This record is a partial extract of the original cable. The full text of the original cable is not available.

UNCLAS SECTION 01 OF 04 CAIRO 006419 
 
SIPDIS 
 
SENSITIVE 
 
STATE FOR NEA/ELA, NEA/RA, AND EB/IDF 
USAID FOR ANE/MEA MCCLOUD 
USTR FOR SAUMS 
TREASURY FOR MILLS/NUGENT/PETERS 
COMMERCE FOR 4520/ITA/ANESA/TALAAT 
 
E.O.  12958: N/A 
TAGS: ECON EFIN ETRD EINV EG
SUBJECT: EGYPT'S NEW TAX LAW 
 
 
Sensitive but Unclassified.  Please protect accordingly. 
 
Ref:  Cairo 04374 
 
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Summary 
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¶1.  (SBU) In June President Mubarak signed into law a new 
tax code that substantially reduces personal and corporate 
taxes.  The law also includes provisions to settle 
outstanding tax debts and to encourage the informal sector 
of the economy to begin paying taxes.  The Ministry of 
Finance (MOF) claims the new law will establish a new era of 
trust between taxpayers and the tax authority.  Taxpayers 
will now begin assessing their own tax payments and audits 
will be conducted on a sample basis.  Although tax holidays 
for new businesses have been eliminated and fines for tax 
evasion have been increased, the business community has 
responded positively to the new law.  The MOF claims that 
the cuts will not negatively affect GOE revenues, as lower 
levels of tax evasion and increased payment of taxes by the 
informal sector will offset the lost revenue from the 
reductions.  After signing the new law, President Mubarak 
also increased the bonus of public workers, in what is seen 
by many observers as an election year move.  The increased 
bonus, coupled with the tax cuts, is likely to push the GOE 
budget deficit beyond the current projections of 9% of GDP. 
End summary. 
 
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Tax rates cut in half 
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¶2.  (U) In early June President Mubarak signed into law a 
new income tax code that replaces Egypt's Tax Law No. 157 of 
¶1981.  The new law is designed to incorporate all income- 
generating entities, using a territorial basis, and 
eliminate loopholes.  The law is a major step in the GOE's 
plan to expand the tax base, eliminate irregularities and 
improve regulation of the tax system.  Under the new law, 
personal income tax is reduced approximately 50% from the 
levels in the 1981 law, effectively creating three new tax 
brackets: 
 
- 10% tax on annual income of LE 5,000 - 20,000; 
 
- 15% tax on annual income of LE 20,000 - 40,000; 
 
- 20% tax on annual income > LE 40,000. 
 
¶3.  (U) Tax on natural persons (i.e., individuals) is 
imposed on income derived from salaries, wages and in-kind 
allowances, including from foreign sources for work 
performed in Egypt, commercial and industrial activity 
engaged in by individuals, vocational and professional 
activity (including income from intellectual property 
rights) and real estate wealth.  Income from Egyptian 
sources for work performed outside Egypt is also subject to 
taxation.  The new law applies to all income generating 
individuals, including both partners in a married couple. 
The previous tax law had treated families as a single unit 
in which only one spouse benefited from tax breaks, even if 
both spouses were working. 
 
¶4.  (U) Income from real estate wealth is divided into three 
types:  1) income from agricultural land; 2) income from 
built realties; and 3) income from furnished units.  For 
agricultural land, the tax base is the total rental value of 
the land as determined by the Agricultural Real Estate Tax 
Law of 1939.  Income from cultivation in desert areas is 
exempted for ten years from the date the land is considered 
productive.  For built realties, the tax base is the total 
rental value as determined by the Built Realties Real Estate 
Tax Law of 1954.  Income from furnished units is determined 
by the actual rental value, after a 50% reduction for 
expenses.  A 2.5% tax is also imposed on income from the 
disposal of real estate located within town limits, except 
where the real estate is disposed of as a gift to the 
government, public juridical persons or public interest 
projects. 
 
¶5.  (U) The annual personal tax exemption is set at LE 4000. 
Other income exempt from taxation includes pensions and 
severance pay, interest from savings accounts and deposits 
in banks registered in Egypt, interest from government and 
corporate bonds issued on the Cairo and Alexandria Stock 
Exchange (CASE), dividends from stocks and mutual funds, and 
profits from the Social Fund for Development.  Commercial 
activity involving land reclamation, poultry production, bee 
and cattle breeding, animal fattening and fisheries is 
exempt from taxation for ten years.  For 
vocational/professional activity, exemptions include income 
from writing or translating scientific, cultural, religious 
and literary works, income derived by professors for written 
works, and income obtained by artists for photographic and 
sculptural works and carvings.  The income of professionals 
registered in trade unions is also exempt for three years 
from the date the individual begins exercising the 
profession. 
 
