Tax reform is test for Cairo

23 May 2008
The Egyptian government says the tax breaks it has introduced should not have come as such a big surprise to companies.

Companies, like people, will always grumble when taxes are raised, and Egyptian companies are no exception. The government says the reforms it has introduced altering the status of free zone companies, including the removal of some tax breaks, should not have been a surprise to anyone. According to Cairo, the move followed months of talks with the businesses that would be affected.

The new rules are limited to about 40 companies, but they could boost government coffers by as much as $1bn.

However, just two weeks on, international oil companies say they are unsure about the impact the new measures will have on them, and have warned that they could cut back on future investments.

One of two things has happened: either the companies have not been listening or, and this is far more likely, the government has done a poor job of communicating its plans to them.

It is not that Cairo is wrong to want to address its debilitating budget deficit by levying taxes. The problem is that companies, especially local ones, that had developed their business plans on the assumption they would not be taxed are now facing the prospect of unexpected costs. They will have to reassess the economics of their businesses.

Cairo says it has no plans to extend the tax net any further. But it is already moving away from the free zone model in favour of investment zones, which give developers the same unbureaucratic environment with-out the fiscal benefits or government-owned infrastructure.

The new direction will be a test of which side is strongest. If the companies need the Egyptian market more, they will pay up. But if Cairo needs their investment and expertise more than their tax revenues, it could yet be forced to scale back its plans.

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