On August 19, 2014, President Abd Al-Fatah Al-Sissi issued presidential decree No. 117 amending the building tax law No. 196/2008, known as the Building Tax (The Official Gazette, 2008 and 2014).1 The Building Tax law was first introduced in 2008 by Dr. Youssef Boutros Ghali, the Finance Minister at that time, to replace a law from 1954 (known as Qānūn al-`Awāi’d in Arabic) as part of the tax reform agenda (The Egyptian Gazette, 1954)2. The new law was expected to improve tax collection, increase government revenue, direct new revenue to development projects in local administrative units and popular neighborhoods, as well as discourage land speculation.
However, as it had never been publically debated nor did the Real Estate Tax Authority sufficiently deliberate it, the law raised widespread opposition, especially among the tourism and real estate sectors and was eventually never enforced. The Supreme Council of the Armed Forces (SCAF) proposed modifications to the law in 2011 while they were in power during the transitional period after the overthrow of President Hosni Mubarak. These changes were scheduled to come into force in January 2013 (The Official Gazette, 2011). However, in December 2012, President Mohamed Morsi announced new legislation to replace SCAF’s (The Official Gazette, 2012). His building tax legislation would have come into effect in July 2013, but, once again, politics intervened, and Morsi was deposed.
Even without considering the political turmoil of the last few years, implementing a real estate tax law in Egypt is difficult, for a number of reasons. First, according to a 1997 study by economist Hernando de Soto, more than 90 percent of property transactions in urban areas were never formally recorded with the authorities, and as a result, the government does not know who owns what, and tax evasion is widespread. Second, the real estate tax is a very visible tax that has to be paid directly by taxpayers in periodic lump sum payments – unlike income tax, withheld at source, and the sales tax, paid with each daily purchase (Slack and Bird, 2006). This does not make the building tax popular especially among powerful land-holding interests, with ties to the military, large corporations, or foreign investors in Egypt,– which are the required to pay the more as the building tax is inherently progressive – but also among middle-income Egyptians for whom property is among the most popular forms of long-term investment. The alignment of middle- and upper-income interests makes the building tax extremely unpopular. This explains why many constraints on the tax were introduced, in order to make the new law acceptable to the public (Slack and Bird, 2014).
The 2008 building tax law (including Al-Sisi’s subsequent amendments) aims to correct two flaws of the 1954 law – limited tax base and inefficient tax collection system – which seriously undermine its collection efficiency. To expand the tax base, the new law applies to all properties in the country, including those under construction, whereas under the 1954 law, taxes were applied only to properties within city boundaries (or “Kurdūn” in Arabic), accounting for just one-third of all properties in Egypt, and properties under construction were exempt (Article 2, The Egyptian Gazette, 1954). This means that the new communities—usually high-end developments, resorts, or hotels on the outskirts of Cairo or on the north coast—will be taxed for the first time. Bringing buildings still under construction closes a common loophole that property owners used to evade taxation by leaving an “unfinished” top floor that remains “under construction.” This will also encourage property owners to finish their buildings and encourage the sale or rental of these properties.
The 2008 law also reforms building tax collection. The 2008 law reduces the time between property value assessments from ten years under the 1954 Law (Article 3 and 11, 1954) to five years (Article 5, 2008) and it establishes a flat tax rate of 10% on all properties (after a 30% deduction for maintenance expenses of residential properties and 32% for non-residential properties) (Article 12, 2008). This new rate replaces the 10 to 40% rates of the 1954 law (after a 20% deduction) which varied according to rent values (Article 12, 1954). However, since the values mentioned in the 1954 law had not been updated according to inflation rates and increases in land value – the 10% rate was for instance required in the law for rents of less than 3 pounds and the 40% one for rents of more than 10 pounds – most taxpayers were supposed to pay the maximum i.e. 40% of the rental value of their property each year. It is nevertheless unlikely that such a large amount was actually applied to taxpayers considering that a majority of them would not have the means to pay it.
Overall, implementing the new tax law will help to update the database of the Real Estate Tax Authority (RETA) about taxpayers of the building tax. More taxpayers will be registered and assessments will be more regularly done. In addition, the flat tax rate will most likely facilitate the work of RETA, as the rates will be more adapted to the financial means of taxpayers and therefore more likely to be paid.