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Corporate income tax 
-------------------- 
 
¶6.  (U) The new law also reduces tax on juridical persons 
(i.e., companies, corporations, partnerships, etc.) by 
approximately 50% from the levels in the 1981 law, creating 
the following tax brackets: 
 
- 20% tax on annual net profits of all juridical persons 
resident in Egypt, whether profits were derived from Egypt 
or abroad, and for all juridical persons resident abroad, 
with profits derived from an establishment in Egypt; 
 
- 40% tax on annual net profits of the Suez Canal Authority, 
the Egyptian Petroleum Company and the Central Bank of Egypt 
(CBE); 
 
- 40.55% tax on the annual net profits of oil and gas 
exploration and production companies. 
 
¶7.  (U) Exempted from corporate income tax are government 
ministries; public educational institutes; NGOs established 
under the NGO Law of 2002; non-profit organizations pursuing 
social scientific, sporting or cultural activities; private 
insurance funds; international organizations governed by a 
treaty; profits from investment funds established under the 
Capital Market Law of 1992; interest from bonds and profits 
from securities issued/listed on the CASE, and profits from 
securities issued by the CBE.  Profits from land reclamation 
and cultivation companies and from poultry production, bee 
and cattle breeding, animal fattening and fisheries are 
exempted from corporate tax for a period of ten years from 
the beginning of the companies' activity. 
 
¶8.  (U) The new law eliminates the multi-year tax holidays 
granted under the 1981 law for newly established commercial 
and industrial activities.  Sunset provisions are granted, 
however, for companies currently benefiting from those 
holidays.  Minister of Finance Youssef Boutros Ghali (YBG) 
has indicated in discussions with USG officials and in the 
press that the tax holidays were eliminated because the 
holiday system allowed new companies to simply dissolve at 
the end of the holiday period and re-incorporate soon 
thereafter to begin a new holiday period.  Executive 
regulations for the new law still have to be drafted, a 
process likely to take six months, according to YBG. 
 
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New law taxpayer-friendly 
------------------------- 
 
¶9.  (U) In addition to cutting the personal and corporate 
income rates in half, the new law also contains provisions 
to settle outstanding tax disputes and encourage Egypt's 
large informal sector to begin paying taxes on a regular 
basis.  For all outstanding tax disputes, unless the 
taxpayer requests continuation of the settlement process 
begun before passage of the new law, the new settlement 
procedures are as follows: 
 
- all dispute on sums under LE 10,000 are forgiven; 
 
- disputes on sums between LE 10,000 and 100,000 are abated 
upon payment of 10% of the disputed sum; 
 
- disputes on sums from LE 100,000 to 500,000 are abated 
upon payment of 25% of the disputed sum; 
 
- disputes on sums exceeding LE 500,000 are abated upon 
payment of 40% of the disputed sum. 
 
On the first day after the signing of the new law, the MOF 
decided to drop 26,000 tax dispute cases, most of which were 
disputes with companies and corporations. 
 
¶10.  (U) The new settlement procedures are also much more 
taxpayer-friendly.  Under the old system, a committee headed 
by the Tax Authority reviewed all tax dispute cases, despite 
the fact that the Tax Authority was a party to the dispute. 
The committee usually rendered biased decisions against the 
taxpayer.  The new law has changed this system, allowing for 
an impartial committee headed by a third party. 
 
¶11.  (U) The new law also contains provisions to encourage 
formalization of informal economic activity.  All unpaid tax 
on income earned through informal economic activity prior to 
passage of the new law will be forgiven, provided:  1) the 
persons engaging in such activity have not previously 
registered with the tax authorities, and 2) such persons 
register with the tax authorities within one year of passage 
of the new tax law. 
 
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New era of trust 
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¶12.  (U) A huge media campaign accompanied passage of the 
new law, with numerous TV, radio and newspaper ads 
highlighting the new principles of the law, its taxpayer 
friendliness and the fact that paying taxes improves living 
standards and social services.  In statements to the press, 
YBG indicated that the new law was designed to streamline 
procedures and eliminate bureaucracy, creating a new era of 
trust between taxpayers and the tax authorities.  According 
to YBG, the new law gives taxpayers more rights, in exchange 
for what he hopes will be a greater commitment to pay taxes 
and share in the responsibility for Egypt's development. 
 
