Imposing a tax on stock market capital gains and dividends will "destroy the investment climate for years to come", according to Ahmed Al-Wakil Ahmed Al-Wakil, the head of the Federation of Egyptian Chambers of Commerce (FEDCOC). The tax, he said, would raise unemployment rates, weaken the value of the pound, and bring Egypt "back to dollarization", raising the cost of imports and the cost of the import bill. Sherif Sami, Chairman of the Egyptian Financial Supervisory Authority (EFSA), said: "The government has resorted to imposing a capital gains and dividends tax on the stock market in order to bring in participation of all economic sectors to support the economy." Sami believes that over the long run the stock market will absorb the tax, which is 10% of capital gains and dividends, but in the short term there will be negative repercussions. Sami noted that the government has agreed to exempt bonus shares, only taxing monetary stock dividends and capital gains earned at the end of each year by 10%. He said it is up to the government to carry out economic and legislative reforms to improve the climate for doing business and accelerate the pace of economic growth. The government's efforts to impose the 10% tax come as part of a broader effort to reform the tax system. The government seeks to increase revenues by approximately EGP 10bn during the coming fiscal year, and is standing by its decision. "We are calling on Prime Minister Ibrahim Mehleb to clarify the image of the policy before public opinion, and to explain that it's part of a comprehensive reform to increase state resources, and we will not retreat from the 10% tax on capital gains or monetary dividends," said Mounir Fakhry Abdel Nour, Minister of Industry, Foreign Trade and Investment. The economic group headed by the prime minster was scheduled to hold a press conference on Saturday to discuss the economic situation, particularly with regards to the budget and the capital gains tax. Finance Minister Hany Kadry Dimian said that imposing the tax comes as part of the government's plans to broaden the tax base, allow for increased social spending, and achieve financial stability. "The tax strikes a balance between achieving justice with regards to who bears the burden and ensuring the efficiency of the investment environment and financial market in Egypt," so there is an increase in wages and pensions in addition to other social protection programs through a number of tools, including the stock market tax," said Dimian. Transactions in the Egyptian Stock Exchange are currently exempt entirely from taxes on profits earned as a result of the transaction. Profits are distributed both monetarily and in the form of bonus shares to shareholders of the listed company. "The government has to undertake economic reforms to raise the value of economic activity, which will increase revenues and expand the tax base without hurting current financiers," said Al-Wakil. The government canceled the stamp tax, which was a .1% tax collected on stock market transactions for every purchase and sale. The tax brought in EGP 300m last year for the state treasury. Hisham Tawfiq, board member of the Egyptian Stock Exchange, said: "The stock market is going to see the organised exit of a large segment of investors as a result of pressures from the tax." Tawfiq questioned "the government's not imposing a similar tax on banks' saving schemes, in order to apply the principle of equality, and to ensure that non-banking sectors aren't weakened." "The banks earn imaginary profits from investment in government debt instruments" such as bonds and treasury bills, "but don't pay taxes on them" despite safe investment, unlike the riskier investment of the stock market, said Tawfiq. "So why does the government discriminate between the sectors?" Tawfiq noted that the finance minister pledged in a meeting last week not to apply the tax on the market value of the client's portfolio of investment on the stock exchange retroactively, but will take into account the share's closing value one day before passage of the law. This will be compared with the value of the portfolio at the end of the year. The new tax comes at a time when Egypt suffers from a range of economic woes including rising rates of inflation and unemployment, and the government is seeking new sources of funding after the flight of tourists and foreign investors over the past three years.
