Investors at Orascom Construction Industries S.A.E. (OCI S.A.E) should be rejoicing as the company will save more than LE7 billion ($1 billion) in taxes.
Tuesday, the Dutch company, OCI NV, announced that the Egyptian Public Prosecutor has "fully exonerated Orascom Construction Industries, the company’s Egyptian subsidiary, of any wrongdoing and all charges of tax evasion." According to the company's statement, the decision was issued on 18 February.
The controversial dispute between the Egyptian government and the Sawiris family, who own OCI, began during a speech by ousted president Mohamed Morsi in October 2012, where he alleged that Orascom had evaded LE14 billion ($2 billion) in taxes.
The accusation was made over the acquisition of Orascom's subsidiary, Orascom Building Materials Holding (OBMH), by cement giant, Lafarge for $12 billion.
In April 2013, OCI reached a settlement with the government, agreeing to pay the Egyptian Tax Authority LE7.1 billion in ten instalments from 2013-2017.
Orascom has paid a first instalment of LE2.5 billion ($0.36 billion) but suspended the second instalment of LE900 million ($128 million) due this past Dec. 31.
The suspension was part of "the appeals and reinstated litigation process of OCI's ongoing dispute with the Egyptian Tax Authority," OCI NV's investor relations department said.
It is not clear whether OCI will request a refund of the paid instalment; Ahram Online could not reach the company's administration for a comment.
Was there tax evasion?
It is widely-believed that OCI found a loophole that allowed it to designate the acquisition as an untaxed market transaction. Instead of selling OBMH (taxable transaction) directly to Lafarge, OIC introduced the company in the Egyptian Stock Exchange and sold it as shares to Lafarge, thus avoiding taxes.
Although details of the transaction were announced, it generated a great deal of questions regarding the exorbitant amount of money that went untaxed.
OIC was subject to a tax audit for the period 2007-2010 by the ETA. The latter referred to LE4.7 billion of the transaction as an exchange of shares (and not a market transaction) taxed by law.
For several months after the transaction, the Sawiris repurchased shares in Lafarge companies that the ETA designated as part of the exchange.
Despite the controversy, the government has not addressed the loophole used by OIC.
Paradoxically, just a few months after the controversy with OIC began, the Shura Council (Upper House of Parliament) under the Muslim Brotherhood announced a modification of the income tax law, imposing a 10 percent tax on acquisitions or bids exceeding 50 percent of their market value.
As of today, shares of OCI have risen 2.65 percent to 349.02 LE.