A government plan to impose a 10 per cent tax on capital gains on stock-exchange trades in May 2020 is soon to be reviewed by the cabinet and parliament. The plan was temporarily shelved in 2015 and 2017.
The Egyptian Capital Market Association (ECMA) has also proposed a number of modifications to “reduce the tax burden on investors”, said Association head Mohamed Maher.
The proposals include imposing 0.1 per cent stamp tax on Egyptian transactions, on the condition that the deduction does not exceed 10 per cent of any capital gains made throughout the year.
Egyptians who lose their investments on the stock market would be refunded their stamp tax by the Misr Organisation for Central Clearing, Depository and Registry.
At present the stock exchange applies a 0.15 per cent stamp tax on investors’ transactions, whether they lose or make a profit. “The current stamp tax is unfair because taxes are meant to be charged only in the case of investors making profits,” Maher told Al-Ahram Weekly.
The government had earlier planned to raise the stamp tax to 0.175 per cent in July. However, the plan was put off. “If that raise had been applied, the transactions would have decreased. Since the early 2000s, transactions have already retreated from $400 million a day to $20 million,” Maher added.
The ECMA suggests imposing a stamp tax of 0.1 per cent on transactions, and at the end of the year an investor’s collective stamp taxes would be deducted from a 10 per cent profit margin.
The proposal seems to have appealed to the Finance Ministry, Maher said, and a bill is being drafted to be discussed by parliament.
In July 2014, the government approved a 10 per cent tax on dividends in addition to another 10 per cent tax on capital gains on stock trades. It then froze the latter tax for two years starting in 2015 due to objections on the part of investors and traders.
In 2017, the suspension was extended for three more years. After the temporary scrapping of the capital gains tax in 2015, the government resorted to the stamp tax until the imposition of the former tax, which had been recommended by the International Monetary Fund (IMF) in 2015.
The tax imposed in July 2014 led to a shortage of liquidity and the exit of Egyptian and foreign investors from the stock market in protest at ambiguities surrounding the application of the new tax and the additional burdens being put on their shoulders.
Before 2014, investors trading on the Egyptian bourse were exempted from taxes on transactions and dividends in traded companies.
In May this year, the IMF’s final review of Egypt’s economic reform programme recommended decreasing tax and customs exemptions.
The IMF’s final review, according to media reports, focused on the importance of conducting a comprehensive reform of the tax system through managerial and structural reforms to achieve an annual growth rate in tax revenues ranging between 0.5 per cent and one per cent.
Government sources pointed out that the IMF had discussed the means to apply the capital gains tax on traded companies in the stock market to increase tax revenues with the cabinet. The discussions had included a merger between the stamp tax and the capital gains taxes.
The government sources added that the IMF’s recommended reduction of tax and customs exemptions was currently being studied, but that the suitable time to conduct the reductions had not been decided.
Hani Tawfik, head of the Egyptian Private Equity Association, a traders group, said that imposing the stamp tax on both winning and losing investors was “unfair and unconstitutional and has resulted in traders leaving the market.”
He suggested the gradual imposition of the taxes, since many people who did not want to publish their tax returns had also rejected the application of the stamp tax. He added that the suggestion that the deduction should not exceed 10 per cent of actual capital gains made throughout the year was not new, but was a temporary solution that could be used until the situation had become clearer.
Rania Yacoub, a member of the advisory committee at the Egyptian Financial Regulatory Authority, the market watchdog, said the announcement to apply the capital gains tax had had a negative effect, leading to the exit of traders from the market and a decrease in bourse transactions.
After the announcement, the Egyptian stock market had lost its competitive edge against other markets, such as those of Saudi Arabia and Kuwait, she said.
She said that imposing the capital gains tax at the present time, and in the light of the global economic slowdown and the trade war between the US and China, would lead to a further decrease in transactions.
The imposition of the stamp tax had not achieved its target since revenues had only reached LE700 million, she added.
In fiscal year 2018-19, amounts raised from stamp taxes had reached LE660 million, instead of the targeted LE1.57 billion, she said. In the fiscal year before that, stamp taxes had recorded LE566 million.
Yacoub suggested rejuvenating the stock market to increase revenues by cancelling all taxes on transactions, accelerating the initial public offerings to attract more liquidity, and widening the traders’ base to attract new foreign investments.
The Egyptian stock market has witnessed frequent tax developments in the past five years. In May 2013, a stamp tax was applied on bourse traders that managed to collect LE350 million, or $18.5 million, before it was frozen in July 2014 as unconstitutional.
In July 2014, a 10 per cent tax was imposed on dividends and capital gains on the stock exchange. In May 2015, the government suspended the capital gains tax for two years in the light of the bourse’s heavy losses.
In November 2016, the Supreme Investment Council extended the suspension of the capital gains tax for three more years, ending in May 2020.
In January 2017, the IMF recommended the application of the capital gains tax or stamp tax on bourse trades not later than fiscal year 2017-18. Six months later, President Abdel-Fattah Al-Sisi approved the stamp tax on bourse trades to be shouldered by sellers and buyers in the stock market.
*A version of this article appears in print in the 24 October, 2019 edition of Al-Ahram Weekly.