Despite these improvements in regards to tax collection, the new building tax law will not generate significantly higher revenues because of exemptions and limits on assessments. The law sets a ceiling on assessed value increases at 30% for residential and 45% for non-residential properties (Article 5, The Official Gazette, 2008 and 2014). These limits will have negative, long-term, implications for revenue collected from the building tax. To start, the inflation rate in Egypt has a 50-year average of 9% annually. Recently, the rate has been even higher. Inflation alone will wipe out any increases in property values due to the dynamics of the real-estate market. For example, based on the inflation rates from the Central Bank of Egypt, a property with a value of EGP 930,000 in the beginning of 2009 would be worth about EGP 1.35 million at the end of 2013 based on inflation alone. This is an increase of 45% without accounting for the dynamics of the real-estate market. With a cap of 30% on assessment increases every five years, residential properties will effectively depreciate over time regardless of their actual value and with a cap of 45% on non-residential properties, these properties value will remain constant. In other words, if the property market fails, the government’s revenues decrease, but if the property market increases, the government and those who depend on public services from the government, forego those benefits. All properties should be assessed at current market rates whenever that assessment happens and adjustments to that assessment, if contested, should be taken on a case by case basis and only if they exceed a much higher increase.
In regards to exemptions, the tax exempts the several million apartments that are “rented” under the Nasser era rent control system under which renters pay a negligible (often less than EGP 50) monthly rent. Considering that property value is assessed through rent value, the tax amount would have, in any case be, negligible. In addition, many exemptions have been introduced in the 2014 amendments to the 2008 law.
First, all principal residential properties assessed below EGP 2 million or EGP 24,000 annually (EGP 2,000 per month) are exempt. However any additional residential properties owned by an individual are not exempt. Of the properties assessed at over the EGP 2 million threshold, taxes will be collected on only the amount over that threshold. Though it is good that the new amendment allows to tax all non-primary properties – while all properties below worth EGP 500,000 or collected EGP 6,000 annually in rent (EGP 500 per month) where exempted in the 2008 law – few taxpayers will in the end be concerned by this measure without considering the fact that some could register their secondary housing unit under a family member’s name. Second, all non-residential properties whose annual net rent is below EGP 1,200 or whose assessed property value is below EGP 100,000 meant to support small commercial, industrial, and service activities are exempt. Finally, all clubs and hotels of the armed forces as well as military medical centers, hospitals and clinics are exempt despite the opposition of the Egyptian Council of State which reviewed the law (Article 18, 2014).
The intent of the law is to protect homeowners and small businesses (and also gain their political support). The government’s support for lower-income families is appreciated, but the law’s exemption cap for residential properties is too high. In 2008, the former chairman of the Egyptian Real Estate Tax Authority, Tarek Farag, estimated that 90% of properties in Egypt were valued at less than EGP 500,000 or had an annual rent of less than EGP 6,000 meaning that at least that many properties will be exempt under this building tax law. While no one enjoys paying property taxes, however it further establishes the citizen-government relationship and legitimizes residents’ claims on the government to provide public services to their communities.
All citizens should pay the building tax even if it is a highly progressive tax, for instance, 1-2% for properties below EGP 500,000, 5% for properties below EGP 2 million, and 10% for those above, and a mechanism should be introduced to regularly update thresholds according to inflation rates. The government can still protect lower-income families with the building tax without exempting most of the population from paying.
As a result of the new building tax legislation, the government was expecting EGP 3.5 billion in revenue annually (Ministry of Finance, 2014). However, because of the delay in sending notifications to property owners and other administrative complications, the government collected only EGP 1 billion as announced by the Minister of Urban Renewal and Informal Settlements, Dr. Laila Iskandar.
The Building Tax legislation is expected to increase the resources of local administrative units to address local and social issues. The law specifies that 25% of the building tax revenue will be allocated to governorates (Article 28, 2008 Law). In 2012, the Minister of Finance announced that 25% of the revenue will be allocated to the Informal Settlements Development Facility (ISDF), which is part of the Ministry of Urban Renewal and Informal Settlements (MURIS), and he later announced that the remaining 50% will be used to improve education, health and retirement pensions as well as fund development programs in the governorates. Despite these announcements, it is unlikely that the new building tax law will have any concrete impact on local issues.
