Less is more
Higher taxes could mean more harm than good to the economy, experts tell Niveen Wahish
Not many were pleased with the suggestion last week by the Federation of Investor Associations (FIA) that taxes increase from the current 25 per cent to 30 per cent on incomes above LE10 million.
FIA had made their proposal in the framework of helping the government boost its revenues to meet increasing social demands.
The government has already hiked tax rates in July this year when it raised taxes from their previous ceiling of 20 per cent to 25 per cent on incomes above LE10 million for individuals and companies.
But although government officials have said that no tax hike is in the horizon, the suggestion has nonetheless not gone down well with other members of the business community.
"This is not the right time," Ahmed El-Wakil, head of the Federation of Chambers of Commerce told Al-Ahram Weekly. He lamented the fact that already the unstable political environment and lack of security is pushing investors away. Ministry of Finance figures show that foreign direct investment dropped to 0.9 per cent of GDP in fiscal year 2010/ 11 compared to 3.1 per cent of GDP the year before. El-Wakil pointed out that already there are indicators that because of the slowdown the targeted tax revenues will not be achieved, then "what sense would increasing taxes make?" he asked.
Hassan Hegazi, chairman of the Customs and Taxation Committee of the American Chamber of Commerce in Cairo (AmCham) also believes that if taxes were to be raised again this year that would give the wrong impression and push away investors who are already worried about the existing instability and lack of security. "It was acceptable once because of the extraordinary circumstances. But if another hike is implemented that undermines the credibility of the government."
He pointed out that time has proven that tax revenues increase when rates are cut rather than raised. When the maximum tax ceiling was cut from around 42 per cent to 20 per cent in 2005 tax revenues went up. In fact, he believes that was one of the areas where the last government in Mubarak's era succeeded.
Hegazi pointed out that although Egypt's taxes are much lower than those of the US or Europe, that is not what Egypt should compare itself to. "The competition is from neighbouring countries that have much lower tax rates."
In Hegazi's opinion, any talk of tax increases should not be brought up before five years when the country has stabilised, investment is back to decent levels and investors can see in Egypt a market that would justify paying extra taxes. Even then he believes higher taxes are not a good idea. He explained that collecting a low tax means more profit for investors which should allow the investor ample room to expand, increase their business and thus taxes revenue will increase by default. He added that a higher tax may not matter much to the multinationals, but it will affect the local industries and the small and medium enterprises.
Ashraf Hanna, president of Ashraf Hanna Accounting, Auditing and Tax Consulting firm reiterated a similar opinion. However, he supports the idea that an increase in taxes could be imposed but only for a temporary pre-specified period of time to help the government out of its current revenue shortage. To him, increasing taxes is better than facing the consequences of borrowing. Hanna was keen to stress that the global trend now is to cut taxes. He too explained that more profitable enterprises expand their business and create more jobs. When more people have jobs, they have income to spend which then means more sales tax, another source of revenue for the government, he added.
He too believes Egypt should not compare its tax with that of the US or Europe. "The latter have higher taxes but they offer investors facilities, credit, land and skilled professionals, all of which are not readily available in Egypt." He pointed out.
In the meantime, the Minister of Finance himself does not seem supportive of a tax increase. He believes revenues could increase by around LE4 billion with better tax and customs collection.