PARLIAMENT PASSES NEW REAL ESTATE TAX LAW

UNCLAS CAIRO 001274

SENSITIVE
SIPDIS

STATE FOR NEA/ELA, NEA/RA
USAID FOR ANE/MEA MCCLOUD AND RILEY
TREASURY FOR MATHIASON AND CONNOLLY
COMMERCE FOR 4520/ITA/ANESA/OBERG

E.O. 12958: N/A
TAGS: ECON EFIN EINV EG
SUBJECT: PARLIAMENT PASSES NEW REAL ESTATE TAX LAW

Sensitive but Unclassified. Not for Internet distribution.


1. (U) Summary: Egypt's parliament approved a new real estate tax
law on June 16 that will significantly increase the nation-wide
property tax base. The real estate tax law previously in effect
limited property taxation to residential and commercial property in
the Cairo metropolitan area. The new law will cover the entire
country, adding to the national tax base all residential and
commercial property in the Nile valley, the northern Mediterranean
coast, the eastern Red Sea coast and all of the Sinai Peninsula.
The draft bill introduced by the Ministry of Finance (MOF) stirred
heated debates in parliament and was heavily amended by both the
Shoura Council and the People's Assembly before final approval.
Passage of the law completes one of the benchmarks in the U.S.-Egypt
Human Development cash transfer MOU.


2. (U) The new law, which takes effect January 2009, will tax
property at 10% (down from 14% proposed by MOF) of its rental value,
after subtracting maintenance costs of 30% for residences and 32%
for commercial property. Rental value is calculated as 1.8% of the
property's total value for units worth up to LE 5.5 million ($1
million) and 2.4% for units above that value. Property value will
be assessed every 5 years, with a maximum increase in assessed value
of 30% for residential property and 45% for
non-residential/commercial property in one 5-year period. Property
with a total value under LE 500,000 ($103,000) (up from LE 450,000,
or $84,000 proposed by MOF) and/or rental value equal to or less
than LE 6,000 ($1,132) will be exempt from taxation, as will
property owned by the government, used for public services (schools,
hospitals, etc.),for religious activities, or as political party
and NGO offices. The new law also forgives tax disputes under the
previous law, and allows deduction of property tax from tax paid on
income from properties.


3. (U) The bill met with considerable resistance during debate in
parliament. Al Wafd Party parliamentarians claimed proper
procedures for introduction of tax bills were not followed and that
the proposed creation of a committee to assess property value would
only cause confusion, given the sheer volume of real estate units to
be assessed, 30,000 in Cairo alone. Independent MPs were also
critical, claiming that they received the draft bill - distributed
by the NDP committee - only a few hours before holding debates,
resulting in hurried discussions with no time for proper assessment.
Some NDP members, including Kamal El Shazli and Zakaria Azmi, also
opposed the bill, objecting to a new tax burden on Egyptians. Other
opposition members argued that the law was unconstitutional, as it
affected private property, but People's Assembly Speaker Fathi
Sorour dismissed these objections, stating that the bill complied
with Egypt's constitution.


4. (U) The real estate tax law is part of an overall MOF tax reform
plan, which began with passage of the income tax law in 2005. The
real estate tax is expected to bring in LE 1 billion ($188 million)
in revenues for the GOE in its first year of implementation and LE
5-6 billion ($943 million - 1.1 billion) in the medium term,
according to Minister of Finance YBG. YBG responded to criticism of
the bill by claiming that the government will pay the tax on behalf
of individuals who do not earn enough to cover the tax assessment of
their property. He also noted the law would require three years
from approval to full implementation, allowing time for taxpayers to
adjust to the new burden.


5. (SBU) YBG Advisor Amina Ghanem told us that the tax is so
controversial because it incorporates all of the country, not just
the Cairo metropolitan area. The second homes, family farms and
vacation villas of many of Egypt's middle and upper classes will now
be taxed. Ghanem noted that the revenue generated by the tax may
not meet MOF's initial expectations, and in any event, will not be
significant, only about .03% of GDP, even if expectations are met.
The real significance of the law is that all property throughout the
country will be incorporated into the tax base and revenue stream.
Having property registered for taxation purposes will also help
development of the mortgage market, as it would provide a basis for
evaluation of sales prices.


6. (SBU) Comment: Passage of the new real estate tax law is one of
the benchmarks under the private sector development portion of the
human development cash transfer MOU between USAID and the GOE. A
new, comprehensive real estate tax system is a reform both USAID and
the IMF have been supporting for some time as a means to increase
and diversify revenue sources and bring more people into the formal
economy. Although passage of the law is an important step, the
final version passed by parliament watered down much of MOF's
original bill, and may therefore have limited revenue-generating
potential. In addition to the reduction in the tax level and the
increase in the exemption level, we share the concerns raised by IMF
Resident Rep Cyrus Sassanpour that by capping the appreciation value
of all property units to 30% in 5 years, the new tax base generated
by the new law will eventually erode. We also expect that agreeing
on valuation levels will be a difficult element of the law to
implement, as there are few skilled valuators and the process could
present opportunities for corruption.
SCOBEY