¶13.  (U) Under past procedures, the tax authority calculated 
individual and corporate tax returns and informed the 
taxpayer of the amount due.  With the new law, the taxpayer 
fills out the return and submits it to the tax authority, 
which accepts a return as accurate until determined 
otherwise.  Auditing will be conducted on a sample basis and 
an appeal mechanism is included in the law to settle any 
disparities between the taxpayers' calculations and those of 
the tax authority. 
 
¶14.  (U) To balance the increased confidence placed in the 
taxpayer, penalties for tax evasion have become much 
harsher.  Tax evaders and their accomplices are subject to 
prison terms of not less than six months and not more than 
five years, in addition to payment of the evaded taxes. 
Fines for not registering income-generating activities are 
set at not less than LE 2000 and not more than LE 10,000 and 
the fines are doubled for recurrences within three years. 
Fines of 5%, 15%, and 80% may also be imposed for non- 
payment of the full amount of tax due by the deadline of 
April 1 for natural persons and May 1 for juridical persons. 
The harsher penalties send the message that taxpayers should 
not abuse the new trusting relationship with the Tax 
Authority. 
 
¶15.  (U) The business community has for the most part 
reacted positively to the new tax law, though many business 
leaders have complained about the elimination of the tax 
holidays.  Speaking to the press, Galal El Zorba, Chairman 
of the Federation of Egyptian Industries, echoed YBG's views 
that the new law will create a new relationship between 
taxpayers and the government, one based on trust.  Khaled 
Abu Ismail, Chairman of the Federation of Chambers of 
Commerce, noted that the new law increases the amount of 
cash in the hands of investors, which will translate into 
economic growth for Egypt. 
 
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Effect on GOE revenue 
--------------------- 
 
¶16.  (U) According to contacts at the MOF, tax revenues for 
the GOE will not be negatively affected by the cut in tax 
rates, as the cut will be offset by an increase of LE 4.7 
billion, annually, the amount MOF estimates is lost each 
year through tax evasion.  MOF is optimistic that tax 
evaders and individuals operating in the informal economic 
sector will respond to the provisions in the new law 
designed to establish a trusting relationship with the 
government and make paying taxes easier.  MOF also projects 
revenues will increase as overall economic growth increases. 
The GOE currently predicts that economic growth will 
increase to 5% annually by fiscal year 2006/07, stimulated 
by macroeconomic reforms, of which tax cuts and customs 
tariff reductions form the main components. 
¶17.  (U) The GOE budget for fiscal year 2005/06 estimates 
revenues of LE 81.6 billion from taxes, which includes 
personal and corporate tax, sales tax, customs revenues and 
other taxes.  The FY 2005/06 projection is a 14.6% increase 
over projected tax revenues for FY 2004/05, and a 21.5% 
increase over actual preliminary figures for FY 2004/05 
(reftel).  As noted in reftel, the GOE's projected growth 
figures seem overly optimistic, considering the normal lag 
time involved before macroeconomic reforms translate into 
actual economic growth. 
 
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New tax law advances GOE reform effort 
-------------------------------------- 
 
¶18.  (U) At the signing ceremony for the new law, President 
Mubarak cited it as the beginning of "phase three" of the 
GOE economic reform program.  The new law was the first step 
towards creating an economic framework that would integrate 
Egypt's economy into the modern global economy, stimulate 
private sector investment and create 700,000 new job 
opportunities annually.  He noted that the income tax 
reforms would be followed by reform of sales and real estate 
taxes.  Shortly after signing the new tax law, Mubarak also 
announced an increase in the public sector bonus of 20% over 
the next five years, effective in July 2005.  Prime Minister 
Nazif noted in a public statement that the increase, coupled 
with tax cuts, would amount to a total increase of 30-40% in 
net income for public workers. 
 
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Comment 
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¶19.  (SBU) The increase in the public workers' bonus is 
clearly an election year gesture, one that calls into 
question the GOE's seriousness about controlling Egypt's 
already large budget deficit.  The bonus, coupled with the 
new tax cuts and tariff reductions enacted last year, is 
likely to increase the budget deficit in the short term 
beyond its projected FY 2005/06 level of 9.3% of GDP.  MOF's 
prediction of increased tax revenue from the informal sector 
also seems overly optimistic.  It will take more than mere 
reassurances from the MOF for individuals in the informal 
sector to begin trusting the tax authority and paying taxes 
regularly.  End comment.