First, revenue coming from the building tax law is too limited. As mentioned above, the building tax revenue for 2015 is expected to be about EGP 1 billion. Improvements in tax collection and reducing tax evasion will increase the revenues, but the extent of exemptions in the law will keep the revenue relatively low. The 25% going to the ISDF will be helpful, given that the budget of the MURIS is only EGP 600 million in 2014-2015, compared to the New Urban Communities Agency (NUCA), a subsidiary of the Ministry of Housing, whose budget increased from EGP 14 billion to EGP 28 billion in 2015. The same goes for the increased revenue to the governorates—in theory, it is helpful, but distributing 25 percent of EGP 1 billion (or even EGP 3.5 billion if the government hit its initial target) among 27 governorates is not a substantial increase and there is no reason to believe that it will trickle down to lower levels of local administration.
The second issue is centralization. In Egypt, building taxes are set by the national legislature, and then collected and redistributed by the Ministry of Finance (MoF). Local administrative units have no control over rates, collection, or expenditure of building tax revenue. The building tax is one of many revenue streams managed by the MoF which they can use to allocate funding to the lower administrative units throughout the country. While this law requires that 25% of the building tax revenue go to the governorates, there are no guarantees that all other central government transfers will remain constant. In other words, there is no guarantee of revenue increases for governorates at all. The Ministry of Finance can easily offset the increase in funding from the building tax revenue by decreasing transfers from other revenue streams. And even if there are increases in revenue, the governorates are not free to use the money as they wish as the Ministry of Finance follows up the implementation in order to make sure that the projects implemented agree with national plans priorities.
In many countries, property taxes are the primary source of revenue for local governments. Local governments are responsible to set property tax rates and collect property taxes within their jurisdiction. There are several advantages to this. First, the administrative burden on the central government is lessened and the amount of money that reaches the local levels of government increases. True, the potential for corruption at the local level increases, but this is already a challenge that the government must address at all levels of government. Second, local control over property taxes has a positive effect on local public service delivery. The building tax is a highly visible tax and one that Egyptians are reluctant to pay. Taxpayers’ willingness to pay the building tax will likely depend on the benefits they receive. As a result, local governments direct public investment toward projects whose impact is visible for the taxpayers, such as building schools, roads, neighborhood parks, garbage collection systems, etc. Likewise, the efficiency of public sector decisions is also improved as taxpayers will presumably support those activities for which the benefits received exceed the taxes (Slack and Bird, 2014).
The building tax system in Egypt should be decentralized, at least in part, to local administrative units. However, the building tax as the new local administration law whose draft has been revealed to the public last August do not at all prepare the country for any such decentralization. This is a short-sighted mistake that will continue to hobble the effectiveness of local administrative units for many years to come.
In Egypt, there is a paradox in the housing market: there is an extreme shortage of lower-income housing, yet according to 2006 CAPMAS figures, 25% of housing units in Cairo, 32% in Giza and 35% in Alexandria were vacant. This percentage has increased since 25 January 2011 due to rampant and uncontrolled construction throughout Egyptian cities. As we mentioned above, real estate is a popular form of investment in Egypt across all social classes and demand is high, as it has proven to be a relatively safe investment and provides protection against high inflation rates. Apartments are also in high demand for the young population looking to get married. Families will often purchase apartments and leave them vacant until their children are ready to be married.
With the right legislation, building taxes can be used as an instrument through which the government can encourage property owners to use their property productively and begin to solve the lower-income housing shortage in Egypt. A high-enough tax rate will force owners of vacant units to at least consider renting or selling them and curb some of the informal development happening throughout the city. A building tax could also be applied to vacant land which could go a long way to depressing land prices to allow for more affordable housing options to be built.
The building tax law is mixed on its ability to encourage property owners to use their property productively. First, expanding the tax base to include the new communities is a good first step. Developers sitting on any number of units will have a greater incentive to sell or rent the units when they have the opportunity. It is also good that the law taxes all non-primary residential properties, but, as mentioned above, this is easy enough to avoid by registering secondary units under a family member’s name. This is a loophole that the government should move to address. In addition, the high number of exemptions is significantly limiting the impact of the law.
