxation."

While the new income tax laws are set to be implemented starting next month, a less popular increase in sales tax has not yet been introduced.

Additionally, possible changes to the country's subsidy system could impact millions who rely on government help to pay for fuel and bread.

A report by the U.N. World Food Programme (WFP), the International Food Policy Research Institute (IFPR) and Egypt's statistics agency found that nearly 14 million Egyptians, or roughly 17 percent of the population, suffered from food insecurity in 2011, as opposed to 14 percent in 2009. The report defines food security as "when all people, at all times have access to sufficient, safe and nutritious food to meet their basic dietary needs."

It found that around 40 percent of household expenditures are spent on food, and poorer people spend more than half.

The report said that reforms to the current subsidy system would allow for savings that could be invested in nutritional interventions and job creation.

Also Tuesday, Standard & Poor's Rating Services said an increasingly difficult set of economic circumstances could raise inflationary pressures and lead to further social unrest in Egypt. Its report said inflation causing erosion of incomes could further bring down an "already low standard of living for the majority of the population."