CORPORATE TAX ACTIVITY FINAL EVALUATION Submitted to: USAID/Egypt Strategic Objective 16 Environment for Trade and Investment Strengthened Under: MOBIS Contract No. GS-10F-0185K Task Order No. 263-M-00-03-00006-00 Prepared by: Paul O’Farrell Senior Economist Samuel Taddesse Senior Economist/ Evaluation Specialist Ronia Hawash Economist Submitted by: Development Associates, Inc. Results Reporting Support Activity 20 Aisha El-Taimoreya St., 1st Floor, Suite 2, Garden City, Cairo, Egypt July 29, 2004 Development Associates, Inc. July 29, 2004 Corporate Tax Activity Final Evaluation i TABLE OF CONTENTS TABLE OF CONTENTS ........................................................................................................... i LIST OF ACRONYMS ............................................................................................................ iii EXECUTIVE SUMMARY ...................................................................................................... iv CHAPTER ONE: INTRODUCTION.......................................................................................1 PURPOSE OF THE EVALUATION ...........................................................................................2 METHODOLOGY OF THE EVALUATION ............................................................................2 CHAPTER TWO: TAX DEPARTMENT COMPONENT.....................................................4 Task 1: Policy Initiatives .................................................................................................................4 Task 2: Computerization Initiatives..............................................................................................6 Task 3: Tax Collections ...................................................................................................................7 Task 4: Audit Selection System......................................................................................................9 Task 5: Public Awareness Campaign..........................................................................................12 Task 6: Reorganization Plan ........................................................................................................12 Task 7: Anti-Evasion Tax System................................................................................................14 Task 8: Data Analysis and Modeling...........................................................................................15 Task 9: Training.............................................................................................................................16 CHAPTER THREE: SALES TAX REFORM.......................................................................18 Task 1: Implementation of the Sales Tax to the Wholesale and Retail Level ......................18 Task 2: Computerization Initiatives............................................................................................21 Task 3: Strengthen New Departments........................................................................................22 Task 4: Registrant Assistance.......................................................................................................23 Task 5: Organizational Structure................................................................................................25 Task 6: Training.............................................................................................................................26 Task 7: Economic Research Department (ERD).......................................................................28 CHAPTER FOUR: MODEL CUSTOMS AND TAX CENTER..........................................30 CHAPTER FIVE: MINISTRY OF FINANCE COMPONENT ..........................................33 Task 1: Research Studies ..............................................................................................................33 Task 2: Training.............................................................................................................................34 Task 3: Commodity Procurement ..............................................................................................34 CHAPTER SIX: CONCLUSIONS..........................................................................................35 CHAPTER SEVEN: RECOMMENDATIONS .....................................................................38 Development Associates, Inc. July 29, 2004 Corporate Tax Activity Final Evaluation ii APPENDICES APPENDIX I: INTERVIEWS CONDUCTED ........................................................................I APPENDIX II: DATA TABLES AND GRAPHS.................................................................. II Table 1: Tax Revenues (1990/91-2002/03) ........................................................................... II-1 Table 2: Consolidated Fiscal Operations of the Central Government (1998/99-2002/03)II-3 Table 3: The State Budget Revenues (1990/91 - 1997/98) .................................................. II-4 Table 4: GDP at Factor Cost - By Economic Sector in Constant Prices – 1991/1992 and 1995/1996 .......................................................................................................................... II-5 Table 5: GDP at Factor Cost - By Economic Sectors in Constant Prices – 1996/1997 and 2000/2001 .......................................................................................................................... II-6 Table 6: GDP at factor cost - by Economic Sectors in Constant Prices - 2001/02 and 2002/03 .............................................................................................................................. II-7 Table 7: Balance of Payments – Current Account (1995/96 – 2002/03)............................ II-8 Table 8: Balance of Payments – Capital Account (1995/96 – 2002/03) ............................. II-9 APPENDIX III: AN OVERVIEW OF EGYPT’S ECONOMY ..........................................III APPENDIX IV: INCOME TAX REFORM PROGRAM.................................................... IV APPENDIX V: ORGANIZATIONAL STRUCTURE OF TAX DEPARTMENTS ...........V Development Associates, Inc. July 29, 2004 Corporate Tax Activity Final Evaluation iii LIST OF ACRONYMS ADP Automatic Data Processing CTA Corporate Tax Activity DT2 Development Training 2 GDP Gross Domestic Product GOE Government of Egypt GST General Sales Tax GSTACS General Sales Tax Administration Computer System IRM Information Resource Management, USAID ITACS Income Tax Administrative Computer System MCTC Model Customs and Tax Center MIS Management Information System MOF Ministry of Finance PFAP Public Finance Administration Project USAID United States Agency for International Development This publication was made possible through support provided by the U.S. Agency for International Development, under the terms of MOBIS Contract No.GS-10F-0185K. The opinions expressed herein are those of the authors and do not necessarily reflect the views of the U.S. Agency for International Development. Development Associates, Inc. July 29, 2004 Corporate Tax Activity Final Evaluation iv EXECUTIVE SUMMARY The Corporate Tax Activity (CTA) is the title of the last five and a half years of USAID/Cairo’s sixteen-year program of assistance to reform and modernize virtually all aspects of taxation in Egypt. Under the first phase, “Public Finance Administration Project” (PFAP), progress was made in reforming the income tax, but the most important reform was the introduction of the General Sales Tax (GST). The CTA, begun in 1999, was designed to deepen the reform effort in the income tax, to extend the GST to the wholesale and retail sectors and to expand the GST coverage of services. In addition, the CTA contained substantial resources to improve tax administration organizationally, managerially and technically. Finally, the CTA provided a significant amount of next generation computer hardware and software, essential to the operation and management of a modern tax system. As required by its Scope of Work, the contractor, BearingPoint, initially conducted a detailed analysis of the policy and administrative context of the income tax, as it existed in 1999. By June 2000, a two volume comprehensive policy and administrative reform program was presented to the Ministry of Finance. For the next year and a half, extensive discussions and further analysis of income tax policy were carried out between the MOF and BearingPoint and a draft new law was finalized and approved by the Cabinet for submission to the Peoples’ Assembly in 2002. Unfortunately, the Peoples’ Assembly was unable to schedule its debate of the proposed legislation in the 2002 session due to the press of other legislative priorities. Again, in 2003, other legislative priorities took precedence on the calendar. In fact, as of the time of this evaluation, the tax reform bill had not yet been released from the Cabinet’s Office for discussion in the Parliament Council. Therefore, income tax policy, as embodied in law, remains unchanged from that prevailing at the start of the CTA. On the organizational side, a comprehensive re-engineering of the [income tax] Tax Department was proposed but, to some extent, became linked to the passage of the tax reform bill. That is, the MOF was reluctant to proceed with the proposed reorganization simultaneously with the effort to legislate tax policy reforms. Consequently, the Tax Department remains essentially the same organization as that prevailing at the start of the CTA. Nevertheless, skill levels and management reports have improved as a result of the CTA’s training and development of the MIS. A new department has been started to provide information and assistance to taxpayers. In addition, the Tax Department is now approximately 50 percent computerized. Finally, important work has been done to develop a risk assessment model that will become the basis for the Tax Department to shift to a selective audit approach in its review of tax returns. In contrast to the above, greater progress toward CTA objectives is evident in the Sales Tax Department. As a new department created under the prior PFAP, the Sales Tax Department was more developed organizationally and operationally than its sister [income tax] Tax Department. Consequently, the CTA’s initial activity was preparing the Sales Tax Department for the significant expansion of the taxpayer base that was expected to result from the inclusion of the wholesale and retail sector. The preparation was completed early in the project and the tax was legally expanded on July 1, 2001. Development Associates, Inc. July 29, 2004 Corporate Tax Activity Final Evaluation v At the time of this evaluation, there has been no further expansion of sales tax coverage to services that were not included in the original 1991 legislation. However, this is not a significant shortcoming since the potential value of the not included, but taxable services, is relatively small compared to the wholesale and retail sector. The CTA has instituted new procedures for filing returns, payments and initial review of returns. These have improved efficiency within the department and eased the burden on taxpayers. However, the MOF has not yet accepted a number of CTA recommendations related to inputs crediting that would make the GST a full Value Added Tax. The CTA provided substantial training to transfer sophisticated technical skills as well as to strengthen the career-development training program managed by the Sales Tax Department. As in the [income tax] Tax Department, the CTA provided next generation computer hardware and software and in combination with the MOF’s own purchases, the department is now approximately 75 percent computerized. The most innovative development supported by the CTA was the establishment of the Model Customs and Tax Center (MCTC). The concept had not emerged at the start of the CTA but resulted from a CTA financed tour of European tax facilities for senior MOF staff. The Center is a one-stop service center for corporate taxpayers who deal with the Tax Department, the Sales Tax Department and the Customs Department. The Center, which opened in September 2003, now provides a single point for all three tax concerns. In addition, the Center provides expeditious payment of customs and clearance of goods through all points of entry. It also provides a single unified audit for both income and sales taxes, resulting in a substantial reduction of the administrative burden on the taxpayers. However, separate auditors perform this function as a team. Most importantly, the staff of the Center has been carefully trained to listen to taxpayer’s problems and work out practical solutions satisfactory to both the taxpayer and the tax departments. This Center has received significant assistance in training and equipment from the CTA. While it is still new and experimental, it is increasingly viewed as a viable alternative to the current organization structures of the existing tax departments. The overall results of the CTA can be characterized as “mixed”. The contractor, BearingPoint, delivered what it was expected to deliver but not all of the intended project objectives were achieved. To some extent this resulted from a clash between sound tax policy advice and social policy interests beyond the control of the MOF. Other reform priorities within the GOE distracted legislators from enacting needed changes in tax policy. Bureaucratic inertia may also have played a role but the creation of the MCTC and the soon to be opened Professional Tax Center offers the opportunity to overcome this problem. The modernization of taxation in Egypt is a “work in progress” and the CTA has provided an important foundation. Tax policy issues are now well known and understood and the MCTC represents a sea change in the way the MOF deals with taxpayers both organizationally and philosophically. Development Associates, Inc. July 29, 2004 Corporate Tax Activity Final Evaluation 1 CHAPTER ONE: INTRODUCTION The Corporate Tax Activity (CTA) is the title of the last five and a half years of USAID/Cairo’s sixteen year program of assistance to reform and modernize virtually all aspects of taxation in Egypt. Initial discussions were held between USAID and the Ministry of Finance (MOF) as early as 1986, at the end of a very limited prior training activity with the Tax Department. Following the design and negotiation of the new program, a technical assistance contractor was brought on board in 1989. The first phase of the program was entitled “Public Finance Administration Project” (PFAP). The contract was awarded to KPMG Pete Marwick (later renamed Barents and currently BearingPoint). The PFAP provided $30 million in assistance and the CTA added $31 million bringing the total amount to date of $61 million. The MOF’s interest in undertaking the overall program arose from the increasingly unmanageable budget deficit brought on by the gradual collapse of the state managed economy. During the 1980’s budget deficits were significantly high that and were largely financed by cuts in investment and services and by borrowing from the Central Bank of Egypt. The MOF felt that this socially unsustainable and inflationary condition was due, in part, to the absence of adequate broad-based tax instruments and the inefficiencies inherent in the labor-intensive manual administration of existing taxes. This situation was permitted to occur because the state managed economy had not relied on broad-based taxes to finance government expenditures. Easy to impose customs duties and excise taxes on selected items were important sources of revenue. In addition, non-tax revenue sources such as the Suez Canal and royalties from oil were important. On the tax side, the personal income tax was largely raised from withholdings from state employees and the corporate tax base was mainly state owned enterprises. Among the latter group, what the government did not collect in taxes, it obtained through the remittance of corporate profits to the treasury. For the remaining taxpayers, the main concern was to ensure that those who earned their income from “professions fees” and the newly emerging private sector (mainly joint ventures with foreign partners) were adequately taxed. Individuals and companies falling within these two categories of the base, for the most part, were visibly rich and presumed to be cheating on their payment of taxes. Due to the complexity of these taxes, serious inefficiencies in tax administration and the dearth of information and methods to verify taxpayer returns, considerable animosity arose between the taxpayers and the Tax Department. It was the treatment of these taxpayers which earned the Tax Department its reputation for arbitrary and capricious behavior in the assessment and collection of taxes, a reputation that it is now struggling to change. In short, at the end of 1980’s, Egyptian tax policy, law and administration was wholly unprepared for the transformation from a state managed import substitution economy to a private sector led, market based participant in the global economy. 