Egypt seeks tweaks to stocks tax, dampens hopes for big changes

Traders work at the Egyptian Stock Exchange building in Cairo. They have said the market does not understand how the stocks tax will be calculated or collected, adding to uncertainty heightened by an indefinite delay to parliamentary elections. Reuters/CairoThe Egyptian government is working on amending the payment method of a new tax on stock dividends and capital gains, the finance minister said yesterday, dampening market expectations of any big changes to the unpopular levy. President Abdel Fattah al-Sisi approved a law imposing a 10% tax on stock dividends and capital gains last July as part of efforts to overhaul an economy battered by years of political turmoil. But Egyptian investors say the law is causing confusion and hampering investment, and filed a lawsuit against the government this week demanding changes to certain aspects of it. “The main amendments we are working on are over the tax payment mechanism,” Hani Kadry Dimian told reporters at a news conference, without elaborating. Traders have said the market does not understand how the tax will be calculated or collected, adding to uncertainty heightened by an indefinite delay to parliamentary elections. The stock market hit a four-month low in early trade on Tuesday, but later rebounded on hopes for a compromise on the tax. Although the law was approved in July, the “executive regulations”, which stipulate how it will be applied, were not published until this month and investors say there are many ambiguities. Egyptian investors had challenged the government in court on Monday over the tax on stock dividends and capital gains, saying it is causing confusion and hampering investment. The head of the Egyptian stock exchange complained the tax rules were too complicated and fund managers called them burdensome. Dimian has estimated that the stock market tax would raise between 3.5mn and 4.5mn Egyptian pounds ($460,000 and $590,000). Profits from stock market transactions in Egypt were previously tax-free. The Egyptian Association for Financing and Investment Studies, representing stock market investors and traders, filed the lawsuit in an administrative court demanding changes to some articles of the law, Mohsen Adel, deputy head of the association, told Reuters on Monday.Adel, a member of the Egyptian Stock Exchange (EGX) board and an advisory economic council for the presidency, said on his Facebook page that the lawsuits were filed due to the government’s “failure to respond” to the issue. The tax applies to dividends and capital gains made from trading stocks on the Egyptian stock market and unlisted companies. “What we aim at through filing this lawsuit is to abolish the law because it hurts the investors, the stock market, and also harms competition with our neighbouring markets,” said Awad Altersawi, the legal adviser of the Egyptian Association for Financing and Investment Studies. The main index of Egypt’s Stock Exchange rose by 32% in 2014, the biggest jump among global markets. But the EGX has fallen this year, hit by liquidity shortages and dropping further since the new tax regulations were issued.Fund managers remain positive on Egypt, but are not as bullish as a month ago, a monthly Reuters survey shows. Twenty percent of respondents said they planned to increase allocations and 7% planned to reduce them; in March, 27% planned to boost allocations and none to cut them.Also, Egyptian companies still face foreign currency shortages despite continued aid to Cairo from the rich Gulf states. Separately, Dimian said Egypt hopes to issue sukuk, or Islamic bonds, at the beginning of the 2015-16 fiscal year. “We hope to issue, at the very least, an ijara-structured sukuk at the beginning of the new fiscal year,” he said. The ijara sukuk structure is a Shariah-compliant sale and lease-back contract. Dimian said his ministry had completed amendments to a sukuk law and a draft had been sent to the Islamic Development Bank for the opinion of the Shariah board.