Egypt loses as much as LE5 billion a year in tax revenue due to companies using tax havens to shield profits from taxes, according to a new report from the Egyptian Initiative for Personal Rights (EIPR).
The practice also distorts figures for Foreign Direct Investment and allows companies to make investments in Egypt without disclosing ownership details, says EIPR researcher Osama Diab.
Entitled “Tax Tourism: A Nail in the Coffin of Social Justice,” the Arabic-language report tracks investments from tax havens. These jurisdictions, generally small countries or territories with small populations and little need for a large tax base, levy few or no taxes on income and allow financial secrecy for companies and individuals.
They also allow companies not based in the territory to register there, which enables companies operating in countries like Egypt to legally or illegally avoid local taxes by shifting profits offshore.
The ease with which companies can register in tax havens also have a corrosive effect on local tax regimes, driving down corporate taxes in a race to the bottom as companies compete to attract investors.
Analyzing data from the General Authority for Foreign Investment covering 1970 to 2013, EIPR found that known tax havens were among the primary source of investment in Egypt.
During these 43 years, small states invested in 479 Egyptian companies, representing US$12 billion in capital.
The Cayman Islands, a well-known tax haven with a population of less than 60,000, ranked 6 on the list, with 85 companies with a total capitalization of US$6 billion. Over 43 years, the Caymans outranked major countries like France, the United States and Italy.
Another notorious tax haven, the British Virgin Islands, came it at number 11, with 112 companies worth US$2.7 billion.
The data from GAFI is not broken down by individual year, but Diab suspects the percentage of money coming from tax havens is likely much higher in the last 10 to 15 years than it was in the 1970s and 1980s.
Central Bank FDI figures are broken down by year, but “tax havens completely disappear,” Diab told Mada Masr.
One likely explanation is that many of the most notorious tax havens — including the Caymans and the British Virgin Islands — are British territories.
“That’s the most likely reason why investment from the UK is so huge,” he says. Some years, that figure amounts to around 50 percent of FDI.
Laws allowing non-resident companies and individuals to register in tax havens mean that many of the supposedly foreign investors could actually be Egyptian.
Financial secrecy means it is hard to get an accurate count of how many of the companies registered in places like the Caymans are actually owned and operated by Egyptians, but anecdotal evidence suggests the number is substantial, Diab says.
“I’m sure if we had accurate figures, we’d find that a huge chunk of FDI figures are not actually foreign,” says Diab. “The quality of the data is distorted.”
It is not unusual for Egyptian companies to register offshore to avoid Egypt’s cumbersome and outdated business laws, but Diab says that many who do are also seeking to get out of paying taxes or to obscure their investments from public scrutiny.
“All research says the main reason is tax avoidance or secrecy,” Diab says. “The regulatory thing might be true to a certain extent. Egypt is a bureaucratic nightmare. But that doesn’t mean reasons of secrecy and tax avoidance don’t apply.”
EIPR calculated lost revenues from tax havens at LE5 billion per year, assuming that the offshore companies involved have an annual return of 20 percent and therefore brought in LE20 billion in annual profits.
Returns on capital of 20 percent are quite high by global standards, admits Diab. A major study of 5,000 U.S. companies over 40 years found a median return on invested capital of 9 percent.
Still, in a country where both inflation and standard interest rates often exceed 10 percent, it’s not uncommon for companies to have returns exceeding 20 percent, Diab says.
“Of course the calculation will never be accurate, but we wanted to put some sort of figure on how much the treasury loses. My opinion is it’s at least that much,” he says.
The report closes with a series of recommendations for Egypt. Overall, it stresses the need for Egypt to work with other countries to combat tax havens. No country can act on its own, due to the international nature of the problem, and the ever present threat that if Egypt cracks down, investors will simply direct their money elsewhere.
Rich and powerful OECD countries have taken some steps against tax havens, but EIPR urges Egypt and other developing countries to join the fight, perhaps using existing structures such as the Non-Aligned Movement or the African Union.
The report also points to examples of moves other countries have taken, that could serve as examples for Egypt. For example, El Salvador imposes a 25 percent withholding tax on corporate transfers to offshore branches, releasing the funds only when it is satisfied the transaction was made for a legitimate business purpose. Bulgaria has taken an even harder line, banning investments from tax havens in 28 economic sectors, including banking and media.