1 1 An overview of Egypt’s economy is presented in Appendix III. Development Associates, Inc. July 29, 2004 Corporate Tax Activity Final Evaluation 2 The primary focus of the PFAP was the design and implementation of a new general sales tax, which was passed by the People’s Assembly and implemented in 1991. In addition, the PFAP supported a number of key policy reforms in the administration of personal and corporate income tax. Finally, the project began the very large undertaking of modernizing the administration of the income tax. By 1998, substantial progress had been realized. The new sales tax had become a significant source of revenue, generating approximately 28 percent of current revenues2 . The newly established Sales Tax Department had become well staffed, well organized and significantly automated. In the income tax, the differential taxation of individuals by occupation was largely ended and the marginal rates were simplified and reduced to 20 percent for those whose taxable wage income was less than LE 50,000 and 32 percent for all others. On the corporate side, the tax was lowered to a flat rate of 40 percent although producers of industrial and export products were given a preferential 32 percent rate. An exception was also made for oil exploration and production companies whose rate had been established by contracts with the GOE. While important policy reforms were achieved, there was less progress in modernizing tax administration and very little progress in introducing automation. The CTA is the follow-on activity to the PFAP and began in September 1999. It was designed to provide further support to the policy reform effort, particularly in income tax. It was also to support the extension of the sales tax to the wholesale and retail sectors and to several service sector activities that had not been included in the original sales tax law. The CTA contained significant resources to improve the management and staff of the two tax departments and to make significant progress in automation, particularly in terms of Management Information System (MIS) capabilities. The extent, to which the objectives of the CTA were accomplished, is the concern of this evaluation.3 PURPOSE OF THE EVALUATION The evaluation scope of work states the following: The purpose of the evaluation is to perform an end-of activity assessment to determine the extent to which goals and objectives were relevant and achieved in implementing the [CTA] activity and to inform USAID of the evaluation’s findings, conclusions and recommendations so that USAID can use these lessons learned when designing any future and/or similar activity. METHODOLOGY OF THE EVALUATION The evaluation was conducted in June 2004 by a three-person team consisting of two senior economists and an economist. Prior to arrival in Cairo, the team reviewed various reports prepared by BearingPoint and interviewed the Senior Vice President of BearingPoint responsible for this project. 2 See Appendix II. Table (1) 3 For a detailed description of the policy issues see “A comprehensive Tax Reform Program for Egypt”, and “A Comprehensive Program for Tax Administration Reform in Egypt”, submitted to the Ministry of Finance, Government of Egypt and USAID, Barents Group LLC, June 2000. Development Associates, Inc. July 29, 2004 Corporate Tax Activity Final Evaluation 3 During the three weeks of field work in Cairo, the team held in-depth interviews with senior officials at the Ministry of Finance, the on-site contractor staff and USAID project management. Three separate round-table discussions were held with representatives of twenty corporations registered with the tax authority. In addition, the team made site visits to the Sales Tax Training Center, the Income Tax Training Center and the new Model Customs and Tax Center. Additional documentation and reports available in Cairo were also reviewed. The following four chapters of this report present our findings. The presentation of each component of the project begins with a quotation from the contractor’s scope of work stating the results expected from the assistance provided through the life of the contract. This is followed by a discussion of the assistance delivered including any problems encountered. Finally each section ends with the evaluation team’s conclusions. Chapter Six draws important conclusions from the finding and Chapter Seven presents the evaluation team’s recommendations. Development Associates, Inc. July 29, 2004 Corporate Tax Activity Final Evaluation 4 CHAPTER TWO: TAX DEPARTMENT COMPONENT This chapter focuses on the objectives and results of the CTA’s assistance activities directed at the Income Tax Department.4 The Income Tax Department received assistance under the PFAP, which resulted in an improved income tax law and some improvement in the processes and administration within the Department. A relatively greater effort was made under the CTA. Nevertheless, the Tax Department’s processes remain largely manual and employ administrative practices that some taxpayers claim have been unchanged since the creation of the Department in 1939. Income tax policy as embodied in Law 157 of 1981 (before being amended in 1993) imposed a complex and burdensome structure with serious inequities, incentives for inefficient economic behavior and few penalties for tax avoidance. For example, in keeping with the socialist nature of the economy, wage income was given preferential treatment compared to income earned in the “professions”. There were high marginal tax rates on business income and a wide variety of industries and circumstances that were granted tax exemptions or “tax holidays”. Interest on bank deposits were also tax exempt while borrowers could take a deduction for interest paid, thus encouraging debt rather than equity finance of investment. The law contained numerous other lesser violations of the basic principles of taxation. With assistance provided under the earlier PFAP, the tax law was amended in 1993 to significantly reduce the differential treatment of income by source and to lower tax rates. This represented an important movement towards a global income tax and a flattening of marginal rates. However, many deficiencies remained in the law by the time the CTA was begun. Task 1: Policy Initiatives5 Expected Result: ♦ Recommend new policy initiatives for the tax laws and legislation in order to create a coherent and comprehensive tax system that encompasses both Corporate and Personal Income Tax in light of the developments in the Egyptian economic environment as well as the policy changes suggested by the contractor. 4 The Tax Department is responsible for administering the personal and corporate income tax. It is the largest tax authority in the Ministry with 48,000 employees, 16 regional offices and 226 district offices. Its responsibilities put it in direct contact with every taxpayer in the country and it is the bureaucracy that most taxpayers think of first when the word “tax” is mentioned. 5 This section discusses tax policies associated with the base, rate, exemptions and penalties. Policies associated with the method of levying the tax are discussed in other sections of this report such as Reorganization, Audit and Collections. Development Associates, Inc. July 29, 2004 Corporate Tax Activity Final Evaluation 5 Findings: 1. In accordance with its scope of work, BearingPoint prepared and submitted a comprehensive tax reform proposal to the MOF in June 2000. The portion of the proposal dealing with income tax (both individual and corporate) reviewed all aspects of the prevailing tax policy and identified the remaining areas where reform was needed. The proposal provided a clear explanation of each of the problems and went on to recommend corrective measures. In short, the proposal entitled “A Comprehensive Tax Reform Program for Egypt” was an excellent piece of work. 2. For approximately six months following the submission of the proposal, BearingPoint held policy discussions and presentations with the MOF including a two-day workshop. In the first quarter of 2001, the MOF issued a White Paper on tax reform to be used as the basis of review and discussion with various businessmen’s associations in Egypt. The White Paper contained a number of the reforms recommended by BearingPoint particularly related to further implementing the Global Income Tax and reducing rates. However, other aspects such as the inclusion of bank account interest in the tax base, the removal or reduction of exemptions and the stiffening of penalties for tax avoidance were omitted. An analysis of the White Paper by BearingPoint noted that while the White Paper reflected reform progress, it would have little impact on expanding the taxpayer base and would, if adopted, result in reduced revenue.6 3. Further discussions of the White Paper were held between the MOF and BearingPoint and some progress was made to include BearingPoint’s recommendations regarding increasing penalties and interest on delinquent taxes. By early 2002 a draft law was submitted to the Ministry of Justice for its review and to the Cabinet for its approval. The MOF’s target date for Cabinet approval and submission to the Peoples’ Assembly was November 2002 and leading up to this date BearingPoint supported the MOF in preparing related technical papers and responding to issues raised. However, while the Ministry of Justice and Cabinet approval was obtained, the Peoples’ Assembly informed the MOF that their calendar was too full to consider the bill in the session beginning in November 2002. Thus, the MOF’s income tax reform program was put on hold until the next year’s session of the Peoples’ Assembly. BearingPoint took the opportunity to prepare suggested answers to potential questions that could be raised by the members of the Peoples’ Assembly. 4. Unfortunately, the Peoples’ Assembly was also unwilling to schedule its deliberations on the bill in the 2003 session and no new date has been set as of the time of this evaluation. 6 The White Paper was more than just a discussion paper on tax policy. It was a position paper essentially stating what the MOF was and was not prepared to do. In comparing the MOF’s position with the BearingPoint recommendations, one sees the clash between a tax structure ground in sound economic principles and certain social and political attitudes which take precedence, a problem not unique to Egypt. The White Paper, by its omissions, identified a number of “brick wall” issues, that is, issues that the MOF was reluctant to raise because it felt they were not politically acceptable. These include the taxation of interest earned on bank deposits, tax holidays and exemptions, the system of additions and deductions, and its initial unwillingness to impose stiffer penalties on tax evaders. Development Associates, Inc. July 29, 2004 Corporate Tax Activity Final Evaluation 6 Consequently, while the groundwork for the new income tax law has been done, no reform has actually been adopted into law since the last revision of the tax law in 1993.7 Conclusions: In terms of the expected results as stated above, the evaluation team feels that BearingPoint fully achieved the stated expected result during the project period. The issues of importance to further reforming the income tax law have been laid out for the MOF and appropriate reforms have been proposed and supported by sound economic rationales. The fact that not all of the proposals were accepted by the Ministry of Finance and the Cabinet and no action has been taken by the Peoples’ Assembly reflects factors outside the purview of the technical assistance contractor. Task 2: Computerization Initiatives Expected Result: ♦ Continue the computerization initiatives begun under the Public Finance Administration Project. Findings: 1. The sine quo non of a modern tax department is the full automation of its processes and reporting. At the time of this evaluation, the head of the ADP Department roughly estimated that the Tax Department had about 50 percent of its hardware needs, less than 50 percent in terms of software development for MIS purposes, and virtually no automation of processes such as the audit function.8 2. Work in this area began at the start of the project with an analysis of needs leading to a proposed procurement plan. Commensurate with this was the design of the Management Information System (MIS). While the initial procurement plan was prepared by the end of 1999, various revisions required one year of negotiation before the plan was ready for submission for USAID (IRM) approval. Following this, a year and a half was spent in trying to reach agreement among the various parties (the MOF, USAID and BearingPoint) on the technical specifications and questions related to site placement, configuration quantities and installation and support services. In addition, some time was required to finalize the financing arrangements associated with the procurement. Procurement was finally begun in mid-2002. 7 It is not entirely clear to the evaluation team as to why the proposed legislation is on hold. The evaluation team was told that the Peoples’ Assembly had determined that other pending legislation had a higher priority and urgency. Other interlocutors felt that the reluctance to consider the legislation arises from the likely reduction in revenue which will result at a time when the GOE is facing serious budget deficit problems. Still others felt there may be some resistance to the bill’s increases in penalties and interest on delinquent taxpayers or resistance to the reforms in the treatment of paid-in capital and imputed rent. 8 It is not the purpose of this evaluation to review the amount and appropriateness of the hardware and software provided by the CTA. This information is better reported by AID’s Office of Information Resource Management (IRM). An IRM expert conducted a review of this procurement simultaneously with this evaluation. Refer back to Corporate Tax Project - M/IRM Technical Close Out Review - Cairo/Egypt – June 20-24, 2004. Development Associates, Inc. July 29, 2004 Corporate Tax Activity Final Evaluation 7 3. A project report mentioned that part of the reason for the difficulty in finalizing the procurement was the absence of a long-term plan within the Tax Department, which, in part, relates to the lack of clarity on future developments in tax policy and organizational reform. Anecdotal evidence suggests that there also may have been a difference of opinion among the parties over the issue of “state of the art” versus “essential needs”. 4. With procurement underway, attention was turned to establishing high speed connections with the Tax Department’s field offices, the development of software for case tracking and the modification of the Income Tax Administrative Computer System (ITACS) to provide web-enabled tax filing. As of the time of this evaluation, 195 of the 266 district offices are connected with the Tax Department by high-speed telecommunications links. Conclusions: The CTA has made important progress in computerization of the Tax Department. However, much remains to be done. Sufficient automation is now in place for the preparation of basic real time (almost) and scheduled reports for management needs. But, because not all district offices are linked, some portion of the data is not yet real time. Because of this, some senior Tax Department officials said they did not yet have full confidence in the accuracy of the reports. Moreover, the evaluation team sensed that managers have not yet had sufficient experience with computer generated reports to become fully comfortable in accepting their findings. Thus, a corporate culture that bases its management decisions on appropriate MIS reports has not yet developed in the Tax Department. Task 3: Tax Collections Expected Results: ♦ Recommend and implement a complete tax monitoring system in order to enhance the tax collections process. Findings: 1. The Expected Result would suggest that the project’s assistance efforts in collections were to focus on the development of an MIS that produces appropriate reports to inform management. However, BearingPoint went beyond this somewhat narrow objective by providing training in modern collection methods and assisting the Collections Department in a pilot effort to improve the collection of arrears. The difficulties encountered in trying to implement this pilot collection effort provides stark evidence of the extent of administrative reform needed in the Collections Department. 2. The pilot activity was to introduce a taxpayer notification process in which letters would be sent to inform the taxpayer of delinquent payments. The originally design of the pilot called for a stratified sample of 400 taxpayers in each of five district tax offices. However, this was later reduced to three district offices. Model letters of notification were prepared and the amount of delinquent payment owed was identified from each taxpayer’s file. In late 2000, the letters were sent out to the taxpayers. Development Associates, Inc. July 29, 2004 Corporate Tax Activity Final Evaluation 8 3. The first problem encountered was that while the letters themselves had been prepared on a word processor, the envelopes had been hand addressed. A full 60 percent of the letters were misaddressed and, therefore, did not reach the intended taxpayer. The second problem was that approximately one third of the letters that did reach the taxpayer contained substantially erroneous information on the exact liability of the taxpayer. This had resulted from the manual collection of the data from each of the files. The third problem was that when the taxpayer appeared at the tax office to discuss the letter, there was no procedure in place for the collectors to obtain partial payment or negotiate a monthly installment payment plan. 4. A senior Income Tax Department official informed the evaluation team that this pilot was an instructive flop. While he appreciated the help from BearingPoint, the weaknesses in the department overwhelmed the chance of success. He felt that this kind of effort required substantial prior work to more fully computerize the returns of each taxpayer. This has not yet happened and they must still rely on inaccurate manual methods in most processes. 