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CONFIDENTIAL CONFIDENTIAL//NOFORN SECRET SECRET//NOFORN UNCLASSIFIED UNCLASSIFIED//FOR OFFICIAL USE ONLY

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### Viewing cable 10CAIRO219, Egypt: Tax Reform Continues As Revenues Meet Lowered

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Reference ID | Date | Classification | Origin
--- | --- | --- | ---
10CAIRO219 | 2010-02-21 07:07 | UNCLASSIFIED//FOR OFFICIAL USE ONLY | Embassy Cairo

`

    VZCZCXYZ0030
    RR RUEHWEB

    DE RUEHEG #0219/01 0520751
    ZNR UUUUU ZZH
    R 210751Z FEB 10
    FM AMEMBASSY CAIRO
    TO RUEHC/SECSTATE WASHDC 0305
    INFO RHEHNSC/WHITE HOUSE NATIONAL SECURITY COUNCIL WASHINGTON DC
    RUEATRS/DEPT OF TREASURY WASHINGTON DC
    RUEHEG/AMEMBASSY CAIRO

` `

    UNCLAS CAIRO 000219

    SENSITIVE
    SIPDIS

    E.O. 12958: N/A
    TAGS: ECON EFIN PGOV SOCI EG
    SUBJECT: Egypt: Tax Reform Continues As Revenues Meet Lowered
    Expectations

    REF: 10 CAIRO 26

    ¶1. (SBU) KEY POINTS

    -- Egypt's Tax Commissioner expects the implementation of the new
    real estate law to proceed without significant alternations.

    -- He claims that much of the public resistance to filing property
    declarations is rooted in people's desire to maintain the secrecy
    of their wealth, which has traditionally been held in real estate.

    -- Egypt's tax revenue is down substantially from last year, but
    appears to be on track to meet budgetary expectations.

    -- No new tax laws are expected to be presented to the Parliament
    prior to the upcoming parliamentary and presidential election
    cycles, but the Tax Authority will continue working to automate its
    systems and improve data collection in support of expanding and
    deepening the tax base.

    --------------------------------------------- -------------------

    Real Estate Tax Law Unchanged

    --------------------------------------------- -------------------

    ¶2. (SBU) In a February 7 meeting, Ashraf Al Arabi, Egypt's Deputy
    Minister of Finance for Tax Policy and Commissioner of the Egyptian
    Tax Authority, told us that he was confident that implementation of
    the real estate tax would go ahead as scheduled (ref A). He
    acknowledged the negative publicity surrounding the registration of
    properties, which had "created anxiety" among taxpayers. Despite
    this, he was confident that the plan would move forward  with "no
    official changes." Referencing President Mubarak's comments last
    month,  in which Mubarak suggested he might advocate for a
    progressive tax structure or possible homestead exemption, Al Arabi
    told us that the real estate tax situation had subsequently "been
    clarified to the President" and that Mubarak supported leaving the
    law intact.

    ¶3. (SBU) Al Arabi explained that there were a number of reasons for
    the public outcry against the real estate tax: Since most income
    tax is paid through direct payroll deductions, the vast majority of
    taxpayers in Egypt have no experience dealing directly with the Tax
    Authority (Note: for taxpayers who have income tax deducted by
    their employer, there is no annual tax filing requirement. End
    note). His office, Al Arabi said, deals directly with only about
    3.1 million corporate and self-employed tax filers. The new real
    estate tax registration requirement will now bring 40 million
    Egyptians in contact with the Tax Authority. He added that part of
    the outcry relates to people's resistance to disclosing their real
    estate holdings.  According to Al Arabi, Egyptians have
    traditionally used real estate as their primary store of wealth,
    and people do not want information on their assets disclosed to the
    government or made public. This echoes his public comments
    suggesting that once holdings are declared, some people,
    particularly government employees, might find it difficult to
    explain where they got the resources to buy the properties they
    own.

    --------------------------------------------- -------------------

    Revenues on Track, But  Reforms Have Slowed

    --------------------------------------------- -------------------

    ¶4. (SBU) In Egypt's fiscal 2009/10 budget, tax revenues are
    projected at LE 145.5 billion (US$26.5 billion) down 10.8% from
    last year. Actual tax revenues during the first six month of the

    fiscal year (July-December) are down 8.5%. Tax revenues from the
    Egyptian General Petroleum Corporation (EGPC), the state-owned oil
    company, which were budgeted to drop 45% due to lower world oil
    prices are actually running about 6% lower than the already reduced
    budget forecast. With the exception of the EGPC revenue, Al Arabi
    asserted that revenues will meet projections and that the shortfall
    from EGPC taxes could be made up by better than expected revenues
    from taxes on treasury bills and bonds, which are taxable for the
    first time this year.

    ¶5. (SBU) Al Arabi said that the onset of the financial crisis in
    2008 stalled well-advanced plans to replace the sales and
    consumption taxes with a unified Value Added Tax (VAT), and that he
    did not envision much progress in that area until after the 2010
    Parliamentary elections and the 2011 Presidential election. He
    explained that some articles of the new law might still be passed
    even if the complete reform could not yet be addressed.

    ¶6. (SBU) Al Arabi told us that tax collection procedures had
    improved substantially, particularly for corporate taxpayers, and
    that the GOE had made progress in closing loopholes and incentives
    for tax evasion. Tax preparers are now jointly liable with their
    clients for information provided in tax returns. This has removed
    much of the incentive for accountants to evade rather than comply
    with the law. He said that the Tax Authority still has major
    compliance issues with small and mid-sized businesses, many of whom
    deal strictly in cash and lack many of the formal legal and
    accounting structures that would aid in tax collection. He
    estimated that the government's tax revenues currently amount to
    13-14% of GDP, but that by taxing the large informal economy, this
    could rise to 20%.

    --------------------------------------------- -------------------

    Improvements in Data Collection Are the Key

    --------------------------------------------- -------------------

    ¶7. (SBU) El Arabi, who has been in his current position for a
    little less than three years, comes from a private sector
    accounting and auditing background. He stated that the
    reorganization he has done in the Tax Authority has proven
    difficult. He pointed to the example of consolidating the 64 "tax
    regions" that had previously existed into the 15 regions that exist
    today. This consolidation removed a great deal of redundant
    bureaucracy, but also limited promotion possibilities for Tax
    Authority employees. He said successes in automation and
    segmentation meant that the Tax Authority was "no longer a soft
    administration" within the government.

    ¶8. (SBU) Al Arabi credited US assistance through USAID with much of
    the progress in both automation and training within the Tax
    Authority. He added that further progress in tax collection will be
    reliant on the quality of information gathered and the proper
    analysis of that data. He said he plans to create an "internal
    inspection unit" and will build an "intelligence center" for data
    collection and verification.

    -------------

    Comment

    -------------

    ¶9. (SBU) Lower revenues and higher budget deficits remain a worry
    both for Egyptian policy makers and the rest of the financial
    community. Egypt does, however, appear to be on track to meet its
    tax revenue projections for the year. As reported septel, the
    spending side of the equation is less promising, as greater than
    expected expenditures on subsidy programs and fiscal stimulus
    packages continue to put a strain on the overall budget.  Public
    discontent with many of the measures proposed by Finance Minister
    Youssef Boutros Ghali, including the real estate tax,  continues to

    be reflected in the press and among some members of the Parliament.
    However, all indications are that Boutros Ghali continues to have
    the support of the President, and the much needed fiscal reforms he
    has been promoting will continue, though perhaps at a slower pace.
    SCOBEY

`