VZCZCXYZ0000
RR RUEHWEB

DE RUEHEG #1274/01 1711337
ZNR UUUUU ZZH
R 191337Z JUN 08
FM AMEMBASSY CAIRO
TO RUEHC/SECSTATE WASHDC 9610
INFO RUEATRS/DEPT OF TREASURY WASHDC
RUCPDOC/USDOC WASHDC 0414

UNCLAS CAIRO 001274 
 
SENSITIVE 
SIPDIS 
 
STATE FOR NEA/ELA, NEA/RA 
USAID FOR ANE/MEA MCCLOUD AND RILEY 
TREASURY FOR MATHIASON AND CONNOLLY 
COMMERCE FOR 4520/ITA/ANESA/OBERG 
 
E.O. 12958:  N/A 
TAGS: ECON EFIN EINV EG
SUBJECT:  PARLIAMENT PASSES NEW REAL ESTATE TAX LAW 
 
Sensitive but Unclassified.  Not for Internet distribution. 
 
¶1.  (U) Summary:  Egypt's parliament approved a new real estate tax 
law on June 16 that will significantly increase the nation-wide 
property tax base.  The real estate tax law previously in effect 
limited property taxation to residential and commercial property in 
the Cairo metropolitan area.  The new law will cover the entire 
country, adding to the national tax base all residential and 
commercial property in the Nile valley, the northern Mediterranean 
coast, the eastern Red Sea coast and all of the Sinai Peninsula. 
The draft bill introduced by the Ministry of Finance (MOF) stirred 
heated debates in parliament and was heavily amended by both the 
Shoura Council and the People's Assembly before final approval. 
Passage of the law completes one of the benchmarks in the U.S.-Egypt 
Human Development cash transfer MOU. 
 
¶2.  (U) The new law, which takes effect January 2009, will tax 
property at 10% (down from 14% proposed by MOF) of its rental value, 
after subtracting maintenance costs of 30% for residences and 32% 
for commercial property.  Rental value is calculated as 1.8% of the 
property's total value for units worth up to LE 5.5 million ($1 
million) and 2.4% for units above that value.  Property value will 
be assessed every 5 years, with a maximum increase in assessed value 
of 30% for residential property and 45% for 
non-residential/commercial property in one 5-year period.  Property 
with a total value under LE 500,000 ($103,000) (up from LE 450,000, 
or $84,000 proposed by MOF) and/or rental value equal to or less 
than LE 6,000 ($1,132) will be exempt from taxation, as will 
property owned by the government, used for public services (schools, 
hospitals, etc.), for religious activities, or as political party 
and NGO offices.  The new law also forgives tax disputes under the 
previous law, and allows deduction of property tax from tax paid on 
income from properties. 
 
¶3.  (U) The bill met with considerable resistance during debate in 
parliament.  Al Wafd Party parliamentarians claimed proper 
procedures for introduction of tax bills were not followed and that 
the proposed creation of a committee to assess property value would 
only cause confusion, given the sheer volume of real estate units to 
be assessed, 30,000 in Cairo alone.  Independent MPs were also 
critical, claiming that they received the draft bill - distributed 
by the NDP committee - only a few hours before holding debates, 
resulting in hurried discussions with no time for proper assessment. 
 Some NDP members, including Kamal El Shazli and Zakaria Azmi, also 
opposed the bill, objecting to a new tax burden on Egyptians.  Other 
opposition members argued that the law was unconstitutional, as it 
affected private property, but People's Assembly Speaker Fathi 
Sorour dismissed these objections, stating that the bill complied 
with Egypt's constitution. 
 
¶4.  (U) The real estate tax law is part of an overall MOF tax reform 
plan, which began with passage of the income tax law in 2005.  The 
real estate tax is expected to bring in LE 1 billion ($188 million) 
in revenues for the GOE in its first year of implementation and LE 
5-6 billion ($943 million - 1.1 billion) in the medium term, 
according to Minister of Finance YBG.  YBG responded to criticism of 
the bill by claiming that the government will pay the tax on behalf 
of individuals who do not earn enough to cover the tax assessment of 
their property.  He also noted the law would require three years 
from approval to full implementation, allowing time for taxpayers to 
adjust to the new burden. 
 
¶5.  (SBU) YBG Advisor Amina Ghanem told us that the tax is so 
controversial because it incorporates all of the country, not just 
the Cairo metropolitan area.  The second homes, family farms and 
vacation villas of many of Egypt's middle and upper classes will now 
be taxed.  Ghanem noted that the revenue generated by the tax may 
not meet MOF's initial expectations, and in any event, will not be 
significant, only about .03% of GDP, even if expectations are met. 
The real significance of the law is that all property throughout the 
country will be incorporated into the tax base and revenue stream. 
Having property registered for taxation purposes will also help 
development of the mortgage market, as it would provide a basis for 
evaluation of sales prices. 
 
¶6.  (SBU) Comment:  Passage of the new real estate tax law is one of 
the benchmarks under the private sector development portion of the 
human development cash transfer MOU between USAID and the GOE.  A 
new, comprehensive real estate tax system is a reform both USAID and 
the IMF have been supporting for some time as a means to increase 
and diversify revenue sources and bring more people into the formal 
economy.  Although passage of the law is an important step, the 
final version passed by parliament watered down much of MOF's 
original bill, and may therefore have limited revenue-generating 
potential.  In addition to the reduction in the tax level and the 
increase in the exemption level, we share the concerns raised by IMF 
Resident Rep Cyrus Sassanpour that by capping the appreciation value 
of all property units to 30% in 5 years, the new tax base generated 
by the new law will eventually erode.  We also expect that agreeing 
on valuation levels will be a difficult element of the law to 
implement, as there are few skilled valuators and the process could 
present opportunities for corruption. 
SCOBEY