5. Several senior Tax Department officials express strong appreciation for the training in modern tax collection methods carried out by BearingPoint. The Tax Training Center has, in fact, translated and reformed the material provided in one of the courses into an in-service course which it now gives at the district offices. They have learned new methods of sequestration of property and now have installment payment plans for delinquent taxpayers. 6. With respect to the MIS, the Collections Department has been provided with sample reports that management should have on a real time or scheduled basis. An unspecified number of these reports are now being generated but there are still some district offices that are not linked to the WAN network. The evaluation team was told that these un-linked offices do have computers and enter the data as they receive tax returns. CD’s are then forwarded to the central office and the data is entered into the master file. However, we were told by other officials that this was not exactly the case and data was still coming from some district offices to be entered at the central office. Thus, a number of reports are not yet comprehensive or timely. 7. BearingPoint was also asked by the Collections Department to assist them in improving the “additions and deductions” system, which is a sales transaction based income tax withholding system. BearingPoint offered some suggestions on unifying the withholding rates but suggested the system should be replaced by a quarterly estimated tax payment system. However, there has been little additional assistance on this request under the CTA because the MOF is not prepared to replace the system with the estimated quarterly payment system. 8. The Collections Department, along with the Audit Department, has now decided to focus its attention on the opening of a new, experimental facility for taxpayers in the “professions”. This facility is patterned after the Model Customs and Tax Center which caters to corporate returns. The new “professional” center is expected to open in September 2004. Development Associates, Inc. July 29, 2004 Corporate Tax Activity Final Evaluation 9 Conclusions: The CTA has made progress on the development of the MIS for collections information, but it is not clear that the reports are considered sufficiently complete or timely for management to rely on them for decision making. Nevertheless, there is a strong desire in the Collections Department to speed up the automation of data entry and automation of procedures and there is a high expectation that a trusted MIS will be valuable for improving the performance of the Department. Task 4: Audit Selection System Expected Results: ♦ Develop methods for improving [the] quality of audits of corporate income tax returns. ♦ Design, recommend and implement a complete selective auditing system for tax returns instead of the currently adopted system of 100 percent auditing. Findings (First Expected Result): 1. With regard to improving the quality of audits, BearingPoint provided the MOF with a variety of proposals to improve the function in terms of audit quality and efficiency in management. On the basis of a review of procedures, organizational structures and auditor qualifications carried out at the start of the project, ideas regarding an improved MIS, quality controls, team audits for large cases and other organizational and management issues were presented to the MOF. In addition, BearingPoint pointed out the need for a greater overall training effort and the introduction of specialized training courses. BearingPoint also urged the Ministry to adjust its then prevailing payroll incentive system from the number of audits completed to quality measures of audits. Given the incentive to audit as many taxpayer files as possible in a given period, improving the skills of auditors would not be likely to have much of an effect on the quality of audits. 2. The project’s first training effort to improve basic audit skills was reported by Tax Department officials to be initially less than fully successful. The opinion expressed was that the trainers had underestimated the degree of knowledge of the trainees and the course content and material was considered too elementary. Discussions were held with BearingPoint and a new, more advanced course was prepared for 30 auditors who would then become trainers themselves within the Tax Department. The feedback from the Tax Department on this second effort was quite positive. 3. Complementing the classroom training activity, BearingPoint assisted the Tax Training Center to develop a self-study course for new auditors. The project provided a consultant on the design of the materials and later printed the 500 copies needed of this 14-volume self￾study manual. This training instrument is well regarded in the Tax Department because the Tax Training Center has neither the resources nor the facilities to adequately train new auditors using traditional classroom methods. With the self-study course, new auditors learn the material at their locations assisted by an experienced auditor/mentor. Development Associates, Inc. July 29, 2004 Corporate Tax Activity Final Evaluation 10 4. In our conversations with Tax Department officials, it is clear that the most well received training were the courses and technical papers presented on specialized audit topics and methods. The subjects included audit techniques for particular industries and services such as banking, tourism and petroleum as well as special topics such as transfer pricing issues and techniques for auditing firm who maintain computerized accounts (although at this time the auditors themselves do not yet have computers and will not get them under the CTA). This type of training is typically hard to find in Egypt and the Tax Department sees it as one of the essential benefits of outside experts provided through foreign assistance. 5. A number of initial suggestions made by BearingPoint did not seem to be developed as anticipated. Specifically, the effort to implement an overall improvement in the management of the function through the use of large case audit teams and new quality control units became bogged down when the working groups were distracted from the tasks by the press of their regular duties. In addition, it is not clear from the documents provided to the evaluation team or from conversations with the Income Tax Department official how much progress has been made in developing the MIS. Views seem to vary depending on the particular reports needed by the particular manager. However, the consensus is that the reports are better than they use to be and the expectation is that they will continue to improve as the Tax Department expands its Automated Data Processing (ADP) system. The present estimate is that the Tax Department is approximately 50 percent automated. 6. The proposal to form large case audit teams was not entirely lost. Rather, a new idea for a consolidated tax office was suggested by the Commissioner of Sales Tax after returning from a project financed tour of various European tax services centers. This idea, which has emerged as the Model Customs and Tax Center (described and discussed later in this evaluation report) provides for a team approach to auditing and focuses on the relatively large firms. Thus, the large case audit team concept as proposed by BearingPoint is, in fact, being tried, but in the much broader context of a full service tax center that addresses the sales tax and customs duties obligations of the firms served by the Center. 7. In addition, the Audit Department will be testing new approaches and procedures in the soon-to-be-opened center for taxpayers who earn their income in the “professions”. Conclusions (First Expected Result): The project has developed methods for improving the quality of audits of corporate tax returns but the extent to which there has been an actual improvement could not be assessed by the evaluation team during the course of this evaluation. Further, improvements in the MIS are only partial as the automation of the Tax Department is incomplete. For the foreseeable future, the continued improvement in the specialized skills of auditors will rely on the Tax Department’s ability to access outside experts. Finally, the quality and efficiency improvements associated with large case audit teams depend on the success of the experimental Model Customs and Tax Center. Development Associates, Inc. July 29, 2004 Corporate Tax Activity Final Evaluation 11 Findings (Second Expected Result): 1. Regarding selective auditing, the MOF requires that 100 percent of all registered taxpayers be audited annually. Perhaps this was originally not an onerous requirement and was intended to compensate for the lack of adequate bookkeeping skills among certain taxpayers. However, the very strongly held desire to maintain this objective today reflects the Tax Department’s deep belief that all taxpayers consciously and conscientiously act to avoid taxes. 2. As a practical matter, it is impossible for the Tax Department to meet this objective. Thus, the audit of most taxpayers in a given year becomes delayed to the next year or beyond. Delays can reach up to five years after which the unaudited assessment of tax liability becomes final and the Income Tax Department has no further right to audit the return for errors or unreported income. However, in its effort to audit as many taxpayer files as possible in a given year, the auditors had received incentive pay based on the number of files they complete. This incentive encouraged a more rapid and cursory audit with consequent negative effects on the quality of the audit. Without a quality audit, neither the GOE nor the taxpayer knows if the correct tax liability has been determined. From the taxpayer’s point of view, tax audits are costly and disruptive to their business. In combination with other practices of the system, (in particular, the current salary incentive for maximizing revenue), the effort to audit 100 percent of the taxpayers has made the tax system subject to substantial abuse and wasteful conflict and appeals. The effort continues to fuel the significant mutual distrust and disrespect between the taxpayer and the Tax Department. 3. At the Ministry level there is recognition that selective auditing has to be introduced as the economy becomes larger and increasingly more private sector. Consequently, early on in the CTA, the Minister of Finance approved proceeding with the analysis and modeling needed to establish selective audit procedures. Based on our interviews with Income Tax Department officials, it is clear to the evaluation team that the Tax Department then and now requires substantially more convincing than the Ministry that an acceptable selective audit approach can be developed and successfully implemented.9 Hopefully, a successfully tested risk probability model will provide the convincing needed. 4. BearingPoint constructed a risk probability model from a sample of 100 construction firms whose files had been audited as part of the effort to develop the model needed by the Economic Research Department to estimate the revenue effects of various tax reforms. BearingPoint then used the model to rank a sample of 450 construction firms that had filed returns in 2003. At the time of this evaluation, audits of the top (higher risk) 60 companies and the bottom (lower risk) 40 companies are underway. 9 The requirement for a successful selective audit system is that the Tax Department be able to identify the relative risk that a particular return is inaccurate. Then only those returns that are predicted to be of high risk are audited. To do this, a probability model is first constructed from a sample of existing taxpayer files. New returns are then analyzed within the model and the probability of evasion is determined. However, before the model can be used for the actual selection of audits, it must be verified, and perhaps adjusted, on the basis of a 100 percent audit of a new sample of tax returns. Development Associates, Inc. July 29, 2004 Corporate Tax Activity Final Evaluation 12 Conclusion (Second Expected Result): Since the testing of the risk assessment model is not complete and the statistical significance of its estimates are not yet know, the project has not yet delivered to the Income Tax Department a sound methodology upon which to base a selective audit system. Obviously, none has yet been implemented. The effort to develop and implement a selective audit system has been stymied by shortcomings in the tax files and by the other responsibilities of the auditors assisting BearingPoint which distracted them from this task. Task 5: Public Awareness Campaign Expected Results: ♦ Design, recommend and assist the Ministry of Finance and the tax departments in implementing a public awareness campaign designated to inform the public of changes in tax laws, policies and procedures. Findings: 1. The Taxpayer Services and Awareness Department in the Tax Department was organized as a result of project recommendations and BearingPoint has worked closely with senior management to get the Department operational. There had been no such department in the past and taxpayer information was not well organized or consistent. 2. The Department is quite new as of the time of this evaluation and consists of 12 employees. Nevertheless, it has been quite active in developing and producing taxpayer brochures on tax laws and a tax awareness advertisement that was shown on local Egyptian TV channels this past December. The ad sought to raise peoples’ consciousness as the tax filing date approached. The ad showed the linkages between the payment of taxes and the provision of facilities and services by the government from taxes. The Department has expansion plans to place staff at district offices. The current staff has been trained in the tax rules and in how to deal with the public. Conclusions: The CTA has generated a whole new undertaking for the Tax Department both organizationally and in terms of how they related to the taxpayers in the past. In conversations with senior Tax Department officials, there appears to be the seed of the notion that the taxpayer is the customer of the Tax Department, not its enemy. Task 6: Reorganization Plan Expected Results: ♦ Develop, recommend and implement a complete reorganization plan for the tax department taking into consideration the current geographical distribution of tax offices that are scattered among Egypt’s 26 governorates. Development Associates, Inc. July 29, 2004 Corporate Tax Activity Final Evaluation 13 Findings: 1. The comprehensive tax reform plan submitted by BearingPoint in 2000 contained a volume entitled “A Comprehensive Program for Tax Administration Reform in Egypt”. This volume focused primarily on the Income Tax Department although it also contained sections on expanding the sales tax and recommendations related to the concept of the Model Customs and Tax Center being developed by the MOF.10 2. For each Central Department the report detailed inefficiencies, duplications and the absence of basic management information. It then outlined a comprehensive reorganization plan for the structure as a whole, for each Central Department and for the management information systems that need to be installed. Among other changes, the reform proposed a new organization chart to streamline management (currently over 270 managers’ report directly to the Tax Commissioner), reallocate auditor workloads on the basis of size of company and a selective audit system, and strengthen the use of MIS. 3. The report points out that the fundamental principles that underlie income taxation in Egypt foster the organizational problems that were identified. So too does the salary incentive structure and the absence of adequate penalties and enforcement. Consequently, the system is a process of negotiation between the Tax Department and the taxpayer with the final outcome not necessarily related to the actual tax liability imposed by the law. The principle of income taxation in Egypt provides no real room for taxpayer self-assessment as the Tax Department “assesses” the tax. This leads taxpayers to understate their incomes, if they even file a return, because they know the Tax Department will assess at a higher level. Given the absence of meaningful penalties, it is estimated that 90 percent of the taxpayers appeal and less than one percent get criminally prosecuted. Thus, the appeal process is where the actual tax is negotiated. In its need for revenue, the MOF has stressed quantity over quality; quantity in the assessment and quantity in the audit process. There is no doubt that the system lends itself to abuse and there is no doubt that the system does not maximize the collection of the tax liability legitimate under the law. The evaluation team was told that arrears are now approximately LE 28 billion, only 25 percent of the taxpayers submit a return and five out of seven taxpayers submit returns showing financial losses during the year. Conclusions: There has been no real movement on the proposed