By Mohammed Ayyad
Imposing a tax on capital gains and dividends on the stock exchange is a positive step which will not weaken competition or drive away investors, according to Mohamed Farid, president of Dcode Economic and Financial Consulting.
Farid added that the move would work well with “a system of economic, legislative, and investment reforms … to improve the business environment.”
The government is considering imposing taxes on capital gains and dividends as a step to resuscitate a slowing economy, which suffers from budget deficits, a weak currency, and the exodus of tourists and foreign investors. Its new budget includes a comprehensive tax system reform that aims to raise revenues by EGP 10bn over the coming fiscal year.
“American investors earn capital gains on the Egyptian exchange without paying any taxes, and then transfer that money to their home country, paying taxes that only benefit their country,” said Farid, who had served previously as the vice chairmen of the Egyptian stock exchange. “How is the Egyptian government supporting the US Treasury with this money while denying the Egyptian Treasury, which suffers from deficit, any right to it?”
Farid believes, however, that any additional taxes without clear and executable reforms will frighten off investors and weaken the Egyptian market’s competitiveness. The current government, he said, has thus begun taking serious steps to reform the subsidy system while reviewing economic legislation and is improving the business environment.
Transactions on the stock exchange are entirely exempt from taxes on capital gains, which include sales of stock by any investor at a price above the purchasing price. Dividends, whether monetary or in bonus shares, are also exempt.
According to Farid, in 2005 the government removed a number of tax breaks for newly established companies, but the move came within a series of measures to reform the economy and improve the business environment to raise the rate of new start-up companies. Farid called on the government to announce the value of new tax proceeds and to discuss the issue with all stakeholders in the capital market.
Imposing taxes on the stock market is “expected” by the government, but the exchange will lose its competitiveness among emerging and Arab markets,” said Ahmed Abu El-Saad, the managing director for Delta Rasmala Asset Management.
El-Saad believes that taxes on the exchange will lead to a gradual decline in trading volume, because any new tax means an increase in the cost of investing in the market.
The government previously imposed a stamp tax of 0.1% on stock market transactions, borne by buyers and sellers, during May of last year. The move sparked anger, and lawsuits on the tax’s validity are still under judicial review.
“Imposing taxes on the stock market is just the continuation of government confusion in the management of the financial market, increasing the burdens placed on it and reducing its competiveness. This is going to stir anger among traders,” said Eissa Fathi, a member of a Cairo securities company.
Fathi believes that it is up to those currently managing the financial markets to focus on restoring the investors that have exited since 2011, rather than placing new burdens on them, which he sees as reducing the likelihood of their return and increasing the chances that others will exit. “It’s the wrong timing,” he said.
