Burrowing beneath the legalese

By Aziza Sami
When, three months ago, the Sales Tax Authority decided to ignore the legal precedent set by a Court of Cassation ruling exempting a timber importer from payment of the sales tax, its departure from established practice provoked one more uproar in the increasingly cacophonous series that has accompanied the levying of the tax since its introduction in 1991. And the confusion surrounding the tax has, if anything, grown worse in recent weeks, effectively pitting the Court of Cassation -- the final court of appeal in cases involving individual petitioners versus the state -- against the taxation authorities which, in happier days, used to consider its rulings binding. Not so any more, claims the Sales Tax Authority, which is insisting on abiding by the letter rather than the spirit of the law. One timber importer may have been exempted from the tax but if other timber importers, in exactly the same position, want to be exempted, then they must bring individual cases, insists the Authority.
When two years ago, in a different case, the Court of Cassation had decided that the petitioner, a sub-contractor, was indeed eligible to pay the tax, the Sales Tax Authority was more than happy to accept the precedent. The Court of Cassation's 1998 ruling was, after all, something of a godsend for the Authority, which had been avidly seeking loopholes to escape implementing a series of State Council verdicts which had consistently exempted sub-contractors from the tax.
The State Council itself has always operated as the final arbitrator in disputes between government agencies and the executive. And since the inception of the law in 1991, it has consistently ruled in favour of the exemption of sub-contractors, beginning in the 1994 case in which it ruled in favour of the Ministry of Transport, petitioning on behalf of companies contracted to build the second line of the metro, and against the Sales Tax Authority. Indeed, by the beginning of January, the State Council found itself issuing its 61st ruling in less than seven years in favour of exempting contractors from the tax.
What is at stake are billions of pounds of tax revenue. Hardly surprising, then, that following the State Council's 1994 ruling the Ministry of Finance should have included a clause in the 1995 budget statement seeking to circumvent the verdict by requiring that any government agency petitioning the State Council should first secure the ministry's permission if the case is likely to involve either a decline in state revenues or an increase in current account expenditures. Equally unsurprisingly, the State Council, resenting such executive encroachment on its authority, contested the ministry's position, resulting in the publication of a circular by the then prime minister, Atef Sidky, instructing ministries that the budget statement clause should not be interpreted as in any way compromising the State Council's ability to issue legal opinions.
All of which served only to further obscure an already complicated picture. Since then there has been a change of government, a new minister of finance and prime minister. Yet the problems dogging the Sales Tax Law continue unabated. And they are a result, argues Tarek El-Bishri, former deputy head of the State Council, of contradictions implicit in the original 1991 legislation. El-Bishri, who has worked extensively on the legal interpretations of the tax and was instrumental in formulating the State Council's legal opinions on the applicability of the sales tax to the contracting sector, explains the current quandary
"The situation as it stand now means that we have a variation in the position of two courts over one issue. The position of the State Council on the issue has been settled, which means that the difference will continue unless the Court of Cassation, through its special department for unification of legal principles, reviews its formal verdict.
When in 1995 the Sales Tax Authority demanded payment of the tax from contractors commissioned by the Ministry of Transport to build the second underground line extending from Shubra to Giza, the ministry [on behalf of the contractors] asked the State Council to give its opinion on the issue.
Now the Sales Tax Law subjects two kinds of operations to the tax. The first category included entities dealing in goods -- produced or imported, they were specified clearly by the law. Subsequently issued decrees then stipulated the rate of taxation at 5 or 10 per cent.
What was not specified by the law, however, was the second category subject to sales taxes -- services. The Sales Tax Law of 1991 did, however, authorise the president of the republic to specify the services which would be subject to the Sales Tax Law, as well as the taxation rates for these.
Thus, presidential decrees subsequently stipulated that transportation, tourism and telecommunications -- whether land-based or wireless -- would fall within this service sector category.
Concerning telecommunications the presidential decree identified 'operational services on behalf of other parties', a sort of catch-all designation encompassing any services not cited specifically in the decrees pursuant to the law but still related to telecommunications, as subject to the tax.
