OCI Tax Debacle in Egypt Stokes Concern Over Who Might Be Next
Egypt’s decision to go after its biggest publicly traded company on a tax-evasion claim is deterring investors that regard the case as a possible precedent setter, EFG-Hermes Holding SAE’s head researcher said.
Orascom Construction Industries (OCIC.CA), which accounts for a quarter of the value of the benchmark EGX 30 Index, has been in talks with tax officials to settle a 14 billion Egyptian-pound ($2 billion) claim stemming from the 2007 sale of its cement business. The company didn’t pay taxes on the transaction because it listed the business on the bourse two months prior to the sale, it said in a March 8 statement. Egypt didn’t have a capital gains tax at the time, which remains the case today.
Egypt aims to “take more measures to improve the investment environment” by developing the legislative framework, providing new incentives for investment and developing vocational training and education, the Cabinet said in an e-mailed statement yesterday. The government wants to increase economic growth to 4.1 percent next year from 3 percent this year, including a 59 percent contribution from the private sector to its 291 billion-pound investment target.
“The government is talking about attracting foreign investment but its actions aren’t consistent with that,” Wael Ziada, head of research at the Cairo-based investment bank, said by phone. “A settlement would be a positive development in the medium term, but it doesn’t mean we won’t see similar cases in the future, which is what concerns potential investors.”
The case of Orascom Construction, or OCI, is the latest in a series of charges brought against investors that thrived under the rule of former President Hosni Mubarak.
‘Bumpy Road’
Damac Properties Co., a Dubai-based developer, filed for international arbitration in 2011 after Egypt seized land the company purchased in 2006 and sentenced its chairman to five years in prison with hard labor. Ezz Steel (ESRS.CA)’s former chairman Ahmed Ezz received a 37-year prison sentence this month for profiteering and squandering of public funds in his company’s acquisition of another steelmaker, El Ezz Aldekhela Steel. (IRAX.CA)
“The government is making some mistakes,” said Muhammed El Demerdash, board member of prominent Islamist businessman Hassan Malek’s Egyptian Business Development Association. “However, the challenge is not that easy: to create a business- friendly investment environment, while applying social justice and the rule of law. The short-term is really challenging. It’s a bumpy road, and that’s a by product of the democratic transition.”
OCI Offer
OCI offered the Egyptian Tax Authority 7 billion pounds to settle the dispute, Ahmed Abdel Rahman, head of the authority’s tax-evasion unit said in a phone interview today. Officials will study the offer once the company files necessary documentation to support its proposal, he said. Omar Darwazah, OCI’s head of investor relations, declined to comment.
OCI’s chief executive officer Nassef Sawiris and his father Onsi have been placed on a travel ban/arrivals watch list by Egypt’s public prosecutor. The company is seeking Egyptian market regulator approval to relocate its base from Cairo to Amsterdam.
The shares gained 3.5 percent, the most in more than three months, to 238.27 pounds at the close in Cairo. The stock is down 8.1 percent since the public prosecutor placed Sawiris on the watch list. That dragged the EGX 30 Index (EGX30) down by 5 percent over the same period.
Bloomberg
