Pity Sawiris

[caption id="attachment_1395" align="aligncenter" width="580"]Nadine Marroushi in Cairo OCI workers protest government charge of tax evasion. By Nadine Marroushi in Cairo[/caption]

At a time when many Egyptian workers are protesting against the chief executives of companies demanding better rights, employees at Orascom Construction Industries demonstrated an unusual display of loyalty against accusations from the government that the company owes 14 billion ($2.1 billion) in back taxes relating to the 2007 sale of its cement arm to France’s Lafarge.

Hundreds of protesters gathered outside the company’s Cairo headquarters last week holding banners saying: “Oh Finance Minister, where is social justice?”, “Bread, Freedom, Sawiris is not a tax evader,” and “100,000 families will lose their income,” Bloomberg reported.

Poor Nassef Sawiris, OCI’s billionaire chairman who is worth $6.5 billion and runs the most valuable publicly traded company in Egypt…

Both Nassef and his tycoon father Onsi are out of the country, but have been placed on an arrivals watchlist related to the tax evasion charge meaning they could be arrested if they return to Egypt.  There’s little chance that they’ll be flying back to Cairo anytime soon.

Yes, this case has prompted the country’s business community to decry the move against OCI as another example of the government choking off much-needed investment and using its power to strike at liberal opponents (Nassef’s brother Naguib is a founder of the Free Egyptians party, a fierce critic of the Brotherhood).

But the reality is, companies will always outsmart governments and OCI did just that. That’s how Wall Street escaped regulators for so long and why white collar crimes are often only discovered years after the offence.

In Egypt, where financial watchdogs are absent and regulators are toothless, OCI’s really only guilty of using legal loopholes to evade tax. And that’s not illegal.

OCI has repeatedly denied that it broke any laws and says it owes a much smaller sum of 4.7 billion pounds.

The bigger story is that it is likely that the cement business OCI sold in 2007 did so well (and had such a high valuation) by exploiting energy subsidies to industries. The company grew quickly by using cheap fuel meant for the poor and then sold the business when it was at its peak.  The deal, then valued at €8 billion, was the largest ever in the history of the stock exchange, the FT reports.

The truth is tax evasion is widespread in Egypt because of the complicated and largely ineffective collection system. Employers have developed a number of strategies to spare themselves the grief of wading through Egyptian tax law. For example, many foreign workers are paid in cashable cheques or employed as advisors and consultants, leaving the responsibility of tax payments to the employee himself. Usually the government doesn’t chase you up unless you earn over a certain amount.

What is more, Egypt regularly misses tax collection targets. In the budget for the country’s 2010/11 financial year, the revenue target was LE200 billion. Only LE192 billion was collected. Again, for the 2011/2012 fiscal year the tax revenue target stood at LE232 billion, but the government only raised LE170 billion.

This financial year, the government has set an ambitious goal of collecting LE260 billion, but considering the Morsi administration’s track record, this is unlikely to be fulfilled.

OCI have the upper hand. They are well-versed in the legalities of their case, better so than the fumbling, muddled lawyers working for the government.

Nassef is by all means an important businessman and his conglomerate employs many thousands of Egyptians, but he is also not the victim his lawyers make him out to be. His businesses thrived on the labour of Egyptians and subsidies on fuel from the government. It would be wrong for the government to file baseless accusations against OCI, but the company’s clever “tax avoidance” should not be applauded either.

As the Tax Justice Network writes in its manifesto: “Tax is the most sustainable source of finance for development. The long-term goal of poor countries must be to replace foreign aid dependency with tax self-sufficiency.”

Egypt’s precarious financial situation is not just related to inefficiency and bad governance. The tycoons of the pre-revolutionary period are also to blame. Using their government connections, they helped push through laws that were ideal for growing their personal wealth and not for increasing income of everyday Egyptians. Nassef himself was a board member of the Egyptian Center for Economic Studies, which the Washington Post explained in 2011, helped write the laws that led to Egypt’s privatization spree. Fellow board members included Ahmed Ezz, Gamal Mubarak, among others.

Unfortunately, the political battles have relegated this debate to the side, but whether you like the government or not, increasing the tax base is important for Egypt to get back on track. One part of this is to put in place better laws that prevent billionaires from paying only a pittance on multi-billion dollar deals.

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