reorganization. The reorganization plan proposed by BearingPoint requires that the basic principle of taxation shift toward a self￾assessment process with tax law and administration providing the “incentive” to the taxpayer to be more honest. In addition, it requires that the tax department become fully professional in its use of management information and change its incentives to employees to focus on the quality of their work. For the reorganization to be effective as opposed to being just a reshuffling of the 10 Without fear of exaggeration, the description and analysis of the organization and operation of the Tax Department suggests a bureaucracy so flawed and misdirected in its purpose and so “old fashion” in its methods that one could easily conclude that there was no “reorganization” solution that could remake the organization into a modern tax department. Development Associates, Inc. July 29, 2004 Corporate Tax Activity Final Evaluation 14 deck chairs, a number of changes in the tax law and regulation needed to be done. Unfortunately, this has not yet happened. BearingPoint’s proposed income tax reform proposal stated “The recommendations proposed in this program, both the structure of the global income tax and the administrative changes to implement it, have been specifically designed to accommodate the economic and administrative circumstances prevailing in Egypt today,…”11 This may have suggested to some senior MOF officials that the administrative reform was, to some degree, dependent of passage of the policy reforms. BearingPoint asserts that it never agreed with this linkage, arguing that policy and administrative reform needed to be simultaneous. Nevertheless, the MOF chose to proceed first on policy, whether due to work load or other interests such as the emerging concept of the Model Customs and Tax Center, mindful that the policy reform legislation was expected to pass in the near future. The evaluation team does not conclude that nothing was done in the area of reorganization. Instead, we found that while only a few changes were introduced in the existing Tax Department (e.g., taxpayer services and awareness); the MOF was deeply involved in developing the Model Customs and Tax Center. It may well be that the MOF reached the same conclusion as we that a reorganization of the Tax Department was not the appropriate approach to creating a modern tax authority. Rather, an entirely new organizational concept was needed, which exactly describes the Model Customs and Tax Center. Task 7: Anti-Evasion Tax System Expected Results: ♦ Design, recommend and implement a complete anti-evasion tax system. Findings: 1. As in the other functional areas of the Tax Department, BearingPoint initiated its involvement by conducting a comprehensive assessment of the Anti-Evasion Department and its links with other departments within the MOF. As a result, a number of procedural and legislative changes were proposed. Of the various recommendations, the Department agreed to focus its attention on large cases and to expand its efforts to identify unreported income. The remaining recommendations, including those that required new or amended laws were accepted for further consideration by the Tax Department and MOF. These are still pending as of this evaluation. 2. BearingPoint then focused on the development of a handbook for auditors and collectors to help them identify possible cases that should be referred to the Anti-Evasion Department for further investigation and perhaps prosecution. Entitled “Evasion Referral Handbook”, the manual was completed in mid-2001, reproduced in 500 copies and introduced to the audit and collections staffs through a training course. BearingPoint had prepared the training course by conducting two workshops to train those who would ultimately present the course to the district office personnel. 11 See Appendix IV-2 Development Associates, Inc. July 29, 2004 Corporate Tax Activity Final Evaluation 15 3. The guiding principle behind the reform recommendations and the “Evasion Referral Handbook” was to increase the quantity and improve the quality of suspected evasion referrals. However, the Anti-Evasion Department informed the evaluation team that it generally had a caseload of 3,000 files, which fully occupied the staff. 4. It would seem that the Tax Department and perhaps the MOF is somewhat averse to moving a case to increasing levels of punitive action including prosecution. With underestimation of income widely reported, most cases are settled before referral to the Anti-Evasion Department. Of the 3,000 plus that are referred, 90 percent are settled before further referral to the prosecutor’s office and 90 percent of the those taken up by the prosecutor are settled before trial. In combination with the MOF’s policy White Paper originally omitting increases in penalties and interest, it would seem that the ethos of the tax authority is to negotiate a settlement between the Tax Department and the taxpayer. The head of the Anti￾Evasion Department said that his department does not take on cases for the money associated with the penalties but rather for its deterrent effect. We were also informed by BearingPoint that the head of the Anti-Evasion Department was now focusing more on larger and higher quality cases. 5. BearingPoint conducted a variety of training courses including topics such as money laundering, e-commerce and evasion cases involving international transactions. These courses were held in high regard and were video taped for repeat presentations. 6. The Department was provided with a “stand-alone” computer system to ensure confidentiality of the data that they collect and maintain. Specialized anti-evasion software has been promised but had not been delivered as of this evaluation. Conclusions: While an anti-evasion system is in place, it is largely the system that existed at the start of the project. However, the head of the Department feels that progress has been made in focusing their efforts and improving staff capabilities and evasion was reported to have been reducing over the past several years. Task 8: Data Analysis and Modeling Expected Results: ♦ Develop, recommend, gather and analyze base line and implementation data for the entire activity. Findings: 1. The intent of this Expected Result is to modernize the capability of the Economic Research Department to analyze the revenue effects of alternative tax policies. To do this, the models used by the Department had to be updated and transferred to currently used software (they were originally written in FORTRAN). To update the models, the project had to establish a database for a more recent year (1994 was chosen). 2. In early 2000, BearingPoint proposed formats for data entry and identified a sample of 1,400 tax files. However, the Audit Department was unable to start gathering the data because of Development Associates, Inc. July 29, 2004 Corporate Tax Activity Final Evaluation 16 the press of other work and the transcription began late in the year. By the end of 2000 it was realized that the sample was inadequate because an insufficient number of taxpayers had actually filed a return for the base year. A new sample methodology was then agreed to and transcription restarted. 3. The transcription process was far slower than expectations because the auditors did not want their involvement in this exercise to detract from their job of auditing returns. There was a problem with the quality of some of the transcription that had to be dealt with but also the salary incentive system interrupted the work. The incentive system paid auditors on the basis of how many files they audited in a given period and their assignment to the transcription process jeopardized this pay supplement. During the peak audit period, transcription was halted. 4. By mid-2002 the transcription was finally completed with a sample of 451 corporate returns. The Corporate Tax Model was translated from FORTRAN to Access based software and the model was made operational. Other models such as the Salary and Wage Tax Model and the Commercial and Industrial Profits Income Tax Model were subsequently also translated to Access and made operational. 5. The project has made some progress on developing a Global Personal Income Tax Model which combines the Salary and Wage Tax Model with the Commercial and Industrial Profit Income Tax Model. However, the new baseline data can not be merged due to differences in deductions between the two types of tax categories. A merger is possible when a new baseline is established. Conclusions: Despite considerable data and methodological problems, the CTA has established a new baseline and the relevant models have been updated. The Economic Research Department is responding to Ministry requests to assess the revenue effects of alternative tax policies. Experts in the Department feel comfortable that they know how to use the model and the related statistical software correctly. However, at this time, revisions of the models would require outside expertise. It is likely that such expertise is available in Egypt but not in the government sector because of the salary level compared to the local market for this level of econometric skill. Task 9: Training Expected Results: ♦ Develop a needs assessment and training plan. ♦ Continue the training initiatives of Public Finance Administration Project. Findings: 1. BearingPoint’s initial activity was to conduct a needs assessment and develop a training plan. Submitted to the MOF in early 2000, the Tax Training Department took issue with the assessment, arguing that it did not adequately describe the training facilities of the Department. Upon further investigation, BearingPoint concluded that the training centers needed major renovation and the main center in Zaitoun needed to be replaced. Thus far, the Development Associates, Inc. July 29, 2004 Corporate Tax Activity Final Evaluation 17 resources provided from the MOF’s own budget are inadequate to implement BearingPoint’s recommendations, although the Director is hopeful that funds will be provided in the future. The project itself did provide a limited amount of equipment to the Tax Training Center. 2. In terms of curriculum, BearingPoint proposed a restructuring of the training program for newly recruited auditors. As noted elsewhere in this report, one output was the 14 volume self-study manual. Conclusions: BearingPoint has delivered the Expected Results noted above and its training program, both from in-house experts and through DT2, has been well appreciated by Tax Department staff and management. However, the evaluation team was not able to determine during our brief visit to Cairo if any of the more sophisticated training in audit methods have made a difference in terms of the taxpayers or the revenue collections. Senior officials at the Ministry and Department level expressed the view that training was beginning to make a difference in reshaping the attitude of the staff towards a more professional relationship with the taxpayers. Development Associates, Inc. July 29, 2004 Corporate Tax Activity Final Evaluation 18 CHAPTER THREE: SALES TAX REFORM This section evaluates performance of the Corporate Tax Activity with regard to accomplishments of tasks directed at supporting the Sales Tax Department. It assesses the extent to which each task was accomplished and what impact it had on the Sales Tax Department’s performance. It also highlights the actions taken by the GOE to benefit from the technical assistance, training and commodities provided by the CTA. In May 1991, the GOE, assisted by USAID under the PFAP, introduced a broad-based General Sales Tax (GST) Law. The GST is an invoice-credit type of value-added tax that applies to all imports, locally manufactured goods and to selected services. Implementation of the GST resulted in a significant increase in revenues from consumption taxes, from 3.4 percent of GDP in 1991 to 4.8 percent in 1992. In 2000, GST revenues represented 6.4 percent of GDP and for approximately 40.5 percent of total tax revenues12. Implementation of the GST was a significant achievement of the PFAP. The CTA was implemented to consolidate the successes of the PFAP and to assist the GOE address remaining deficiencies in the GST with regard to broadening the tax base, reducing collection lags, increasing voluntary compliance, discouraging tax-evasion and improving tax administration. The GST still had numerous sales tax categories and rates, which were also addressed by the CTA.13 Task 1: Implementation of the Sales Tax to the Wholesale and Retail Level Expected Results: • Extend the sales tax to the wholesale, retail and services sectors. • Develop policy recommendations for (a) full crediting of taxes paid on all inputs used for the production of traded goods and services, (b) reducing the number of sales tax categories and rates, and (c) eliminating or reducing the number of exemptions. • Develop recommendations and procedures to transition the tax audit system from the traditional audit of 100 percent of taxpayers to selective audit system. • Develop recommendations, mechanisms and procedures for paying taxes through the banking system. 12 See Appendix II Table (1) 13 The dispersion of sale tax rates increases tax administration costs and registrant’s compliance costs. Limitations on full-crediting of taxes paid on inputs impose significant structural deficiency that could negatively impact private investment decisions. In the absence of full-crediting of taxes paid on inputs, businesses continue to absorb the cost of the non-credited GST on inputs, and administrative authorities spend significant resources distinguishing, often arbitrarily, between different types of inputs. Development Associates, Inc. July 29, 2004 Corporate Tax Activity Final Evaluation 19 Findings: 1. The GST was extended to the wholesale and retail sector on July 1, 2001. 2. The GOE did not act on BearingPoint’s recommendations to extend the sales tax to all services. The GST still applies only to services specified in the law14. Since the law was introduced in 1991 further services have been added to the list of those taxed, but none have been added over the life of the CTA, and none were added in 2001, at the time of extension of the GST to the wholesale and retail sectors. 3. BearingPoint’s recommendations for special schemes and for transition issues (including stocks-on-hand) and a plan for coping with the increased workload of returns processing and payments was adopted. The plan was implemented in pilot mode in Dokki Sales Tax Center. The purpose of this pilot-test was to streamline return filing and payment procedures15. After a 3-month experiment, BearingPoint recommended that the procedures be approved for wider application. The recommendations included: • There be only ‘face vet’ at the time of filing, • Arithmetical checks be carried out subsequent to filing, • Payment voucher be abandoned, • Verification of the return take place after filing, • Errors and missions be dealt with after filing, and • Any additional tax due, interest or penalties would be calculated by the computer system when return data was inputted. 4. After studying the revenue and tax administration impact of the registration threshold BearingPoint recommended that a LE 200,000 registrant threshold be adopted. However, , the Sales Tax Department adopted a threshold of LE 150,000 for the wholesale and retail sectors but kept the threshold level of LE 54,000, introduced in 1991, for the manufacturing sector. 5. Recommendations to convert the extended sales tax system to a full Value-Added Tax (VAT) were not acted on by the GOE. The existing GST is not yet a full VAT. In a full VAT one would expect there to be full-crediting for taxes paid on inputs16 and also that more services would be taxed. In addition, one would expect the commodities listed in Table 1 of the Law, which are subject to an excise tax only, to be subjected to the sales tax law. 6. BearingPoint’s recommendations to reduce the sales tax categories and rates were not acted on by the GOE. The only amendment to the sales tax legislation was the increase in 14 In most countries the law brings all services into the tax and then specifically exempts those services the Government does not wish to tax. 15 At the time of the pilot, the practice was to check carefully every return before it was ‘filed’ and only when the official checking the return was satisfied that errors had been corrected would the return be accepted as filed. Also the registrant was required to fill out a complicated ‘payment voucher’ in order to make payment. This meant registrants spent hours in line waiting to file or waiting while their return was checked. It also imposed a heavy burden on office manpower during peak filing periods. 16 Under the existing tax law, credit is given only for inputs physically embodied in the product sold. For example, the machinery and power used in manufacturing are not embodied in the commodity which is made and so no credit is given for the purchase of them. Development Associates, Inc. July 29, 2004 Corporate Tax Activity Final Evaluation 20 the sales tax rate charged on tourist transportation and services from 5 percent to 10 percent; and the clarification if the phrase ‘operating services’, which was frequently challenged in the courts. Law 11, passed in 2002, gave a more precise definition of the phrase. 