The government is leaving no stone unturned in its quest to raise revenues. Niveen Wahish examines the most recent addition to the tax system: the real estate tax As if Egyptians did not have enough laws to decipher, now they have the new real estate tax law to grasp; not only to understand but also to comply with before the end of the year. For months the Ministry of Finance has been seeking to reassure the public about the new real estate tax law. But no creative or funny ads have helped ease popular fear. Ads stress over and again that units up to LE450,000 in value are tax exempt, and even units of higher value will pay a meagre annual tax. Nonetheless, the public suspects the next move of the government. The executive charter of the new law was issued by the Ministry of Finance last week. According to the law, units of a market value of LE500,000 will be taxed LE30 per year while units valued at LE1 million will be taxed LE660 annually. Taxes are due on rented units as well. According to the law, the tax on the units is calculated after the deduction of 30 per cent for maintenance costs. Annual rent below LE6,000 is exempt. The idea behind the exemptions is to make sure the more affluent are taxed and not the less fortunate low or middle classes. A re-evaluation of the units will take place every five years. Statement forms are available for citizens to fill out. Not only owners of apartment houses or land are required to fill out the forms, but also owners of floating homes or kiosks, whether built of brick, wood or iron, need to file statements. Moreover, anything, whether an ad or a mobile phone antenna, on roof tops or façades must also be reported. In the statement, individuals will be required to specify not only basic information such as the area, but also what view the unit has, the unit's direction and the outside finishing. This information is needed because location, quality of construction, provision of basic services and proximity to public parks, health and education facilities, will be taken into account upon valuation. Individuals and corporations should submit real estate asset claims by the end of the year. Taxes on industrial real estate will be deducted from the overall income tax paid by owners. The introduction of the new tax is one of the means by which the government seeks to increase its revenues. Due to the global economic slowdown the government has been unable to rein in the budget deficit as it had planned. Original plans to cut down the budget deficit to around three per cent by 2010 are unrealistic, says Suha Najjar, managing partner and director of research at Pharos Holding. In recent weeks Minister of Finance Youssef Boutros Ghali said the government would try to cut down the budget deficit to three per cent by the year 2014/15. Initial reports show that the budget deficit stood at around 6.9 per cent in the fiscal year 2008/09. It is estimated to reach around 8.5 per cent next year. Observers believe the new tax will increase government income. However, the exact size of that increase is hard to estimate. When the law was being discussion in parliament in mid-2008, Ghali was quoted as saying that the new tax would yield LE1 billion in revenues in the first year of implementation, and LE5-6 billion annually in successive years. But that is too early to confirm at the moment. According to Najjar, there is no concrete data on how many real estate units are in Egypt, aside from the fact that 55 per cent of housing units are illegally built. She questioned if and how these units will be taxed, considering that they do not have legal status. Nonetheless, she says, the tax will be an additional source of income for the government. Recent fiscal year (FY) 2008/ 09 figures show that revenues reached LE274.8 billion with a growth of 24 per cent compared to a growth of 21.2 per cent in FY2007/08. This was attributed to a 20 per cent growth in tax revenues, "itself the result of the tax reform programme," says a report by CI Capital Research. Another advantage of the law, according to Ghali, is that the new tax will force people to put on the market units that are currently locked and not in use. Speaking on television a few months ago, Ghali said the new taxes would encourage unit owners to rent or sell unused units. This would mean increased supply for a market thirsty for housing units. Officials estimate that only 200,000 units are produced annually whereas actual demand is around 300,000 units. In addition, there is a backlog of between 2.3 to three million units needed by the market. That supply, says Najjar, will compete with units in traditional housing areas like downtown, Zamalek, Dokki or Heliopolis. But she does not believe it will compete with new developments. "Anyone wishing to buy into the new developments is looking for a quieter, spacious way of life not available in the old areas," she said. The technicalities, complications and shortcomings of the new law will become more apparent when the Ministry of Finance gets down to the actual collection of the tax. Among the problems expected to emerge is that people may not be satisfied with the valuation of their units. The higher the value of the unit, the more taxes owners will be required to pay. Among issues of contention that emerged during the discussion of the law in parliament was how pensioners living in units bought decades ago but worth millions today could afford the tax. Either their children will pay the tax for them, says Maha El-Kelish, general manager of Dun and Bradstreet Egypt for information services, or they will find it necessary to move into a cheaper unit. "This will help inject new funds into the economy as these units are sold," she says. But the law has provided for cases where owners believe their units are much lower in value than government estimates. Owners will be able to appeal the valuation of their properties within 60 days of a decision. And they will receive a new valuation within a month of appeal. Moreover, properties will be re-evaluated every five years. Experts are hoping that the application of this law will, in the long run, help determine the size of Egypt's real estate wealth. Although a unit does not have to be registered to report to taxes, experts believe that the whole process along with parallel reforms in property registration, could eventually lead to tracking, and establishing a database of, each and every real estate unit in Egypt. That, El-Kelish, says, could be used for the benefit of citizens, for example in proving ownership where units are being passed on from one person to another. Registration of units has long been avoided because of its costliness. And even when the government slashed the registration rates a couple of years ago, the lengthy process and bureaucracy of registration kept people from actually going through with it. Registration fees were slashed to the mere cost of the service, which is not more than LE2,000 per property. In the past, it was 12 per cent of the value of the property. Only a fraction of existing units are registered. But tracking down all real estate will be no walk in the park. Citizens approached by Al-Ahram Weekly do not believe the government will be able to knock on every door and they are not planning to deliver their tax statements. But the Ministry of Finance has warned that failure to deliver statements on time makes unit owners liable to pay a fine ranging between LE200 and LE2,000, whether the unit is exempt or not. But leading member of parliament's Budget Committee, Abbas Abdel-Aziz questions how the government will actually implement the law believing that "neither are there enough experienced tax collectors nor valuation experts." The new real estate tax cuts taxes collected on real estate from 40 per cent down to 10 per cent. Formerly, a real estate tax, known as awayed, was collected only on units within urban areas, explains Abdel-Aziz. He adds that even as cities grew, taxes were collected in areas within the original city borders. Now, the scope of the tax has been widened to include the whole country. Not only that, he adds, but according to re-evaluation every five years, the value of the unit would approximately grow by 30 per cent, which means that the government will be reaping more tax even despite the fact that the tax is now a fourth of what it was, says Abdel-Aziz. To attract as many willing taxpayers as possible the ministry has decided to forgive previously unpaid real estate taxes if unit owners simply present their statements.