Many of Egyptians live without formal title to their land, especially in informal urban areas in the Greater Cairo Region, home to over 60% of the area’s total population. Building taxes can improve land tenure security in these areas and provide some kind of protection against forced eviction. If the occupant of a given property does not have a formal title, but is required to pay taxes, the annual property tax payments receipts can serve as a proof of ownership should any ownership disputes arise. This was the case with some residents of well-established informal neighborhoods such as Manshīyyīt Nāṣir who had paid taxes under the 1954 law. Subjecting informal areas to building taxes also discourages any improper ownership claim because nobody will bribe an official for the right to pay taxes. (Comby, n.d.)
By updating the Real Estate Tax Authority’s dataset on taxpayers, the building tax may improve the land tenure security of some property owners. However, considering the high level of exemptions to the law, we can guess that the Authority will concentrate its efforts on taxpayers who are likely to pay the tax. According to the Ministry of Finance, as of March 2015, about 6.4 million notices of tax assessment had been sent out to housing units in addition to more than 1.8 million notices to commercial, service and industrial units.
Overall, the new building tax, by expanding the tax base, standardizing the tax rate, and increasing the frequency of assessments, will improve tax collection compared to the former law. This does not prevent it from having several severe limitations. The extent of exemptions is problematic and the government should move to gradually reduce the exemptions to continue expanding the tax base throughout Egypt. As a direct result of the exemptions as well as the limits on assessment increases, the amount of revenues the law will generate will likely fall short of the government’s projects for some time to come. The law will also do little to improve the housing situation in Egypt’s urban areas.
Structurally speaking, the impact of the law on local administrative units is limited by the local administration law, which keeps the building tax centralized. The local administrative units neither control the rate of the tax nor how the revenue is spent, and therefore, the law is unlikely to improve local issues. The revenue expected to go to the MURIS for the upgrading of informal areas will be welcome, but insufficient to fulfill their mission of mitigating the risks that residents living in unsafe areas face.
In short, the building tax should apply to all property owners in Egypt with limited exceptions. Establishing a well-considered tax on property owners will help solidify the government-citizen relationship and legitimize citizens’ claims on the government to provide better public services while at the same time, providing additional revenue to the government to do so.
Comby, Joseph (n.d.). “L’impôt foncier”. Comité technique « Foncier & développement ».
The Egyptian Gazette. 1954. “قانون رقم 56 لسنة 1954 في شأن الضريبةعلى العقارات المبنية”, No. 10A (غيراعتيادي), February 4th, 1954
Ministry of Finance. 2014. “البيان المالي عن مشروع الموازنة العامة للدولة للسنة المالية 2014/2015 يقدمه هاني قدري دميان وزير المالية”, Cairo, July.
The Official Gazette. 2008. “قانون رقم 196 لسنة 2008 بإصدار قانون الضريبة على العقارات المبنية”, No. 25C, July 23rd.
The Official Gazette. 2011. “مرسوم بقانون رقم 118 لسنة 2011 بتعديل بعض أحكام القانون رقم 196 لسنة 2008” No. 36A, September 10th.
The Official Gazette. 2012. “قرار رئيس جمهورية مصر العربية بالقانون رقم 103 لسنة 2012 بتعديل بعض أحكام قانون الضريبة على العقارات المبنية الصادر لقانون رقم 196 لسنة 2008”, No. 49, December 6th.
The Official Gazette. 2014. “قرار رئيس جمهورية مصر العربية بالقانون رقم 117 لسنة 2014 بتعديل بعض أحكام قانون الضريبة على العقارات المبنية الصادر بالقانون رقم 196 لسنة 2008”, No. 23A, August 17th.
Slack, E. and Bird, R. 2006. “Taxing Land and Property in Emerging Economies: Raising Revenue… and More?”
Slack, E. and Bird, R. 2014.“The Political Economy of Property Tax Reform”, OECD Working Papers on Fiscal Federalism, No. 18, OECD Publishing.
1. Egypt has three kinds of property taxes: the Agricultural Land Tax (Qānūn Darībat al-’Aṭyān az-Zirā`īah), Real-Estate Transfer Tax, and the Building Tax (Qānūn aḍ-Darībah `Alā l-`Iqārāt al-Mabnīah) (Martinez-Vazquez and Timofeev, 2011). This article focuses exclusively on the Building Tax.
2. Under his leadership (2004-2011), and with the support of the International Monetary Fund, the Ministry of Finance adopted a sweeping tax reform strategy initiated in 2005 with a new income tax law.
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