Sisi Shows Firmness In Decision Making And Dedication To Reforms; Beltone

Beltone Financial research unit stated, in a recent report, that the decisions taken by president Abdel Fattah Al-Sisi shows firmness in decision making and dedication to reforms.

Beltone added that the president and government chose to start off with reforms that would impact the rich rather than the poor as a first step to reforms, by applying specific tax reforms. It could prove more difficult when it comes to applying subsidy reforms as their impact on the poor are more significant.

President El Sisi approved an amended budget for FY14/15 which targets a 10% of GDP budget deficit, down from an initial budget deficit of 12% in FY13/14, which is in line with Beltone’s expectations of 11.6%.

A total of c.LE 50 billion were saved from the initial budget rejected by President Sisi. Savings were achieved through LE 30 in increased revenues and LE 20 billion in increased expenditure savings, mainly as a result of tax increases and reduction in subsidies.

According to Beltone, Revenues in FY14/15 are estimated to reach EGP549 billion, up LE 30 billion from the rejected budget, mainly as a result of tax reforms, taking into account that grants assumed in the budget are relatively low compared to last year and only include petroleum grants expected to be received until August 2014.

Expenditure in FY2014/15 is budgeted to reach LE 789 billion, down LE 20 billion from the rejected budget.

Savings were achieved through a set of reforms on the subsidy side by increasing prices, and increasing subsidy system efficiency.

Increased expenditure on education, health and R&D to comply withthe constitution is maintained within the amended budget and public investments are set at LE 67 billion, LE 50 billion of which are financed through the treasury.

Regarding the Capital Gains taxes, Beltone said that it is proposed to be 10% annually on stocks and investment fund certificates, calculated at the end of the year. It applies to capital gains from stocks listed in the Egyptian stock market, and capital gains from activity in stocks of companies residing in Egypt and not listed in the Egyptian stock market, regardless of whether they are listed or not abroad.

The Minister of Finance expectes to raise between EGP3.5 and EGP4.5 million.

The tax will not be applied on a transaction by transaction basis, but rather on a net portfolio position basis and on the net realized gains and losses, which is definitely better for investors.

The starting point for portfolio valuations should be the date of issuance of the capital gains tax law. Net realized losses on portfolio investments can be deferred for three years. The taxes will not be applied to investors based in countries with which Egypt has signed a tax treaty, to avoid double taxation.

In addition, the tax will be applicable to mutual funds, but not to money market funds. and the government has agreed to cancel the 0.1% stamp duty tax.

A 5% taxes on dividends is considered for long-term investors whose ownership exceeds 25% for two years and 10% for short-term investors. The dividends tax will be implemented on the level of subsidiaries but not on the level of holding companies to avoid double taxation.

Additions to the newly approved law include exemptions of dividends of investment funds that invest at least 80% in securities and other debt instruments, as well as exemption of dividends of investment funds that invest in other investment funds which invest at least 80% in securities and other debt instruments.

Corporate and securitized-bond coupons  are also exempt (excluding treasury bonds). Gains of investment funds that invest solely in the money market are exempt.

The exemption threshold for cash dividends is EGP10,000. Bonus shares will continue to be exempt.