ONE of the most prominent economic features of the year was the successful partnership between the government and taxpayers. January, 2006 saw the implementation of a new income tax law which was introduced in June, 2005, and ratified by the People's Assembly three months later. This was a crucial step, undertaken along with other drastic measures, to upgrade the financial system in Egypt. In addition to reducing both the income tax rate and the corporate tax rate from 32 per cent and 40 per cent, respectively, to 20 per cent, the most important attribute of the new law is the aspect of voluntary compliance and self-assessment. "Tax returns are not systematically audited by the authority and the era of arbitrary evaluations is over," according to Mahmoud Mohamed Ali, head of the Egyptian Tax Authority, who added that the government is keen on extending bridges of trust with the taxpaying community. "This is also believed to be a crucial step towards formalising the informal sector." In order to compensate for the drastic tax reductions, the new law annulled the tax exemptions and holidays given to companies established under the Investment Law, as well as the companies listed on the Cairo and Alexandria Stock Exchange (CASE). In the meantime, harsher penalties such as imprisonment were stipulated in case of tax fraud. While economic experts believed that tax revenues will drop dramatically during the first few years of applying the law, figures released by the Ministries of Finance and of Social Insurance indicate otherwise. During a press conference held three months after the implementation of the new law, Minister of Finance Youssef Boutros Ghali announced that 2.3 million tax returns were filed in March 2006. "This represents a 100 per cent increase compared to the same period the previous year," noted Ghali. A surge in tax revenues was also noticed as income tax revenues went from LE400 million in fiscal year 2004-2005 to LE1 billion in 2005-2006. Another major step towards upgrading the tax system was the merging of the Sales Tax Authority and the Income Tax Authority into one entity, namely the Egyptian Tax Authority mid-year. Although it is still early to evaluate the wisdom of the merger, Ali believes it is one step of many to create an efficient tax administration, to introduce quality services to taxpayers and to foster transparency in the taxing process. The comprehensive merger will be complete in three years, along with new headquarters. In an attempt to streamline the work in the meantime, automation of various tax bureaus is underway. Offices for key taxpayers whose returns contribute significantly to total tax revenues have been operational for almost a year in order to facilitate procedures, while others can now file their tax returns online. Also, a programme for educating and training selected tax inspectors was launched to form "the first generation of competent tax inspectors," stated Ali. "They will be in charge of providing services and educating other inspectors in the newly-formed unified tax administration."