7. In order to process tax returns and payments more efficiently under the extended sales tax, the CTA recommended the use of the banking system and post office for tax payments and filing. The CTA also developed a new and simplified tax return that reduces the reporting requirements on registrants. A process for making sales tax payments through the banking system was developed and discussed with the National Bank of Egypt using various methods for taxpayers to make their payments including: debit card, credit card, electronic funds transfer, check and cash, as well as setting up card machines at each district office for the taxpayers’ convenience in making their sales tax payments using a bankcard. Payment through the banking system was pilot tested for 6 month in 2001 with cooperation from the National Bank of Egypt. However, delays in processing checks and transferring funds to the Sales Tax Department account, the National Bank of Egypt’s wish for a monopoly on the service and the demand by the bank for a higher fee meant that the Sales Tax Department and the bank could not reach a commercial agreement on extending the pilot. However, since that time the SWIFT clearing system has been introduced, which has significantly cut the time it takes to get funds transfers. With the Central Bank of Egypt’s assistance, the cooperation of all banks to participate in a system of bank payment was achieved in mid-2003. Since then the procedures, computer programs, etc., have been developed and tested so that the SWIFT can be used instead of direct payments at the Sales Tax Department offices. The use of banks for paying sales tax will be introduced nationwide for all registrants wishing to use it from July 1, 2004. 8. The feasibility of introducing the compulsory use of cash registers by wholesale and retail businesses was investigated and a report was presented to the Sales Tax Department. However, the GOE has not acted on this concept. 9. In terms of sales tax revenues, there has been a considerable increase. For example, in year 1990/91, tax revenues were only LE 4 billion. However, with the introduction and extension of the GST to the wholesale and retail sectors, tax revenues increased significantly reaching LE 23 billion in 200317. 10. In terms of tax compliance, according to the Commissioner, the industrial and the service sectors exhibit 96 percent compliance. On the other hand, the trade sector exhibits 84 percent compliance. The Commissioner also noted that every year there has been a steady increase in the levels of tax compliance18. 17 See Appendix II Table (1) 18 It should be noted that the Sales Tax Department has made significant strides in developing taxpayer services and awareness. Much of this was achieved during the extension of the GST to the wholesale and retail sector. It developed extensive outreach through the establishment of effective Media and Information department and publications for the general awareness and specific taxpayer use. Relationships have evolved through frequent contact with Chambers of Commerce and professional associations, as well as the press. It has also established a Public Opining Unit in order to obtain more feedback. Recently it conducted a customer satisfaction survey. Development Associates, Inc. July 29, 2004 Corporate Tax Activity Final Evaluation 21 Conclusions: • A significant achievement of the CTA is the extension of the GST to cover the wholesale and retail sectors, which has increased tax revenues substantially. For example, between 2002 and 2003 it jumped by 12 percent to approximately LE 23 Billion19. • At this point, it appears that the GOE will not transition the GST to a full Value￾Added Tax for social and political considerations. Extension of the GST to the wholesale and retail sector has resulted in a significant increase in the number of businesses registered and a corresponding requirement to improve tax administration. In order to enhance the efficiency and effectiveness of the sales tax system, the CTA provided extensive support in the use of information technology, reorganization and streamlining of the various functions of the Sales Tax Department and the transfer of knowledge and skills to the staff. Our findings and conclusions are discussed below. Task 2: Computerization Initiatives Expected Results: • Upgrade the General Sales Tax Administration System (GSTACS) particularly after the extension of the tax to the wholesale and retail levels • Update the GSTACS Complimentary Systems: Tax Evasion, Collection, Audit, and Inspections • Upgrade the Department’s non-tax administrative and financial functions • Continue linking the central office with the district offices Findings: 1. The General Sales Tax Automated Computer System (GSTACS) was upgraded and pilot￾tested and adopted in 2002. Currently, BearingPoint is working on the next release of GSTACS, which will incorporate new filing and payment procedures and centralized processes to issue to taxpayers (a) assessments for stop-filing, (b) penalties for late filing, and (c) immediate demand notices for non-payment. Changes to the GSTACS will also include the automatic issue of (a) registration certificates, (b) amended certificates of registration and (c) deregistration notices. To date, in addition to technical assistance, the CTA has expended or committed more than $6.6 million for computer hardware, software and computer training in support of the Sales Tax Department. 2. The development and full integration of the GSTACS Complementary Sub-systems including Audit, Anti-Evasion, Survey, Collections, Debt Tracking, Registrant Assistance, Legal Affairs, Capital Goods and Exemptions were finalized in 2002. The Audit sub-system includes the audit reporting forms that are loaded onto laptop computers for use by auditors in the field. 19 See Appendix II Table (1) Development Associates, Inc. July 29, 2004 Corporate Tax Activity Final Evaluation 22 3. The implementation of the automatic and online transfer of data/transactions between the three levels of the Sales Tax Department organization (central, regional and district levels) has been completed. The central office of the Sales Tax Department and its 23 regional and 106 district offices are now automated and integrated. 4. According to the Sales Tax Department, to date, more than 1,100 operational staff has been trained in basic computer skills and the use of the relevant GSTACS applications. Computer specialists have also been trained to maintain and carry out future development of the system as a whole. 5. BearingPoint also submitted the outline of an automated case tracking system that builds on the functions provided by the GSTACS. The design was reviewed and accepted by the Sales Tax department staff working on enforced collection. 6. According to the Commissioner of the Sales Tax Department computerization of the auditing and anti-evasion internal processes are incomplete. According to the Commissioner this has negatively affected the workflow of the department. 7. The Sales Tax Department’s non-tax administrative and financial functions have not been upgraded. However, BearingPoint has completed an assessment on the current status of these functions and has provided it to the Sales Tax Department. Conclusions • The CTA has successfully completed the computerization of the relevant sales tax administration functions including audit, anti-evasion, survey, collection, and debt tracking and further enhancement can be carried out by the IT personnel. Task 3: Strengthen New Departments Expected Results: • Recommend and advise the Sales Tax Department on ways to strengthen the functions, goals of the Planning, Tax Research, and Personnel Departments, and recommend further reengineering action for the Sales Tax Department. Findings: 1. The CTA focused on enhancing the capacity of the Survey Department, which is responsible for identifying and registering new businesses for the tax, to improve its procedures and to better utilize its database records in identifying unregistered businesses. 2. BearingPoint provided refined mission statements, roles and responsibilities of the Audit, Anti-Evasion and Survey departments. It has delivered the first draft of a Software Requirement Specification (SRS) for a case tracking system for use by the Anti-Evasion and Survey Departments. It has also provided assistance to transform the Survey Development Associates, Inc. July 29, 2004 Corporate Tax Activity Final Evaluation 23 Department into an intelligence unit to ensure a more balanced and targeted approach to non-compliance. 3. In the area of tax audit, BearingPoint has provided technical assistance to both the Audit Planning and the Audit Research Departments. The range of activities has included advice on formulation of the annual audit plan; review of the audit manual; and development of industry specific technical notes to assist auditors in the field. The CTA also trained the Planning Department on its organizational roles and responsibilities, planning methodology and performance measurement. 4. BearingPoint’s recommendation to abandon the systematic gathering of individual transaction details for what is termed commonly ‘transaction matching’ has been adopted. Currently, GST returns are accompanied by summary transaction listing which are being phased out with the new GST returns for the July–August 2004 tax filing period. As part of this new approach, the CTA has recommended and the Sales Tax Department has adopted use of a revised Sales Tax Return form that has been reduced to only 17 boxes and makes no provision for listing or attachment of transaction details. Conclusions: • The CTA has achieved its expected results under this task. Complete adoption of its recommendations by the GOE will require a fundamental change in the civil service law with regarding to recruitment of new graduates, geographic relocation or reassignment of the staff. • Further change in the law is required to force auditors to rely on computerized books of accounts of taxpayers. Since currently the law requires that the taxpayer keep an original manual book of accounts, tax assessors and auditors reject computerized accounts if the original manual books of accounts are not up-to-date or maintained correctly. This means that the taxpayer has to maintain a dual system at significant transaction cost. Task 4: Registrant Assistance Expected Results: • Develop and enhance the capacity of the registrant assistance department by: - Establish a special cadre of employees to better serve taxpayers - Establish the communications network to respond to the registrants inquiries through telephone, computers and internet - Prepare manuals and handbooks - Reorganize and computerize the registrant assistance department Development Associates, Inc. July 29, 2004 Corporate Tax Activity Final Evaluation 24 Findings: 1. The CTA has provided technical assistance, training and commodities and enhanced the capacity of the Registrants Assistance Department (RAD) to develop a mass mailing campaign and a publicity brochure, directed at potential new registrants20. The CTA has also enhanced capacity of the RAD to conduct registrant satisfaction surveys. 2. The CTA has provided technical assistance and training to enhance capacity of the RAD to develop standardized answers to registrants’ most frequently asked questions (FAQs). The CTA has also provided technical assistance for the development of a web site that can be accessed by registrants and members of the public seeking information about the sales tax and its administration. 3. The CTA has provided technical assistance and training to the Media and Information Department that is responsible for improving public information and awareness. It has also provided training on (a) the preparation and production of a TV mini-series on the concept of taxes, (b) the preparation and production of an informative documentary on the tax structure in Egypt, (c) the production of a TV and Print media advertising campaign on taxes, and (d) media relations. 4. The CTA has developed and recommended the use of a simplified Sales Tax Return form for dissemination to taxpayers21. The new form has only 15 boxes to be completed by the taxpayer and will be phased in the July-August 2004 sales tax return period. 5. A small sample of taxpayers, all unregistered with the Model Customs and Tax Center (MCTC), which the evaluation team interviewed, indicated that there is some confusion among taxpayers as well as among tax auditors on how the new sales tax law applies. They said that, “the tax liability determined by one tax assessor (their term) is different from the tax liability estimated by a second assessor or auditor.” These taxpayers indicated that more clarification and communication of how the sales tax law is applied is needed. Conclusions: • The CTA has accomplished the expected results under this task. However, the RAD will need to do a better job in communicating to taxpayers how the new tax law applies. The Sales Tax Department will also need to train tax assessors and tax auditors on common format for validating the tax liability submitted by tax payers. • The confusion about how the new sales tax is applied seems to be related partly to the culture of ‘negotiated’ tax settlement rather than anomalies in the law. 20 The publicity campaign included regular press releases, press conferences, TV interviews and public service broadcasts. A telephone “hot-line” was established to enable the public to report retailers who, in contravention of the legal requirement to do so, refuse to issue a tax invoice. 21 Up till now the Sales Tax Department conducted a systematic gathering of individual transaction details for what is commonly termed ‘transaction matching’. All GST returns were accompanied by summary transaction listing. Under the new approach there are no provisions for any listing or attachment of transaction details. Development Associates, Inc. July 29, 2004 Corporate Tax Activity Final Evaluation 25 Task 5: Organizational Structure Expected Results: • Redesign the organizational structure to accommodate the expanded responsibilities of the Department after the extension of the tax to the wholesale and retail levels • Revaluate the current geographic distribution of the tax offices in light of the tax expansion and design different action plans for reorganizing the department Findings: 1. In 2000, BearingPoint had developed a comprehensive structural reorganization and resources development plan and recommendations for restructuring headquarters, regional offices, and district offices and on performance evaluation, incentive schemes, and the selection for promotion to management. It also had developed baseline-staffing estimates for all District Offices, Regional Offices and Headquarters. The plan had also recommended redeploying staff out of the head office to district offices, which deal directly with the taxpayer, and also from non-functional areas to functional ones. In addition, it had recommended complete reorganization along the lines of the key tax functions including audit, collection, taxpayer assistance, survey (i.e., identification of non-registered businesses which should be registered) and anti-evasion. 2. However, few employees have been redeployed from the central office to regional or district offices. Headquarters remains top-heavy so the first set of recommendations was not implemented. This may be related to the fact that the Department is obliged by the GOE to recruit a certain number of graduates and it cannot reduce the staff numbers. And under the existing civil service law, civil servants cannot be relocated without their consent to different geographical relocations or be transferred into a new functional area. Therefore, the tendency is to recruit to fill vacancies at district level rather than relocating or redistributing existing personnel to the districts. 3. The functional reorganization has been completed with the introduction of a coherently structured registrant assistance department, reorganization of survey and anti-evasion into two new ‘intelligence’ and ‘investigation’ departments, realignment of the collection function and some slight reorganization to audit. 