Steps towards reforming the economy have begun, but more is needed, reports Sherine Nasr The Middle East and North Africa (MENA) initiative on governance and investment for development organised a one-day workshop to review the progress attained on key issues related to investment policy reform in Egypt. The reform agenda discussed was that which had been presented earlier by Mahmoud Mohieddin, minister of investment, at the ministerial meeting of MENA-OECD (Organisation for Economic Cooperation and Development) Investment Programme. The OECD is a group of 30 developed countries that work together to address the economic, social and governance challenges of globalisation. Through active relationships with some 70 countries, including Egypt, and with civil society, the OECD has a global reach. Helping ensure development beyond the OECD's membership has also been part of the organisation's mission. The workshop is the first in a series of other workshops which are being organised by the MENA/OECD Investment Programme. Their objective is to measure the progress made in investment climate reform, in economies of the MENA region. Egypt has taken over the regional chairmanship of the Programme, upon an initiative by the Paris-based OECD to work with 18 MENA countries on mobilising foreign, regional and domestic investment. The most prominent progress attained on the path of creating an investment-friendly climate in Egypt began with the establishment of a one- stop shop for investors, introducing a new income tax law, privatisating some of the state- owned banks and strengthening the capital market. "Egypt's ongoing investment reform in the areas of privatisation and capital market is responsible for increasing investment in Egypt and raising the economy's growth rate from three to six per cent," Mohieddin said during the workshop. Like many developing countries, Egypt has relied on high tax rates in order to maintain its revenue base. Tax incentives were introduced at the same time to compensate for the high tax rates, and for deficiencies in the investment environment. These incentives have gradually expanded over time, since Egypt now finds itself competing with neighbouring countries to attract more foreign investments. According to the World Bank's Investment Climate survey of Egypt (2004), in almost 1,000 of the enterprises sampled, tax-related issues were ranked as the most severe, by almost 80 per cent of these enterprises. A new income tax law was introduced and ratified last June in order to bring the tax system in line with modern international taxation practices, and to provide domestic investors with an incentive for investing in Egypt. The new law comprises elements which would increase taxpayers' compliance, in addition to modernising the tax administration in general. "A major achievement has been to reduce taxes for corporate companies to 20 per cent, instead of 40 per cent, and to 30 per cent instead of 45 per cent for industrial companies," said Ashraf Al-Arabi, senior advisor to the minister of finance on tax policies and the architect of the new income tax law. Other advantages include raising the tax exemption ceiling for civil workers to nearly LE10,000, which has eliminated taxation for thousands of the lowest paid income groups. According to the new law, the accelerated depreciation for all new as well as used assets is 30 per cent, while that for computers, software and other information systems is 50 per cent. "This means that an investor can recapture at least 50 per cent of the invested capital during the first year," said El-Arabi. He added that a Large Taxpayer Office (LTO) has now been operational for eight months. "The experience is a big success and the office is responsible for generating 70 per cent of tax revenues," El-Arabi said. An ambitious reform of the sales tax is also in the planning stages. Its main achievement would be the unification of the sales tax rates to become two or three at the most, instead of the current wide range of rates which has resulted in much confusion and misinterpretation. "We are also working on unifying the Income Tax Authority and the sales tax into one organisation which would be in charge of both categories of taxes." A major reform action recently undertaken was the abolishing of all fiscal stamp duties and limiting them to specific activities, namely insurance companies and banking transactions. Reform of the property tax has also begun. Other major reform steps include waiving all tax exemptions, while reducing the rate from 40 to 10 per cent, and establishing a system to re- evaluate the property every five years instead of every 10 years. Mohieddin noted that, "Egypt has taken strides into the right direction by introducing these reform actions. However, we still have a long way to go, maybe another 15 to 20 years are needed before Egypt can accomplish the more difficult task of eliminating illiteracy, improving health conditions and introducing democratic governance.
