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