4. In 2002, the CTA implemented a performance measurement system22. In 2003, the CTA and Sales Tax Department counterparts took action to remove many of the overlapping areas of competence in the different departments. They revisited and refined mission statements and organizational roles and responsibilities of the Audit, Anti-Evasion and 22 Some performance measures were introduced in the last fiscal year in the audit, anti-evasion and survey departments. Discussions on performance measures were not sufficiently advanced for all CTA recommended measures to be introduced in the fiscal year ending June 30, 2004. The objective was to monitor and report areas of significant revenue yield and significant cases of tax evasion. Development Associates, Inc. July 29, 2004 Corporate Tax Activity Final Evaluation 26 Survey Departments. They also transformed the Survey Department into a more cohesive intelligence department (with increased emphasis on revenue leakage and identifying fraud). The Anti-Evasion Department was re-oriented to focus solely on the investigation of significant or large-scale sales tax evasion. Conclusions: The Sales Tax Department reorganization recommendations have been adopted as much as the civil service law can allow. Further reorganization and departmental realignment along the BearingPoint suggested workflow system will have to be managed by broadening and deepening the use of computerized information management systems. Task 6: Training Expected Results: • Prepare training needs assessment • Design, recommend and develop an efficient administration for the Tax Training Center in Maadi with respect to training programs, courses, curricula, and research facilities • Link the Training center with regional training centers in the governorates • Design, recommend and develop the training process in terms of computerization, video conferences, and training-of-trainers Findings: 1. The Sales Tax Training Center was officially opened in September 1999. According to the director of the training center, the training center’s mission is to (a) train the sales tax department employees to better serve the public23, and (b) raise awareness of the public about changes to the tax law through information campaigns, conferences, and meetings between the specialists from the tax departments and the stakeholders to discuss the new 23 All sales tax department employees have to take a series of courses at the training center in order to qualify for promotion (Law 47). Training “Credit Days System” (CDS) divided into: 70, 100, and 30 days, respectively is used to qualify the employees for promotion. The employee cannot move to the second stage before passing the exam of the previous stage. The sales tax department employees are offered (a) specialized technical training, (b) administrative / management training, (c) computer software training, and (d) English language training. New recruits undergo through several stages of training before they are assigned in their specific competencies. First, a recruit undergoes a behavioral test to discover his/her personality characteristics. Then he/she takes 3 months of training on the various functional areas of the sales tax department. Based on evaluation of the training center the recruit is channeled to specific job within the tax department. Second, the recruit undergoes a month and half on-the job training. This is done to ensure that the recruit is using all the communication skills he/she has been taught. Then the recruit takes a written test in the training center and is evaluated by his/her supervisor. Finally, the recruit is channeled to a suitable job. Third, after assignment to a permanent job, the employee is given a specialized training according to the needs of his job. Development Associates, Inc. July 29, 2004 Corporate Tax Activity Final Evaluation 27 sales tax law. And according to the director more than 26,000 and 15,000 employees were trained in 2002 and 2003, respectively. 2. The CTA provided extensive support to transform the training department into a modern and useful training center. It undertook a number of initiatives. Before embarking on course development and training, BearingPoint along with its Sales Tax Department counterparts conducted a comprehensive training needs assessment using a ‘systems approach’. The BearingPoint’s ‘Front End Analysis’ approach to training needs assessment expanded the scope and coverage of training to a number of important areas including: training practices, training delivery systems, organization and staffing, and staff location. Cadres of course developers from all major functional areas were trained. 3. The existing employee remuneration and incentive scheme has negatively influenced the quality of the training programs. Three major areas are adversely affected: Instruction, Course Design and Development and On-The-Job Training. Under the existing incentive system, the best strategy for anyone assigned as an instructor or course developer is to try to accomplish his/her monthly quotas at his/her regular job as well as concurrently meet his/her assigned training responsibilities. Individuals engaged in a training activity were often forced to stretch their energies between their regular jobs and training related tasks. 4. On-job-training (OJT) is administered informally in some location by some managers. There was no structured program in any function to systematically provide planned OJT, and coaches had not been trained on how to conduct OJT. 5. The CTA recommendation for the establishment of Standards and Quality Branch was adopted to address problems in the quality of instructional material. This organization is responsible for establishing a standard template to be used by all departments when designing and developing courses. A template provides a style guide of how materials should look and what should be included in all materials. This standard template covers: Instructor Guides, Participant Guides, Exercises, Tests, and Audio/Visual materials. In addition, train-the-trainer courses were developed for (a) course design and development, (b) using audio/visual equipment, and (c) course delivery. The CTA also assisted in the development of an Annual Course Development Training Plan to assist in course development to respond to skill gaps. It also assisted with the establishment of a Large Trader Audit Training Unit. 6. A few senior officials mentioned that, some courses delivered by BearingPoint were not effective. They lacked depth and were not directly applicable. Sometimes, experts were assigned to deliver training in areas where they did not have in-depth knowledge or expertise. This resulted in the trainees feeling the training courses were just a waste of their time. Conclusions: • Although, the CTA has provided assistance to the Sales Tax Department Training Center and provided training on various subject, additional training is required to impart latest international experience and practices on various aspects of tax administration. For example, specialized courses such as money laundering have Development Associates, Inc. July 29, 2004 Corporate Tax Activity Final Evaluation 28 transferred valuable skills to the staff. However, it is important to ensure that these skills are widely available by selecting and training trainers. • For training to be applied effectively on the job, the existing tax officers’ remuneration and incentive schemes need to be adjusted. In addition, training should be linked to the career path of tax officers. The existing remuneration and incentive schemes seem to encourage a practice generally referred to as “tax farming” and to poor quality audit of taxpayers. The professional staff is rewarded on the basis of meeting or exceeding targets set for the number of cases handled and the amount of tax revenue generated and on the basis of seniority rather than on performance. • Training Credit Days used by the Sales Tax Department as a condition for promotion is still tied to the seniority system instead of job performance. What is needed is a merit-based system regardless of when the individual entered into service. On-the-job performance and competency improvements to a targeted skill level would form better conditions for promotions. Task 7: Economic Research Department (ERD) Expected Results: • Upgrade and institutionalize the ERD • Assist the ERD with revenue forecasts Findings: 1. The CTA has imparted analytical and report writing skills to the staff of the Economic Research Department. To enhance skills of the ERD staff the CTA developed a study of the impact of a change in customs tariffs on 55 commodities. This exercise was used to enhance the analytical capabilities of the ERD staff. Economic analysis tools were used to develop an effective understating of tax collection problems. 2. In addition to developing simulation modules for use by the staff of the ERD, the CTA has provided and installed seven copies of Eviews24 statistical software package. However, it is not evident if the staff of ERD is able to use Eviews for revenue forecasting. 3. The CTA also assisted the creation of a six-member ‘Information Analysis Unit’ (IAU) within the larger ERD framework. The main function of the IAU is to provide the Commissioner executive summaries of the monthly reports and data produced by the different sections of the Sales Tax Department. Conclusions: • The Economic Research Department staff is capable of conducting revenue forecast and analysis of impact of policy change using the CTA provided simulation and 24 Eviews is a software package used for revenue estimation and forecasting. It combines spreadsheets and relational database technology. It is used for general statistical analysis, time series estimation and forecasting, cross-section or panel data analysis, large scale model simulation and simple data management. Development Associates, Inc. July 29, 2004 Corporate Tax Activity Final Evaluation 29 forecasting models. However, the staff is not yet able to develop and program its own simulation and revenue forecasting analytical constructs. Development Associates, Inc. July 29, 2004 Corporate Tax Activity Final Evaluation 30 CHAPTER FOUR: MODEL CUSTOMS AND TAX CENTER The Ministry of Finance created the experimental Model Customs and Tax Center (MCTC) to administer all taxes and duties as they apply to large taxpayers. This concept was not envisioned at the time the CTA was designed nor was it included in Bearing Point’s Scope of Work. However, because it provides an innovative solution to a number of serious tax administration problems, CTA resources were directed to assist in its development and implementation. Although all tax departments are within the Ministry of Finance, historically there has been very little interaction between the Income Tax, Sales Tax, Customs and Property Tax Departments. MCTC will provide a comprehensive set of tax services to large taxpayers that interact with the sales tax, corporate tax and customs. The MCTC provides a variety of services, including advanced clearance of imports through customs, which it does in conjunction with its ‘advance stations’ at each port. Its goals are to reduce taxpayer burden, improve voluntary compliance, and increase operational and management effectiveness. The Center is active in developing new procedures for coordinated audits, export refunds and a range of web-based services. The MCTC represents the first step in the integration of tax administration in Egypt. The objectives of MCTC include the development of an improved “tax culture” to increase voluntary compliance through the adoption of less burdensome and more transparent administrative processes and by improving taxpayer services. It is also to create a model department that introduces new concepts and innovative procedures that improve administrative practices and professionalizes the civil service in the tax and customs departments. Expected Results: The CTA has provided very extensive assistance for the creation of the center including: developing recommendations for its organizational structure, staffing, and procedures; defining and meeting its IT requirements; and developing taxpayer and public awareness materials. The following list represents a summary of initial innovations planned for the MCTC: Š Coordinated Audit Case Selection/Prioritization/Depth & Quality of Audit Š Placement of an Audit Quality Review Staff within the Audit Department Š Centralizing enforced collection activities for all three tax departments and for MCTC functional departments. Š No Ma'mour (auditor) pre-review of tax returns prior to filing. Š Separate data base-combining data from the three departmental systems with additional data from MCTC. Š Enhanced Functional Reports (Audit, Collection, Appeals, Taxpayer Service, etc.) to improve operational management, and case tracking (case calendar feature) Š Improve anti-evasion operations through use of internal leads (Audit, Collection, etc.) and information gathering activities Development Associates, Inc. July 29, 2004 Corporate Tax Activity Final Evaluation 31 Š Burden Reduction Initiatives to save taxpayer time, money and effort and increase customer satisfaction (mailing returns to taxpayers, computer generated notices, business center services, etc.) Š Customs pre-arrival clearance facilitation and linkage with major ports of entry Š Enhanced taxpayer assistance and educational services (publications, training, Internet, etc.). Š Permanent Appeals Committees within Legal Affairs/Appeals Department. Š Anti-Evasion does not perform audit or enforced collection. Š Appeals will refer cases back to Audit if the taxpayer introduces facts or substantiation not previously provided to the Audit Department. Š Supplemental incentive pay system based on evaluations of the quality of employee work Findings: 1. The MCTC was established on July 1, 2003 and officially opened on September 14, 2003 and currently deals with around 300 taxpayers. The establishment of MCTC was initiated by the Minister of Finance after the review of taxpayers’ problems25 and the revenue impact of these problems and following a CTA-sponsored study tour by senior MOF officials to the Netherlands. The Center was established as a pilot study to deal with the three tax departments (Sales Tax, Income Tax, and Customs Duties). Some unique features of the MCTC include the following: Š MCTC provides one-stop-service and is accessible via walk-in, phone, mail and internet connections Š Taxpayer is given a unique taxpayer identifications number and all his/her tax and customs files are consolidated using this identification number Š Taxpayers are audited by a team of auditors from each tax department Š Appeals committees will provide better/faster/more accurate referrals to/from anti-evasion, audit, and collection departments. Š Appeals will refer cases back to Audit if the taxpayer introduces facts or substantiation not previously provided to the Audit Department. Š Anti-Evasion will coordinate with the Audit and Collection Departments to obtain the physical evidence (false invoices, fictitious suppliers, transfer of inventory, etc.) 2. Although a nascent organization, MCTC is a professionalized and integrated tax administration that has considerably reduced transaction costs for taxpayers. For example, 25 The Executive Director of MCTC identified several problems faced by taxpayers before the establishment of the center. First, the clearance of goods from Egyptian ports took between 15 to 21 days. With MCTC facilitation it now takes less than one day. Second, auditors took approximately 4 months to inspect a file (1 month for the Sales Tax and 3 months for the Income Tax). However, in the MCTC it takes only 3 weeks. Third, the relationships between taxpayers and the tax departments were antagonistic. MCTC seeks to be taxpayer friendly and can be reached by phone, mail and internet. Development Associates, Inc. July 29, 2004 Corporate Tax Activity Final Evaluation 32 MCTC customs facilitation has reduced both time and cost of goods clearance from the associated ports. Customs clearance time has been reduced from between 15 to 21 days to less than a day. Because the customs officers at the port accept the goods classifications and the associated charges importers pay only the amount of custom duties negotiated with MCTC. In addition, the integration of sales tax and income tax audits has also shaved off more than 3 months for auditing and assessing tax liabilities. What used to take 4 month now takes approximately 3 weeks as a result of both the sales and income tax audits being conducted simultaneously by a team of auditors. In addition, since tax assessors and auditors have decision-making authorities tax liabilities are negotiated and settled very quickly. In addition, because tax assessments and audits are current, cost of late payment and other penalties are avoided. 3. MCTC has employed the cream of the crop from each tax department. Extensive training was provided to these employees to professionalize them more than the other tax department employees. However, these MCTC employees are still tied to the existing remuneration and incentive schemes in their parent departments. Change is needed to sustain the professionalism and enthusiasm of these employees. Perhaps their incentive scheme could be tied to taxpayers’ satisfaction scores and increases in voluntary tax compliance (i.e., timely filing and payment of the correct tax liability amount). 