What can be done to tackle tax evasion and avoidance in Egypt?

Photo: Mohamed Abd El Ghany/Reuters

According to a policy paper by public policy research project, Alternative Policy Solutions (APS), at the American University in Cairo (AUC), the wealthiest 10% of Egyptians possessed a 73.3% share of the country’s total wealth in 2014, while the top 1% possessed 48.5%. These shares accounted for $285.87 billion and $189.15 billion, respectively.

Between 2000 and 2014, the wealth of the upper 10%’ grew by an average of 5% annually, while the wealthiest 1% saw their fortunes grow by 7%.

The closest thing Egypt has to a wealth tax is the property tax. The projected total revenue that was expected to come in from property tax for the 2015/2016 fiscal year was EGP 41 billion; almost 10% of total tax revenue. In reality, only EGP 28 billion was collected. This is despite the fact that 68% of Egypt’s total wealth is in the form of non-financial, immovable assets (land, property, real estate etc.).

The policy paper, titled “Toward a Wealth Tax in Egypt,” says: “This sharp and rapid movement of wealth to the top segments in the population has the negative consequences of hindering economic growth, increasing speculation, increases the risk of economic shocks that are tied to rising speculation, and prompting imbalances in the balance of payments.”

However, the paper acknowledges the challenges of tax collection even if a wealth tax was levied and if property, land, and real estate taxes were reformed. “The implementation of a wealth tax requires a set of measures that aim to prevent tax evasion and avoidance,” which is one of the biggest obstacles to reforming taxation in Egypt. And one of the biggest contributing factors to it is an “inefficient tax administration due to the absence of data and property records.”

Even so, the paper provides a number of feasible proposals carefully catered to the Egyptian context to overcome these challenges. There are a number of measures which can be taken to address tax evasion and avoidance. However, most importantly, it must begin with “an administrative reform program that is built on coordination and exchange of information among agencies and creating a network that connects assets.”

On the international scene, there is the Base Erosion and Profit Shifting (BEPS) project, which is an international effort to provide governments with the means to tackle tax avoidance in foreign companies operating within their borders. Egypt joined the project in July 2016.

Action 13 of the BEPS project stipulates that each of the participating countries issue reports of multinational corporations’ (MNCs) transactions that take place within their borders. “In this system, MNCs report to tax authorities in the country where their headquarters are based […] the MNCs separately report information on each of their branches to the authorities where the branch is located. These reports are then shared with the tax authorities of the country with which the company trades.”

The purpose of Action 13 is to address the legal loopholes that facilitate tax avoidance in different tax systems.

In November 2016, Egypt joined the Global Forum on Transparency and Exchange of Tax Information – a forum intended to have nations participate in international efforts to share information. An essential part of the forum is the Automatic Exchange of Information (AEOI) project, which carries with it a number of legal and accounting standards which Egypt is yet to abide by, one of which is banking confidentiality laws. Reforming them is crucial, and must still retain “privacy standards, which are regulated by the project’s framework. There is also a need to enforce laws that allow tax authorities to access information (in accordance with article 59 of Law 53/2014).” The APS paper also goes as far as to say that these confidentiality laws should be abolished.

Any reform process must address the legal and institutional barriers to adhering to the BEPS and AEOI guidelines.

On the domestic level, a new national tax authority should adopt and enforce BEPS and AEOI guidelines locally. On the road to this, the paper proposes establishing a committee to reform Egypt’s tax governance, which should be “representative of employees, as well as the most important stakeholders from the government, legislative body and civil society, to carry out a comprehensive assessment of the tax system and propose amendments, reforms and criteria for evaluating the reform process.”

Egypt currently has three distinct tax authorities, namely the Tax Authority, the Real Estate Tax Authority and the Customs Authority. What is proposed is that these authorities be reigned in under a Sovereign Resources Authority, which would “supervise the operations of each department separately, regulate reform and contribute to the exchange of databases and unifying measures.”

One of the first tasks of this Sovereign Resources Authority should be to address the country’s tax gap. A tax gap is the discrepancy between projected tax revenues and actual taxes collected within a given fiscal year. This figure is used as a reliable indicator of the scale of tax evasion.

Taxes and other revenues were estimated to account for almost 18% of Egypt’s GDP in 2017. However, the Egyptian finance ministry is expecting tax revenues to account for 14% of GDP for the 2019/2020 fiscal year, which is less than the taxes that were collected in 2017/2018, and equal to revenues recorded for 2018/2019.

Considering the aforementioned tax gap in property taxes for the 2015/2016 fiscal year, there is a lot of potential for this share to be increased, freeing up fiscal space for the Egyptian state. “Calculation of the tax gap…is a useful metric to evaluate tax collections and the practical obstacles in the collection process.”

Data is also important, the availability of which can be helped by reforms to laws that have to do with wealth disclosures. Egypt previously had a law issued in 1981 which required citizens to disclose their wealth holdings; however, it was repealed in 2004. Any enforcement of a wealth tax would require this law to be reinstated which would help create official databases.

In an effort to increase property tax collections, details of property, land and real estate ownerships would also need to be included in these databases. The paper proposes attaching citizens’ owned properties to their national identification numbers to better track their tax payments.

Dialogue, transparency, representation and participation are also of crucial importance to a tax system reducing rates of evasion and avoidance. That is why the paper also proposes that taxpayers be separated into different categories based on income and wealth. “Each segment should be formulated in accordance with differences in their circumstances, while maintaining equitability between them.” Committees should also be formed for each category to represent them so that the “problems and complaints they articulate can be addressed more efficiently to prevent tax evasion and tax avoidance.”

Perhaps the most important point the paper raises is the independence of the tax authorities, and the powers of their officers, saying that “there is a need to balance the requirements of administrative control, on the one hand, and, on the other, to enable the tax collection representative to detect corruption and tax evasion.”

Complicated bureaucratic procedures in reporting cases also impede tax collectors’ efforts, as they have to go through the finance ministry. “Reporting procedures should be simplified within a specific and structured framework that gives tax agents the authority to perform their legal role directly.”

Fears of taxpayers launching legal action against tax inspectors is another major disincentive for officers to not perform their jobs efficiently and effectively. Providing legal protection and empowering tax inspectors would go a long way in addressing the tax gap and fighting evasion and avoidance.

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