Back to basics — (II) On investments and tax

Ziad Bahaa-Eldin
Wednesday 12 Oct 2022

In whose interest are tax exemptions for investment, asks Ziad Bahaa-Eldin

 

With the subject of investment back in official discourse, various statements by senior government officers have indicated their interest in launching a new package of attractive incentives for Egyptian and foreign investors. I fear that this refers to tax exemptions, known in Egypt until 2004 when they were cancelled after 40 years of being the norm.

Renewed interest in investment and investors is the right call, as well as seeking to provide incentives to make them risk their money in our markets. But it would be a mistake to return to comprehensive tax incentives that would have - in my opinion - a detrimental effect on our economy, and especially on the middle- and low-income classes.

My reasons for objecting to comprehensive tax exemptions, by which I mean those that are available for all or most economic activities and for extended periods, are the following:

First, in principle, a modern economy is where tax payment is the norm and not exemptions from it. Every economic activity that makes a profit must return a part of it for the development of the country, achieving social justice, and meeting the requirements of public spending.

Second, an income tax is due on the profit of economic activity, and so whoever fails to make a profit does not pay. This is in contrast to the (recently increased) fees which are due regardless of profit and loss. Indeed, an economic activity may be making losses, but will continue to pay exorbitant fees. Such fees are the ones that deserve to be abolished, not taxes linked to profit.

Third, opening the door to tax exemptions also opens the wider doors of nepotism and corruption, because granting the exemption requires issuing a special decision, fulfilling certain conditions, and setting a date for the start of production, and each of these elements is subject to someone’s discretionary authority.

Fourth, due to double taxation agreements between Egypt and other countries, an activity by a foreign company that is granted a tax exemption will most likely be obligated to pay that tax in the home country as a result of enjoying the Egyptian exemption. In other words, we would sacrifice our tax revenues in order to find them paid in the country of origin, meaning we would be donating our tax proceeds to countries with higher incomes, wealth and economic progress.

Fifth, comprehensive tax exemptions cause a major imbalance in the economic system and in the allocation of resources because they drive investments towards the most generous tax space and not towards the most efficient production, in addition to causing a similar imbalance in the pricing of products and services that are produced at less than their fair cost.

Sixth, and most importantly, the tax exemption wastes an important resource that the public treasury needs. And since taxes - if used properly - are the state’s primary means of achieving social justice, this means less resources for social and welfare spending that benefits the less privileged.

Is this enough to convince the policy makers to abandon tax exemptions? I hope so.

However, let me clarify that my reservations do not extend to non-tax incentives such as lowering the price of land, lowering tariffs on production inputs, lowering fees for utilities, allowing access to foreign currency, training workers, facilitating financing, and easing bureaucratic burdens. All these advantages and incentives are strongly encouraged. The same applies to “targeted” tax exemptions used to achieve specific, exceptional and temporary economic, social and development goals, as long as they do not become the norm.

Welcoming investment in any field is in the interest of society and the national economy, as long as it does not break the law and pays its obligations. But going beyond such welcome to granting tax exemptions is not necessarily the right path as it may bring about more harm than good. And this should be carefully considered before rushing again on that path.


* This article also appears in Arabic in today’s edition of the daily Al-Masry Al-Youm.

*A version of this article appears in print in the 13 October, 2022 edition of Al-Ahram Weekly.

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