4. Automation of the MCTC is almost complete. MCTC can now generate consolidated management reports on arrears, collections, and returns. Conclusions: • While the CTA cannot claim credit for introducing the MCTC concept, it was flexible enough to recognize that the MCTC was an efficient alternative to achieving CTA objectives. Consequently, BearingPoint’s technical expertise was put to full use in helping the MOF establish the Center, set up its systems and procedures and train its staff. Senior MOF interlocutors stated that the CTA provided support essential to the timely and successful establishment of the MCTC. • The MCTC is an alternative concept for unifying and integrating the Egyptian tax systems. It could also serve as a vehicle for creating a modern tax administration system. However, its long term viability and success is critically dependent on the creation of an appropriate incentive scheme for the staff. • Exposure to how effectively and efficiently taxes are administrated in other developed countries coupled with the strong political will of senior MOF officials to reform the tax system resulted in the creation of the MCTC. • As more and more taxpayers join MCTC, Egypt will shift toward a more unified and integrated tax system without requiring massive reorganization of the tax departments. • Trained, knowledgeable, and professional tax officers, empowered to make decisions, can substantially reduce transaction cost for taxpayers and enhance taxpayer voluntary compliance. In addition, credibility of the MCTC is critically dependant on skills, knowledge and professionalism of MCTC management and staff. Development Associates, Inc. July 29, 2004 Corporate Tax Activity Final Evaluation 33 CHAPTER FIVE: MINISTRY OF FINANCE COMPONENT The expected results stated under this component of the project essentially repeat or aggregate the expected results in each of the tax departments. However, BearingPoint was conscientious to brief and involve the Ministry of Finance in each step of the project and to provide computer equipment, software and training to meet particular needs at the Ministry level. Task 1: Research Studies Expected Results: ♦ Develop a tax reform package that includes a set of coordinated tax policies and draft legislation in corporate tax policy, income tax policy, and sales tax policy. ♦ Develop a coordinated administrative, operational, and procedural reform package for the offices of corporate tax administration, income tax administration, and sales tax administration. ♦ Prepare and submit a prioritized implementation plan for the above policy and administrative reform packages. Findings: 1. As noted elsewhere in this report, the comprehensive policy and administrative reform packages were delivered to the MOF and relevant departments in June 2000. At the Ministry level, the focus of attention was the harmonization and coordination of the total reform package including the elimination of stamp taxes as the sales tax expands. Presentations, briefings and discussions were held at the Ministry level for the Minister and his senior taxation staff on the overall program as well as on a number of the important specific reforms. The project prepared an implementation plan for the program and, ultimately, the draft legislation packages. 2. In addition, at the Minister’s request, discussion papers on special topics were prepared for and given to the Minister. The topics included the system of additions and deductions, personal and employment-related deductions, penalties and interest, and stamp duties. 3. The project also provided the Ministry with alternative organizational designs for a proposed new Economic Research Department in the Office of the Minister. The contractor also helped screen potential candidates for the positions in this new department. 4. Throughout the project, BearingPoint maintained a close working relationship with the Minister and his staff. In our interview with the Minister, the evaluation team found him to be exceedingly well informed on the status and objectives of every component in the project. In addition, he described a clear vision of what he had wanted the project to help him achieve; that is, a modern, cost-effective, depersonalized tax administration managing an equitable and efficient tax structure. Development Associates, Inc. July 29, 2004 Corporate Tax Activity Final Evaluation 34 Conclusions: The expected results as stated above were fully met. However, political considerations outside the control of the MOF as well as internal bureaucratic inertia have impeded implementation of the reform program. Task 2: Training Expected Results: ♦ Develop a needs assessment and training plan for all in-country as well as out-of-country training. ♦ Continue the training initiatives of Public Finance Administration Project through modernization of the training centers in both departments and upgrading the capabilities of existing centers. Findings: The training needs assessments and plans for all departments and for the Ministry itself were completed. The project also provided a senior Egyptian economist to facilitate the start up of the new Economic Research Department in the Office of the Minister. Training on the econometric software package “Eviews” was also provided. Conclusions: The expected results as stated above were fully met. Task 3: Commodity Procurement Expected Results: ♦ Develop a commodity procurement plan for both departments and the Ministry of Finance’s office. The commodities to be ordered will be in two categories: computers and peripherals; and training aids and equipment. The plan will include, but not be limited to: ƒ A general description of the commodities, their usage and the number of each to be ordered; ƒ An implementation schedule for ordering, purchasing, and shipping of commodities; ƒ Administrative mechanism to be used for administering the procurement plan. Findings: The project procured 23 desk top computers, three servers, printers, a scanner and software for the new Economic Research Department in the Office of the Minister. In particular, the project procured the “Eviews” econometric software for this department. Conclusions: The expected results as stated above were fully met. Development Associates, Inc. July 29, 2004 Corporate Tax Activity Final Evaluation 35 CHAPTER SIX: CONCLUSIONS This evaluation has primarily tracked the expected results as stated in the contractor’s Scope of Work. However, the activity is larger than the contractor’s Scope of Work and it includes the objectives of USAID and the GOE in agreeing to the activity in the first instance. It also includes the assumptions and common understandings on both sides that certain outcomes were desired and expected from the resources provided through the contractor. The findings indicate that the contractor competently and comprehensively provided all of the services expected at the start of the activity. Therefore, from the planned inputs perspective, the project must be judged a success. However, in terms of the overall outcome of this assistance, the activity achieved mixed results. Specifically, there has been essentially no progress in furthering tax policy reform, as the relevant legislation has not yet reached the Peoples’ Assembly for passage. The majority of income taxpayers must still deal with a vast, inefficient and out-of-date bureaucracy that has shown itself slow to adopt new methods and procedures. Automation and essential management information systems have not yet become the backbone of income tax administration. However, there has been important progress in increasing revenues as a result of the extension of the GST to the wholesale and retail sector. Also, the management and administrative picture is brighter on the sales tax side as the department is relatively new and quicker to adopt change. It was created on the basis of a modern tax department and has no past legacy to overcome. The CTA has imparted substantial technical and managerial skills through training and an important advancement has been made in automation. The CTA responded flexibly and competently to new MOF concepts, particularly in supporting the establishment of the MCTC. As the evaluation pointed out, in some cases the less than desired results may have arisen from the impingement of other priorities on a government heavily involved with a variety of reform issues and other concerns. Bureaucratic inertia may have also played a part, although bureaucratic innovation also accounts for the activity’s successes. With this overview in mind, the findings of our evaluation of the CTA suggest the following conclusions: 1. Technical assistance for tax policy reform has essentially been completed. The policy issues and their supporting arguments are on the table and are well known to the MOF and the GOE. There is little “new ground” to break. The consulting team delivered all that was expected in the area of policy. The lingering question, then, is “Was there anything more (or different) that the consulting team could have done to speed up adoption of reforms?” Our answer to this question is no. The consulting team was contracted to provide state-of-the-art technical analysis and advice. The assumption in this and many other technical assistance projects is that the clarity and insight emerging from comprehensive, high quality analysis and advice educates and compels the counterpart to take the right course of action. It is quite clear from this project that this assumption is erroneous. This leads to a second conclusion. Development Associates, Inc. July 29, 2004 Corporate Tax Activity Final Evaluation 36 2. If the reform effort is to be moved up on the list of priorities, the project needs to have access to alternative or additional methods of coalition building than those solely provided by the technical arguments of the contractor, however compelling they may be in terms of sound economics. The promulgation of new policies in areas that have a significant public impact, such as taxation, requires, at a minimum, that those affected do not disagree with the policy change to the point where they form a political coalition to resist the change. The ideal situation would be that a political coalition forms in support of the reforms, but this is unlikely when the reform seeks greater tax coverage. The CTA was designed on the premise that a good technical assistance contractor would convince the MOF who would, in turn, convince the government decision makers outside the MOF who would, in turn, forge the necessary political acceptance or support among the public. It appears that this linkage is a weak and time consuming approach, as evidenced by the CTA experience. The effort to convince the people needed to form the political coalition in support of new tax policies required more time than the project provided and may have required more social policy justification than that provided by the technical arguments submitted by the contractor. A concerted “policy dialogue” between the GOE and the US Mission, with the help of other donors and international institutions, may have accelerated tax reform, but officials in these agencies must ration their “dialogue” efforts among many other program objectives. Even the Ministry of Finance itself, when dealing with the larger GOE, has competing priorities when one considers its responsibilities for policy reforms on the expenditure side of the budget. One has no assurance that a senior MOF official who accepts a reform proposal on the basis of sound technical arguments will, the next day, advocate the reform at the next higher level. The next day or the next week or the next month may be filled with other priorities. With respect to reorganization, the findings suggest; 3. Given its problems and the broader needs of taxpayers, further efforts to reorganize the Tax Department internally would appear to be a costly and somewhat futile exercise. An alternative conceptual approach as seen by the Model Customs and Tax Center offers more promise as a modern tax authority than a stand-alone, reorganized Tax Department, although the concept has not yet been fully tested in Egypt. The MCTC approach to building a modern tax authority has two distinct advantages. First, it provides the opportunity to develop a new “corporate culture”, which is far less expensive to do than trying to change an existing and deeply rooted “corporate culture”. Second, it provides a better way to coordinate and integrate the functions of the various tax departments than is likely to occur even if each tax department were fully reorganized and modernized. The success of the experimental MCTC does, however, require the MOF to adjust several macro￾level policies of taxation and tax administration. Specifically, the MOF needs to fully embrace the concept that tax administration should be built around taxpayer self-assessment combined with incentives that promote honesty. These contrasts with today’s practice of having the tax authority determine the levy with the tax return merely providing some supporting information. Development Associates, Inc. July 29, 2004 Corporate Tax Activity Final Evaluation 37 A second macro-level policy that needs changing is the method of calculating the incentive pay for employees. The current incentive is based on maximizing revenue. This is not fully compatible with the MOF’s desire to ensure an accurate and fair levy of the tax for each taxpayer. If accuracy and fairness is the objective, the incentive needs to shift from a quantity basis to a quality basis. The expansion of revenue would then rely on an expansion of the taxpaying base, increased taxpayer compliance and/or an increase in the tax rate. Related to management practices and systems, the findings suggest; 4. A selective audit system is essential to improving the cost-effectiveness of the tax authority. However, there should be no expectation that the MOF will be able to adopt one until there is a functioning system of taxpayer incentives for more honest self￾assessment. Given the state of development of the risk assessment model, the data and the other influencing factors, a selective audit approach may require three to five more years to become operational. 5. The sine quo non of a modern tax authority is it reliance on electronic data processing. The Tax Department may be only 50 percent and the Sales Tax Department 75 percent of the way in terms of hardware and software, which, at the present time, seriously limits the full use of the technology. Also, if the MOF is unable to continue the pace of expanding system coverage, the training and new management practices that depend on ADP will not be fully utilized. 6. Both the Sales Tax Department and the Tax Department have a genuine (and large) appetite for training in tax audit, collection and management techniques employed by modern tax authorities in the industrial countries. This training is generally not available in Egypt. 7. Training will not produce the desired effect until it is tied to tax officers’ career paths and matched with appropriate remuneration and incentive schemes. Development Associates, Inc. July 29, 2004 Corporate Tax Activity Final Evaluation 38 CHAPTER SEVEN: RECOMMENDATIONS On the basis of the findings and conclusions, the evaluation team offers the following recommendations to USAID: 1. Any further assistance in the area of organizational development should focus exclusively on helping the MOF succeed in its experimental MCTC, the new “Professional Tax Center” and other such integrated service centers that are planned. If one looks back at USAID/Egypt’s success rate in institution building, the record shows that the “success” column contains relatively more new institutions and the “failure” column contains relatively more long established departments. The reorganization of the Tax Department as originally proposed by BearingPoint should not be pursued for the reasons noted in the Conclusions of this report. 2. Should USAID consider further assistance to the MOF’s program of modernizing taxation in Egypt, the assistance package need not include tax policy assistance. If the full exclusion of tax policy assistance is considered too restrictive, the program or activity could include limited periodic visits by a tax policy expert to assess progress and answer MOF questions, should any arise. As noted in the full evaluation report, the reform agenda provided by the CTA and its predecessor PFAP constitute ample identification of the remaining policy shortcomings in the tax system today. Also, there is ample analysis and economic justification for the recommended courses of action. The full time presence of policy expertise would not be efficacious in terms of alternative uses of program resources or in helping speed up the approval of the reform within the GOE. 3. There is and will continue to be a need for training, particularly to expose the technical personnel in audit, collections, anti-evasion and data management departments to new, sophisticated methods and technology. While some of this can be done through offshore training, the level of English may require instructors to be brought here with simultaneous translation facilities provided. In addition, there continues to be an immediate need to help managers understand and become familiar and comfortable with the MIS and the reports it generates so that these become valued management tools. In keeping with the previous recommendation, the training should focus on personnel being assigned to the new tax centers. 