The country is looking to introduce a capital gains tax, which is something unprecedented for the oldest stock exchange in the Middle East and north Africa. However, the tax’s dependence on initial public offerings (IPOs) may mean paltry returns.
As part of an economic programme presented in November to the International Monetary Fund to secure a $4.8bn loan, the government proposed, but is yet to draft, a law that would levy a 10 per cent tax on corporations’ profits from flotations.
The tax will be on the first transaction of the listed securities in the secondary market, and mainly targets owners of shares rather than regular traders. In a bid to broaden the tax base and combat a widening budget deficit, there are also plans to tax profits from mergers and acquisitions and demergers.
Taxes will be imposed “on acquisitions if the deal exceeds 33 per cent of the company’s capital or shareholder rights”, says Momtaz al Said, finance minister. What is not calculated into the plan is the near non-existence of IPOs or M&As over the past two years, which calls into question the size of possible tax revenues the government is hoping to raise.
Mohamed Omran, executive chairman of the exchange, says: “The IPO market is related to political stability, which entails improving the investment climate, having trust in the economic system and creating clear economic policies. We’re assuming that political stability will bring economic growth.”
Though a far cry from a previously proposed 10 per cent tax on profits from normal trading or dividends, a decision that was swiftly and unceremoniously shot down in 2011, some say it also risks dousing investor appetite. Without the necessary environment to make investment opportunities clear for companies, there is little to prompt them to seek access to finance for expansion or growth, the primary reason companies list in the first place.
While some argue that a tax of this kind has been long overdue, others are wary it may deter companies from going public to expand, in turn, hindering instead of encouraging investment in an already feeble IPO market.
A capital gains tax “is utterly non-conducive to investors in the real economy”, says Hisham Tawfik, Arabeya Online Securities chairman. “It’s depressing to investors and increases the unattractiveness of our market,” he adds; “trading in secondary markets is not taxable but direct investment is”.
Mr Omran disagrees: “I don’t see any significant reason why companies would be deterred from listing.” Companies list “to expand their ownership base, have a better exit strategy and valuation and implement better governance, disclosure and transparency systems,” all factors that will remain attractive options for businesses.
He also foresees no harm being done to daily trading. “There were rumours of a capital gains tax on trading before, so at least this issue is closed,” he says.
Since the uprising, trading on Egypt’s market has been characterised by violent fluctuations. At the outset, it lost 16 per cent of its value in two days, leading to a two-month closure.
Upon reopening, performance was weak throughout a mismanaged transition to civilian rule extended by the ruling army council that came to power after Hosni Mubarak’s removal.
Two days before the first anniversary of the uprising, and in the calmest month Egypt had seen in a year, an elected parliament was seated and the pretext for a solid transition appeared to be in place. The market soared, recouping some of the losses and gaining its ranking as the best performing in the region.
Still, sharp crests and troughs continue to mirror lapses in Egypt’s political transition. “I don’t see this title of ‘best performing market’ as sustainable,” Mr Tawfik says. “Yes, the performance this year has been great but that’s because the previous year was so bad.”
The market plunged most recently as a result of renewed clashes and fierce opposition to President Mohamed Morsi’s November 22 constitutional declaration (later reversed), which gave him unprecedented sweeping powers.
On November 25, the market lost E£29.3bn ($4.7bn) of its capitalisation, its third largest single-day drop, which would have been higher if it had not been for the circuit breakers that halted trading for 30 minutes. It has since slightly recovered.
Hopes of the IMF deal ushering in the start of a recovery have been dashed with the developments of the past weeks. Mr Tawfik says: “There was no co-ordination [with stakeholders]. The ‘revolution government’ thinks it can do whatever it wants,” and that priority should be given to introducing more sophisticated instruments.
Mr Omran says the government is doing just that, with plans to introduce exchange traded funds in 2013, as well as talks on issuing sharia-compliant sovereign bonds and finalising sukuk regulations.