The problem started, then, when the Sales Tax Authority interpreted this phrase to include construction operations. And it was this which was contested by the Ministry of Transport in 1994. When the matter was presented to the State Council that year, it concluded that 'operating services on behalf of others' does not include general contracting operations. And certainly, had the phrase 'operating services on behalf of others' been applicable to any of these unspecified services, then the subsequent presidential decrees specifying new services would not have been issued. Thus, the State Council concluded that a sales tax should not be levied on construction.
The problems that subsequently accrued, and that continue to accrue, arise out of the erroneous position undertaken by the administration at the time. The Ministry of Finance did not accept this opinion, asking that it be reviewed once again by the State Council. We did so and gave the same opinion. Yet instead of complying with this legal verdict, the Ministry of Finance maintained its position and continued to levy the sales tax on the contracting sector. Now, it has collected hundreds of millions of pounds in revenue and it will never consider returning them. Had the ministry remedied the situation from the beginning, the dispute would have been contained.
The Ministry of Finance at that time should have taken the initiative and accepted the opinion of the State Council. It should have asked the president of the republic to issue a decree, as the Sales Tax Law stipulates, stating explicitly that contractors must pay the sales tax.
But what the Ministry of Finance did in fact do was to seek a loop-hole allowing it to claim that it was acting legally. And this was provided in the Budget Law, issued in 1995, which included a clause stating that the Ministry of Finance's 'permission' was needed before administrative bodies could seek the State Council's opinion on questions which, once settled, could result in either a decline in state revenue or an increase in state expenditure.
The State Council protested the Ministry of Finance's actions. Atef Sidky, who was then prime minister, subsequently issued a circular to all ministries saying that the aforementioned clause did not in any way impinge upon the State Council's right to issue legal opinions. This was followed by an explicit statement in the budget for 1996 affirming the position in Sidky's circular.
However, subsequent additions to the text of the Sales Tax Law still failed to include a specific clause mentioning that contractors would be subjected to the tax while meanwhile the Supreme Constitutional Court issued a ruling declaring unconstitutional the imposing or modifying of customs tariffs by the president.
The government -- stating that it was doing so to avoid a similar ruling being issued by the Constitutional Court against presidential decrees on the sales tax -- then presented parliament with a draft law that collected all of the presidential decrees related to the sales tax on services without modifying the wording. This draft law stated that enforcement of the sales tax would be retroactive to the date the presidential decrees were issued. During parliament's discussions of the draft law, some MPs brought up the State Council's ruling regarding the contracting sector, asking if the new [draft] law resolved the differences on the issue between the Council and the Ministry of Finance. It was at that time the Speaker of the People's Assembly conceded that this draft law did not rectify this issue, though he asserted, too, that the wording of these decrees-turned-law would not in any way be changed.
Then in May 1998 the Cassation Court issued its ruling in support of the Ministry of Finance's position. Nonetheless, courts of appeal are still making rulings based on the State Council's opinion concerning the sales tax on construction. The State Council affirmed its ruling, in the face of the Court of Cassation's decision, almost immediately. Indeed, since 1994 the State Council has issued over 60 rulings to this effect. Some were requested by government agencies, while others came out of disputes arising between different government bodies. And in all of these cases, the opinion of the State Council was legally binding.
Why then, have its legal opinions not been upheld? The effects have been cumulative, born out of the Ministry of Finance's willful bureaucratic disregard of the rulings.
All of the resulting turmoil could have been averted had a presidential decree been issued that the sales tax is enforceable on contractors. The detrimental effects involved in levying the tax illegally for seven years, from 1994 up until today, would then have been avoided.
For the problem now to be solved the administration and bureaucracy must begin heeding proper legal opinion and accept that it is bound to execute it. If the administration is facing political and economic problems, it should not burden the judiciary with them by seeking legal support for their positions in retrospect. What is needed now is a new [sales tax] law to be issued, one that settles the controversy in a clear and unequivocal manner. And the accumulated effects of what have been faulty tax collecting procedures will need a suitable economic solution as well.
Administrators, economists and financiers sometimes -- perhaps because of the magnitude of the problems they face -- think they can relegate responsibility by placing the burden on the judiciary. They think that because a judge deals with words and terminology, he can give interpretations and change meanings at will. But the truth is, any lack of consistency causes only resentment and confusion. And that, for administrators, stores up, at the end of the day, far more expensive problems."
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