Egypt will impose a capital gains tax of 10 percent beginning next fiscal year as part of its attempt to rein in the country’s growing budget deficit following a popular uprising, Finance Minister Samir Radwan said.
Profits from capital investments, dividend payments, mergers and acquisitions, and asset revaluations will be taxed, Radwan told reporters in Cairo. Egypt will also tax annual income of individuals and companies earning 10 million Egyptian pounds ($1.7 million) or more at a rate of 25 percent, he said. That’s 5 percentage points higher than the current tax rate.
“It’s negative for the market but positive for the budget deficit,” Mona Mansour, co-head of research at CI Capital, a Cairo-based investment bank, said in a telephone interview. “This will help reduce the deficit because it will bring in more revenue for the government.”
Egypt’s budget deficit may reach 11 percent of gross domestic product in the fiscal year that ends in June 2012, compared with an expected 8.6 percent in the current one, after the revolt that toppled President Hosni Mubarak in February hurt revenue from tourism and industrial output, Radwan said. The economy is expected to grow 2.6 percent this fiscal year, accelerating to 3.2 percent the following year, he said.
Egypt’s 5.75 percent dollar bond due in April 2020 rose, forcing the yield down 10 basis points, or 0.1 percentage point, to 5.83 percent at 4:45 p.m. in Cairo, the biggest drop since May 19.
Credit Default Swaps
The cost of insuring Egyptian government debt against default for five years fell 21 basis points, or 0.21 percentage point, to 304 at 6 p.m. in Cairo, according to data provider CMA, which is owned by CME Group Inc. and compiles prices quoted by dealers in the privately negotiated market. That’s the lowest level since Jan. 14, according to Bloomberg data.
The willingness of stock investors to absorb losses from the tax and stay in the Egyptian market will depend on “how far the government is willing to go” in pursuing political and economic reforms, Mansour said.
Egypt’s benchmark EGX 30 stock index has dropped 23 percent this year, even after a 10 percent gain in May that made it the world’s third-best performer that month.
“If your return will be reduced slightly by taxes then it may be more attractive to put the money somewhere else,” said Sven Richter, managing director and head of frontier markets, who helps oversee more than $2 billion at Renaissance Asset Managers in London. “It all depends on the underlying valuation of the investment that you are making.”