Sunday,22 July, 2018
Current issue | Issue 1291, (14 - 20 April 2016)
Sunday,22 July, 2018
Issue 1291, (14 - 20 April 2016)

Ahram Weekly

Offshore interests

Why would Egyptian individuals and companies choose to invest in tax havens, asks Niveen Wahish

Al-Ahram Weekly

Every year, hundreds of millions of dollars are directly invested in Egypt from funds based in countries such as Luxembourg, Cyprus, Bahrain and Bermuda, all of which are tax havens.

While most of these country names do not sound suspicious, they are not so very different from Panama, where millions of documents were leaked this month, revealing hundreds of offshore holdings by politicians, businessmen and celebrities from around the globe.

The leaks, which have come to be known as the “Panama Papers,” were from the database of the world’s fourth-largest offshore law firm, Mossack Fonseca.

The documents were leaked to the German newspaper Süddeutsche Zeitung, which then shared them with the International Consortium of Investigative Journalists. Journalists from more than 100 media outlets have been examining the documents for more than a year.

Countries that do not impose any or only negligible taxes on foreign individuals and businesses are known as tax havens. They do not require that an individual reside in or operate their business out of that country to benefit from its tax policies. They are also known for their opacity, not disclosing information on investors to foreign authorities. Moreover, they have no control on the movement of funds in and out of their territory.

The list of tax havens includes small territories such as Andorra, the Bahamas, Bermuda, the British Virgin Islands and the Cayman Islands, as well as well-known international financial centres such as Hong Kong, Switzerland and even certain states in the US.

Concerning Egypt, the Panama Papers show that 38 companies, 20 clients, 21 beneficiaries and 270 shareholders are involved in businesses dealing with the Panamanian law firm. This is probably just a fraction of total Egyptian investments in tax havens.

Egyptian portfolio investments valued at $416 million have passed through the Cayman Islands, according to Central Bank of Egypt (CBE) figures, as reported on the online news website Aswat Masriya. But there is no record of direct investments.

Setting up companies in tax havens is not illegal for Egyptians as long as they are paying taxes on investments within Egypt, said Ashraf Hanna, president of Ashraf Hanna Accounting, Auditing and Tax Consulting.

He added, “These companies may be considered shady because otherwise why would a company or individual want to go somewhere where they are not asked any questions on the source of their money?”

“The Panama papers are, most importantly, about secrecy, and hiding: hiding drugs money, hiding money from spouses, hiding from angry creditors, hiding from mafia-hunting police, and of course hiding from tax too. It is a more general story about wealthy, law-avoiding folk,” says a blog by the Tax Justice Network (TJN), an independent international advocacy group run by researchers and activists.

While it is not illegal to invest in tax havens, it does mean lost revenues for the Egyptian government. Hanna explained that when a company registers in Egypt all its earnings are taxed, even those made through overseas investments. However, when a company registers in a tax haven it only pays taxes on its operations in Egypt.

“There may be as much as $32 trillion of hidden financial assets held offshore by high net worth individuals,” according to a 2012 report by TJN, adding that it considers the number to be conservative. “This is only financial wealth and excludes a welter of real estate, yachts and other non-financial assets owned via offshore structures,” it said.

To discourage companies from using tax havens, Hanna stressed that Egypt must work to facilitate investment-related legislation, including entry and exit procedures, cutting down on bureaucracy and enabling more transparent dealings.

“Egypt does not need to cut down on taxes. Taxes are much tougher in a country like China, yet investors clamour to invest there because of the size of the market, not because of tax exemptions,” Hanna said.

The political environment before the ouster of former president Hosni Mubarak in 2011 played a major role in pushing companies to invest in safe havens, according to Sherif Al-Diwany, founder and CEO of Solution by Design, a company providing tech solutions to government projects, and a former senior director at the World Economic Forum.

A lack of clarity about the future means that investors do not want to make long-term investments in the country, and they also question how they can leave if something happens, he explained. “The greatest danger to any economy is that investors want short-term profits because they do not know what will happen in the long term,” he said.

While the political environment is not a concern now, Al-Dinawy said the problem lies in the economic environment.

“We have a chance to change that,” he said. Al-Dinawy added that while Egyptian policy-makers missed putting things on the right track after the Egypt Economic Development Conference in Sharm El-Sheikh last year, the visit of the Saudi king this week and the size of expected Saudi investments committed to the Egyptian economy are a second chance.

Together with promising investment projects such as the Suez Canal Special Economic Zone and the existence of a new cabinet, these are elements that could improve confidence in the Egyptian economy in the long term, he said.

“Setting up companies in safe havens was a back door for politicians to engage in business when they should not have done,” said legal counsellor Ghada Kaptan. “They are confident that no one will ever find out what they are up to,” she said, adding that the safe havens not only have strict privacy and confidentiality agreements, but also strict fines and punishments for anyone who breaks such agreements.

Despite the leaks, she does not believe any charges can be brought against personalities like the sons of former president Mubarak without the provision of authentic documents.

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