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Tuesday, 31 March 2020

Problems in the proposed investment law

The Ministry of Investment released a draft investment law a few days ago in preparation for its adoption prior to the economic conference in March, sparking controversy in economic and legal circles

Ziad Bahaa-Eldin , Wednesday 21 Jan 2015
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Although I disagree with several aspects of the proposed investment law, I commend the minister of investment for putting the bill up for discussion, allowing everyone to freely criticize or support it. But given space limitations here, I will address just the broad outlines of the law and its underlying philosophy, especially when it comes to investor incentives.

But let's start with a brief backgrounder. Over the last 45 years, Egypt has seen a succession of investment laws, starting with Law 65/1971. Issued in the run-up to the war for the liberation of Sinai, it had little real impact. After the October war, Law 43/1974 was issued, opening the door to foreign investment; it was later amended to allow national enterprises to take advantage of its provisions and was subsequently amended several times until it was replaced by the law currently in force, Law 8/1997.

All of these laws relied on one basic, unchanging idea to attract investments: the designation of specific "investment fields" that offered benefits and guarantees, most importantly five- to twenty-year tax exemptions depending on the location of the enterprise. This lasted until 2005 when the income tax and investment laws were amended to end tax exemptions due to the resulting administrative corruption, tax fraud, and massive losses to the Egyptian economy—a decision I believe was correct.

This situation remained unchanged for the last decade, until a division was taken to hold a global economic conference in Sharm al-Sheikh and issue a new investment law to signal that Egypt is once more seeking foreign investment.

As important as this goal is, the new bill attempts to achieve it with ill-suited, impractical means. The bill relies on two principal ideas: the restoration of tax benefits and incentives, but this time by Cabinet decree rather than statute, and the expansion of the investment authority (GAFI) as a one-stop shop not only for setting up companies but also for issuing operating licenses. Both of these provisions raise serious legal and practical difficulties that cannot be ignored.

The bill gives the Cabinet the authority to grant tax breaks for enterprises of special economic value, whether because of the size of their workforce or the new technology they bring or otherwise. This, however, violates the well-established constitutional principle that taxes and exemptions should be applied by law, not administrative decree, even if it comes from the Cabinet. The bill goes further by giving GAFI the unprecedented authority to reduce the tax exemption given to companies that violate the law and regulations.

The proposed law thus twice violates the constitution: once by giving the Cabinet the right to grant tax exemptions and again by giving GAFI the right to amend such decision and reduce the duration of the exemption. Moreover, in practice it will be hard to imagine the Cabinet exercising this arbitrary power without clear guidelines and without sparking criticism and accusations of favouritism.

As for operating licenses, the bill introduces a regime of "legal proxy", turning GAFI staff into the investor’s agent for the completion of licensing procedures. A fine idea, but impossible to apply across the board for all investment enterprises. The reason behind this is that the proposed bill redefines “investment enterprise” to include all economic activities in Egypt, regardless of which law regulates them, from cigarette kiosks to steel plants. This means that GAFI’s authority to issue operating licenses will no longer cover only 40,000–50,000 businesses but multiples of  this number, the consequences of which were likely not anticipated by the framers of the bill. This means that GAFI will be obligated to function as a proxy for hundreds of thousands of investors seeking licenses, acting as an intermediary between investors and the entire state administrative apparatus, from ministries and their agencies to provincial and local bodies.

This is not feasible, unless the intent is to offer special services exclusively to large investors or those to whom GAFI grants preferential treatment, which is tantamount to unlawful discrimination. In short, when it comes to licensing, there is no choice but to overhaul the relevant laws and regulations from the ground up instead of trying to circumvent them.

In my personal experience as the head of GAFI for three years and based on my interactions with its staff, the problem lies not with government employees but with overlapping, conflicting regulations and authorities and an unwillingness to engage in comprehensive administrative reform.

The proposed law includes several other provisions, some of them good and others less so. But the issue that deserves discussion at this point, however, is the primary objective of the law. If the goal is to attract foreign investment, a return to the old regime of tax exemptions is not the solution, especially since Egypt desperately needs resources to meet the budget deficit and to finance national megaprojects. Moreover, cutting various state agencies and departments out of licensing procedures is simply unworkable in practice.

Attracting investment requires sound laws and smooth, expeditious procedures, but it also needs a clear economic policy, an efficient judiciary, social peace, a relaxation of the state intervention in investors’ affairs, and a thorough review of current regulations, instead of attempts to skip all this with exceptional mechanisms. I suggest that rather than revising the language of the bill or tinkering with some provisions, we should reconsider our need for it in its current form. Our rush to unveil a new law at the Sharm al-Sheikh conference should not create legal problems that will only further complicate the investment climate in the future.

- Ziad Bahaa-Eldin holds a PhD in financial law from the London School of Economics. He is a former deputy prime minister, former chairman of the Egyptian Financial Supervisory Authority and former chairman of the General Authority for Investments.

This article was published in Arabic in El-Shorouq newspaper on Tuesday 20 January.

 

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