4. There remains a significant need to upgrade the ADP system. The full burden is likely beyond the interest of USAID. However, any future assistance in taxation should insure that the ADP needs of the new centers are met. Finally, it was pointed out to us that the experts needed at this stage, particularly on sales taxation, should be more technically specialized than those needed at the start of the program in 1989. The evaluation team agrees with this view. However, the USAID salary cap may inhibit a contractor from employing the appropriate expertise. If further assistance is to be offered to the MOF, USAID should be prepared to exceed the consultant salary cap on a case by case basis. Development Associates, Inc. July 29, 2004 Corporate Tax Activity Final Evaluation I APPENDIX I: INTERVIEWS CONDUCTED Ministry of Finance: ™ Medhat Hassanein, Minister of Finance Tax Department: ™ Hosni Gad, Commissioner, Income Tax Department ™ Fathi Hammam, Director, Anti-evasion ™ Sabri Khattab, Director, Audit & Collection ™ Fathi Abdel Aziz, Director Central Department, IT Department ™ Nadia Hafez, Director, Training Department ™ Faten Mohamed Ismail, Director, Taxpayer Assistance ™ Sayed Gouda, Economic Researcher Sales Tax Department: ™ Mahmoud Ali, Commissioner, Sales Tax ™ Reda Saadan, MCTC Executive Director ™ Mohamed Badea, Registrant’s Assistance ™ Hamdy El Essawi, Audit Planning ™ Fayza Fouad, Undersecretary, General Sales Tax Department, Training Center Corporate Tax Activity, BearingPoint: ™ Darwin G. Johnson, Senior Vice President ™ Richard Clayton, Chief of Party ™ Bedro Valdes, Senior Resident Advisor, Information Technology ™ Fatos Qendro, Senior Resident Advisor, Information Technology ™ Lew Baurer, Senior Resident Advisor, Model Customs and Tax Center ™ Peter Bruges, Resident Advisor, Sales Tax ™ Phyllis Hodgkins, Senior Resident Advisor, Direct Tax ™ Charolotte Cerf, Senior Resident Advisor, Tax Payer Service United States Agency for International Development (USAID) ™ Anthony Chan, Sector Policy and Privatization Division Chief ™ Iman El Shayeb, Project Officer, Sector Policy and Privatization Division ™ Paul Bruning, Economist, Sector Policy and Privatization Division ™ John Morgan, Program and Impact Assessment Officer ™ Glenn Rogers, Economist, Sector Policy and Privatization Division American Chamber Tax Committee Interviews with 16 companies, MCTC Clients Interviews with non MCTC taxpayers Development Associates, Inc. July 29, 2004 Corporate Tax Activity Final Evaluation II APPENDIX II: DATA TABLES AND GRAPHS Table 1: Tax Revenues (1990/91-2002/03) Item (In L.E. Billion) 1990/91 1991/92 1992/93 1993/94 1994/95 1995/96 1996/97 1997/98 1998/99 1999 2000 00/ 2001/02 2002/03 01/ Total Revenues 28.6 41.4 46.7 52.6 55.7 60.9 64.5 68.0 69.4 73.6 74.6 75.3 82.6 Current Revenues 25.6 37.8 43.7 49.4 52.9 57.7 60.8 63.9 67.2 72.5 72.8 74.1 81.4 Tax Revenues 15.5 24.3 27.3 31.4 34.3 38.2 40.5 44.0 46.5 49.6 51.4 51.7 57.6 Sales Tax (commodities & services) 3.4 6.3 7.2 8.1 9.3 10.5 11.3 12.9 18.6 20.1 20.8 20.6 23.1 Income Tax 6.4 10.0 11.1 12.0 12.1 13.7 14.6 15.3 16.7 20.1 21.2 21.6 23.2 *Others 5.7 8.0 9.0 11.3 12.8 14.1 14.6 15.7 11.2 9.4 9.3 9.5 11.3 GDP in current prices 98.6 131.1 146.2 163.0 191.0 214.2 247.0 266.8 282.6 315.7 332.5 354.6 388.1 Sales Tax as a percentage of the Current Revenues 13.2% 16.7% 16.5% 16.4% 17.6% 18.1% 18.6% 20.2% 27.7% 27.7% 28.6% 27.8% 28.3% Income Tax as a percentage of the Current Revenues 25.0% 26.4% 25.4% 24.3% 22.9% 23.8% 24.0% 24.0% 24.9% 27.7% 29.2% 29.2% 28.5% Sales Tax as a percentage of the Tax Revenues 21.8% 26.0% 26.3% 25.8% 27.2% 27.3% 28.0% 29.4% 39.9% 40.5% 40.5% 39.8% 40.1% Income Tax as a percentage of the Tax Revenues 41.3% 41.2% 40.7% 38.3% 35.4% 35.8% 36.0% 34.8% 36.0% 40.5% 41.3% 41.8% 40.3% Sales Tax as a percentage of GDP in current prices 3.4% 4.8% 4.9% 5.0% 4.9% 4.9% 4.6% 4.8% 6.6% 6.4% 6.3% 5.8% 5.9% Income Tax as a percentage of GDP in current prices 6.5% 7.6% 7.6% 7.4% 6.4% 6.4% 5.9% 5.7% 5.9% 6.4% 6.4% 6.1% 6.0% Tax Revenues as a percentage of Current Revenues 60.5% 64.2% 62.6% 63.5% 64.8% 66.3% 66.7% 68.8% 69.3% 68.4% 70.6% 69.8% 70.7% -1 Development Associates, Inc. July 29, 2004 Corporate Tax Activity Final Evaluation II Sales Tax as a percentage of the Current Revenues from 1990/91 through 2002/03 0% 5% 10% 15% 20% 25% 30% 35% 1990/91 1992/93 1994/95 1996/97 1998/1999 2000/2001 2002/2003 Year Percentage Income Tax as a percentage of the Current Revenues from 1990/91 through 2002/03 0% 5% 10% 15% 20% 25% 30% 35% 1990/91 1992/93 1994/95 1996/97 1998/1999 2000/2001 2002/2003 Year Percentage Sales Tax as a percentage of the Tax Revenues from 1990/91 through 2002/03 0% 5% 10% 15% 20% 25% 30% 35% 40% 45% 1990/91 1992/93 1994/95 1996/97 1998/1999 2000/2001 2002/2003 Year Percentage Income Tax as a percentage of the Tax Revenues from 1990/91 through 2002/03 0% 5% 10% 15% 20% 25% 30% 35% 40% 45% 1990/91 1992/93 1994/95 1996/97 1998/1999 2000/2001 2002/2003 Year Percentage Sales Tax as a percentage of the The GDP from 1990/91 through 2002/03 0% 1% 2% 3% 4% 5% 6% 7% 1990/91 1992/93 1994/95 1996/97 1998/1999 2000/2001 2002/2003 Year Percentage Income Tax as a percentage of the GDP from 1990/91 through 2002/03 0% 1% 2% 3% 4% 5% 6% 7% 8% 9% 1990/91 1992/93 1994/95 1996/97 1998/1999 2000/2001 2002/2003 Year Percentage -2 Graph 1: Sales and Income Taxes as a Percentage of Current Revenues, Tax Revenues and GDP Development Associates, Inc. July 29, 2004 Corporate Tax Activity Final Evaluation II Table 2: Consolidated Fiscal Operations of the Central Government (1998/99-2002/03) Item (In L.E. Million) 1998/99 1999/00 2000/01 2001/02 2002/03 Average Annual Growth Rate (1998/99 - 2002/03) 1998/99 1999/00 2000/01 2001/02 2002/03 Average Annual Growth Rate (1998/99 - 2002/03) Total Revenue and Grants (A+B) 71,072 75,399 76,139 78,968 85,854 5.2% 91,812 97,672 101,051 104,042 115,467 6.4% (A) Total Revenue 69,423 73,626 74,568 75,255 82,585 4.7% 90,163 95,899 99,480 100,329 112,198 6.1% Current Revenue 67,207 72,504 72,776 74,060 81,435 5.3% 87,947 94,777 97,688 99,134 111,048 6.6% Tax Revenue 46,543 49,621 51,358 51,726 57,550 5.9% 46,543 49,621 51,358 51,726 57,550 5.9% Income Taxes 16,740 20,104 21,235 21,625 23,214 9.7% 16,740 20,104 21,235 21,625 23,214 9.7% Goods and Services 18,584 20,085 20,793 20,580 23,066 6.0% 18,584 20,085 20,793 20,580 23,066 6.0% International Trade 11,048 9,295 9,184 9,323 11,079 0.1% 11,048 9,295 9,184 9,323 11,079 0.1% Other 171 137 146 198 191 2.9% 171 137 146 198 191 2.9% Non-tax Revenue 20,664 22,883 21,418 22,334 23,885 3.9% 41,404 45,156 46,330 47,408 53,498 7.3% Capital Revenue 2,216 1,122 1,792 1,195 1,150 -12.0% 2,216 1,122 1,792 1,195 1,150 -12.0% (B) Grants 1,649 1,773 1,571 3,713 3,269 24.6% 1,649 1,773 1,571 3,713 3,269 24.6% Total Exp & Net Lending (C+D) 79,995 88,600 96,121 101,153 101,153 6.6% 92,032 101,834 109,069 113,665 127,382 9.6% (C) Total Expenditures 78,724 86,464 95,942 100,739 100,739 7.0% 84,906 92,950 105,086 106,506 120,162 10.4% Current Expenditures 61,183 69,758 80,843 85,472 85,472 9.9% 67,365 76,244 89,987 91,239 103,747 13.5% Wages & Salaries 19,562 22,180 25,217 28,238 28,238 11.1% 19,773 22,421 25,482 28,500 31,928 15.4% Defense 8,107 8,516 9,731 10,218 10,218 6.5% 8,107 8,516 9,731 10,218 11,155 9.4% Interest 16,406 18,597 20,907 22,903 22,903 9.9% 14,524 16,303 18,833 20,352 24,140 16.6% Domestic 14,081 16,800 19,074 20,570 20,570 11.5% 12,199 14,506 17,000 18,019 21,119 18.3% Foreign 2,325 1,797 1,833 2,333 2,333 0.1% 2,325 1,797 1,833 2,333 3,021 7.5% Other 17,108 20,465 24,988 24,113 24,113 10.2% 24,961 29,004 35,941 32,169 36,524 11.6% Capital Expenditures 17,541 16,706 15,099 15,267 15,267 -3.2% 17,541 16,706 15,099 15,267 16,415 -1.6% (D) Lending-Repayments 1,271 2,136 179 414 414 -16.9% 7,126 8,884 3,983 7,159 7,220 0.3% Overall Deficit/Surplus -8,923 -13,201 -19,982 -22,185 -15,299 -220 -4,162 -8,018 -9,623 -11,915 Source: Central Bank of Egypt (This data has been prepared according to the international classification agreed with the IMF as from 1998/99 ) . Average Growth Rates are based on RRSA team calculations. -3 Development Associates, Inc. July 29, 2004 Corporate Tax Activity Final Evaluation II Table 3: The State Budget Revenues (1990/91 - 1997/98) The State Budget : Revenues (In L.E Million ) 1990/91 1991/92 1992/93 1993/94 1994/95 1995/96 1996/97 1997/98 Total Revenues 28,559 41,406 46,703 52,567 55,719 60,893 64,498 67,963 Current Revenues 25,608 37,834 43,683 49,418 52,925 57,708 60,753 63,889 Central Government 23,875 35,677 41,020 46,384 49,889 54,486 57,179 60,035 Tax Revenues 15,503 24,286 27,334 31,373 34,279 38,249 40,518 43,962 Tax on income and business profits 6,406 9,996 11,114 12,003 12,134 13,707 14,589 15,306 Tax on Property 2 5 8 12 21 24 3 0 Sales Tax ( commodities & services) 3,373 6,324 7,191 8,080 9,333 10,450 11,325 12,925 Customs duties 3,267 4,588 5,009 6,120 7,017 7,911 8,125 8,886 Stamp duties 1,315 1,839 2,067 2,657 2,874 3,074 3,168 3,215 Other tax revenues 1,140 1,534 1,945 2,501 2,900 3,083 3,308 3,630 Non_Tax Revenues 8,372 11,391 13,686 15,011 15,610 16,237 16,661 16,073 Profits Transfers, from: 6,979 8,863 9,364 9,070 10,542 11,133 11,423 10,780 The Petroleum Authority 3,236 3,715 4,626 4,610 4,443 4,717 4,788 3,870 The Suez Canal Authority 1,361 3,015 3,013 2,610 3,132 3,015 2,828 2,940 The Central Bank of Egypt 1,792 1,556 968 1,200 2,072 2,318 2,587 2,617 Other Economic Authorities 590 577 757 650 895 1,083 1,220 1,353 Fees 321 475 459 963 1,220 1,359 1,427 1,483 Miscellaneous 1,072 2,053 3,863 4,978 3,848 3,745 3,811 3,810 Local Government 1,092 1,408 1,782 1,984 1,951 2,125 2,354 2,426 Services Authorities 641 749 881 1,050 1,085 1,097 1,220 1,428 Capital Revenues 2,951 3,572 3,020 3,149 2,794 3,185 3,745 4,074 Other Capital Revenues (Sales of Assets) - 166 682 678 656 611 629 635 Investments (self-financing) 2,951 3,406 2,338 2,471 2,138 2,574 3,116 3,439 Source: Central Bank of Egypt Online Database (This data has been prepared according to the international classification agreed with the IMF as from 1998/99 ) . -4 Development Associates, Inc. July 29, 2004 Corporate Tax Activity Final Evaluation II Table 4: GDP at Factor Cost - By Economic Sector in Constant Prices – 1991/1992 and 1995/1996 Sectors 1991/1992 1995/1996 Average Annual Growth Rate % (In L.E. Million) Public Private Total Public Private Total Public Private Total GDP 50,300 80,269 130,569 55,510 97,216 152,726 2.6% 5.3% 4.2% 38.5% 61.5% 36.3% 63.7% Commodity Sectors 24,302 41,071 65,373 27,277 49,084 76,361 3.1% 4.9% 4.2% Agriculture 254 21,426 21,680 165 24,305 24,470 -8.8% 3.4% 3.2% Industry & Mining 9,105 12,625 21,730 10,202 16,768 26,970 3.0% 8.2% 6.0% Petroleum & Products 10,759 2,249 13,008 12,052 2,313 14,365 3.0% 0.7% 2.6% Electricity 2,220 0 2,220 2,658 0 2,658 4.9% N/A 4.9% Construction & Building 1,964 4,771 6,735 2,200 5,698 7,898 3.0% 4.9% 4.3% Productive Services Sectors 16,526 27,080 43,606 17,035 33,639 50,674 0.8% 6.1% 4.1% Transport & Communication 4,540 4,170 8,710 5,116 5,379 10,495 3.2% 7.2% 5.1% Suez Canal 6,125 0 6,125 5,621 0 5,621 -2.1% N/A -2.1% Trade 2,230 19,500 21,730 1,742 24,194 25,936 -5.5% 6.0% 4.8% Finance 3,215 1,330 4,545 4,109 1,800 5,909 7.0% 8.8% 7.5% Insurance 46 30 76 62 42 104 8.7% 10.0% 9.2% Restaurants & Hotels 370 2,050 2,420 385 2,224 2,609 1.0% 2.1% 2.0% Social Services Sectors 9,472 12,118 21,590 11,198 14,493 25,691 4.6% 4.9% 4.7% Real Estate Ownership 127 2,223 2,350 159 2,660 2,819 6.3% 4.9% 5.0% Government Services 9,345 0 9,345 11,039 0 11,039 4.5% N/A 4.5% Personal services 0 9,895 9,895 0 11,833 11,833 N/A 4.9% 4.9% Source: Central Bank of Egypt Online Database – Average Growth Rates are based on RRSA team calculations. -5 Development Associates, Inc. July 29, 2004 Corporate Tax Activity Final Evaluation II Table 5: GDP at Factor Cost - By Economic Sectors in Constant Prices – 1996/1997 and 2000/2001 Sectors 1996/1997 2000/2001 Average Annual Growth Rate % (In L.E. Million) Public Private Total Public Private Total Public Private Total GDP 76,501 162,778 239,279 73,708 215,131 288,839 -0.9% 8.0% 5.2% 32% 68% 26% 75% Commodity Sectors 35,381 83,611 118,992 30,493 109,468 139,961 -3.5% 7.7% 4.4% Agriculture 188 41,694 41,882 213 47,756 47,969 3.3% 3.6% 3.6% Industry & Mining 11,352 32,031 43,383 7,063 50,752 57,815 -9.4% 14.6% 8.3% Petroleum & Products 14,569 2,892 17,461 11,697 2,327 14,024 -4.9% -4.9% -4.9% Electricity 4,172 4,172 5,557 29 5,586 8.3% N/A 8.5% Construction & Building 5,100 6,994 12,094 5,963 8,604 14,567 4.2% 5.8% 5.1% Productive Services Sectors 22,034 55,526 77,560 20,575 76,584 97,159 -1.7% 9.5% 6.3% Transport & Communication 6,152 10,048 16,200 3,494 16,527 20,021 -10.8% 16.1% 5.9% Suez Canal 6,495 6,495 6,551 6,551 0.2% N/A 0.2% Trade 2,325 39,128 41,453 1,846 50,865 52,711 -5.2% 7.5% 6.8% Finance 6,410 2,990 9,400 8,461 4,162 12,623 8.0% 9.8% 8.6% Insurance 107 75 182 141 104 245 7.9% 9.7% 8.7% Restaurants & Hotels 545 3,285 3,830 82 4,926 5,008 -21.2% 12.5% 7.7% Social Services Sectors 19,086 23,641 42,727 22,640 29,079 51,719 4.7% 5.8% 5.3% Real Estate Ownership 186 4,189 4,375 198 5,492 5,690 1.6% 7.8% 7.5% Government Services 18,900 18,900 22,442 22,442 4.7% N/A 4.7% Personal Services 0 19,452 19,452 0 23,587 23,587 N/A 5.3% 5.3% Source: Central Bank of Egypt Online Database – Average Growth Rates are based on RRSA team calculations. -6 Development Associates, Inc. July 29, 2004 Corporate Tax Activity Final Evaluation II Table 6: GDP at factor cost - by Economic Sectors in Constant Prices 2001/02 and 2002/03 Sectors 2001/2002 2002/2003 Average annual growth % (In L.E. Million) Public Private Total Public Private Total Public Private Total GDP 90,133 255,639 345,772 93,465 262,959 356,423 3.70% 2.9% 3.10% 26.1% 73.9% 100.0% 26.2% 73.8% 100% Commodity Sectors 23,967 156,339 180,306 23,958 160,285 184,242 0.00% 2.5% 2.2% Agriculture 228 58,141 58,369 233 59,770 60,003 2.20% 2.8% 2.8% Industry & Mining 9,471 60,614 70,084 9,564 62,326 71,890 1.00% 2.8% 2.6% Petroleum & Products 1,585 27,775 29,360 1,621 28,562 30,183 2.30% 2.8% 2.8% Electricity 5,814 119 5,933 6,005 392 6,397 3.30% 229.1% 7.8% Consturction & Building 6,870 9,690 16,560 6,535 9,235 15,770 -4.90% -4.7% -4.8% Productive Services Sectors 28,044 74,800 102,844 30,330 77,728 108,059 8.20% 3.9% 5.1% Transport & Communication 4,000 19,753 23,753 4,128 20,779 24,906 3.20% 5.2% 4.9% Suez Canal 8,199 0 8,199 10,091 0 10,091 23.10% N/A 23.1% Trade 1,803 41,156 42,959 1,822 41,964 43,786 1.10% 2.0% 1.9% Finance 13,753 7,369 21,122 14,196 7,406 21,602 3.20% 0.5% 2.3% Insurance 197 157 354 0 0 0 -100.00% -100.0% -100.0% Restaurants & Hotels 92 6,365 6,457 94 7,579 7,673 2.20% 19.1% 18.8% Social Services Sectors 36,599 24,501 61,100 37,578 24,946 62,524 2.70% 1.8% 2.3% Real Estate Ownership 572 13,351 13,923 576 13,453 14,029 0.70% 0.8% 0.8% Government Services 35,269 0 35,269 36,222 0 36,222 2.70% N/A 2.7% Personal Services 758 11,150 11,908 781 11,493 12,274 3.00% 3.1% 3.1% Water (non-add) 1,522 0 1,522 1,598 0 1,598 Source: Central Bank of Egypt Online Database – Growth Rates are based on RRSA team calculations. -7 Development Associates, Inc. July 29, 2004 Corporate Tax Activity Final Evaluation II Table 7: Balance of Payments – Current Account (1995/96 – 2002/03) (In US $ Million) 1995/96 1996/97 1997/98 1998/99 1999/2000 2000/2001 2001/2002 2002/2003 Growth 1995/96- 2002/03 Trade Balance -9,498 -10,219 -11,770 -12,563 -11,472 -9,363 -7,523 -6,616 Export Proceeds** 4,609 5,346 5,129 4,445 6,388 7,078 7,121 8,205 78.0% Petroleum 2,226 2,578 1,729 1,000 2,273 2,632 2,381 3,161 42.0% Non Oil Export 2,383 2,768 3,400 3,445 4,115 4,446 4,740 5,044 111.7% Import payments** -14,107 -15,565 -16,899 -17,008 -17,860 -16,441 -14,644 -14,821 Petroleum -3,172 -2,477 -2313 Non Oil Imports -13,269 -12,161 -12508 Services (net) 5,791 6,192 4,691 5,970 5,631 5,588 3,880 4,890 Receipts 10,636 11,240 10,455 11,026 11,427 11,697 9,618 10,441 -1.8% Transportation, of Which 2711 2535 2457 2637 2635 2704 2715 2964.8 9.4% Suez Canal Dues 1885 1849 1776 1771 1781 1843 1820 2236.2 18.6% Travel 3009 3646 2941 3235 4314 4317 3423 3796.4 26.2% Investment Income 1829 2052 2081 1933 1833 1850 938 641.3 -64.9% Government Services 285 216 303 308 110 190 188 252.8 -11.3% Other Receipts 2802 2791 2673 2913 2535 2636 2354 2786.1 -0.6% Payments -4,845 -5,048 -5764 -5056 -5796 -6109 -5737.9 -5551.8 14.6% Transportation -203 -242 -362 -377 -457 -429 -419 -393 93.3% Travel -1335 -1333 -1307 -1104 -1028 -1054 -1208 -1372 2.8% Investment Income, of which -1291 -1085 -868 -928 -901 -778 -842 -805 -37.6% Interest Paid -1195 -995 -716 -789 -770 -728 -689 -626 -47.6% Government Expenditures -437 -511 -856 -511 -467 -588 -660 -455 4.2% Others Payments -1579 -1877 -2371 -2136 -2943 -3260 -2609 -2526 60.0% Balance of Goods & Services -3,707 -4,027 -7,079 -6,593 -5,841 -3,775 -3,643 -1,726 Transfers 3,522 4,146 4,601 4,869 4,679 3,742 4,253 3,609 2.5% Official (net) 724 890 883 1,097 932 769 1,144 664 -8.3% Private (net) 2,798 3,256 3,718 3,772 3,747 2,973 3,109 2,946 5.3% Balance of Current Account -185 119 -2,478 -1,724 -1,162 -33 610 1,883 Source: Ministry of Foreign Trade, August 2003 * 2001/2002 full year aggregates are preliminary, and some lines may not be consistent with the semi annual and quarterly data in tables 22 and 24. ** Starting 1996/97, trade data includes exports and imports of Free Zones Areas. Note: data in this table are based on banking sector compilation based on cash transactions. It may differ from data compiled by CAPMAS which are based on Custom Authorities' records of movement of goods. -8 Development Associates, Inc. July 29, 2004 Corporate Tax Activity Final Evaluation II Table 8: Balance of Payments – Capital Account (1995/96 – 2002/03) (in US $ million) 1995/96 1996/97 1997/98 1998/99 1999/2000 2000/2001 2001/2002 2002/2003 Capital & Financial Account 1,017 2,041 3,387 919 -1,199 -542 -964 -2733.8 Direct Investment Abroad -15 -47 -137 -56 -43 -27.3 -15.2 -30 Direct Investment In Egypt (net) 627 770 1,104 711 1,656 509 428 700.6 Portfolio Investment Abroad -- -- -56 -43 -12 -5 -3 -15.8 Portfolio Investment In Egypt (net) 258 1,463 -248 -174 473 260 45 -187 Other Investment (net) 148 -145 2,724 481 -3,273 -1,280 -1,493 -3201.6 Net Borrowing 89 225 858 191 492 268 881 -74.6 M&L Term Loans -75 -113 -54 -339 -532 -559 -585 -586.5 Drawings 472 416 525 273 194 268 340 644.9 Repayments -547 -528 -579 -611 -726 -827 -925 -1231.4 MT Suppliers Credit -283 -251 322 -110 -95 -112 -207 -340.1 Drawings 56 77 547 88 236 77 261 42.5 Repayments -339 -328 -225 -197 -331 -189 -468 -382.6 ST Suppliers Credit (net) 447 588 591 639 1,119 939 721 1070.2 Bonds * -- -- -- -- -- -- 952 -218.2 Other Assets 237 -1,590 97 143 -3,112 -2,281 -1,835 -3067.7 CBE -- -- -- -17 -22 -17 12 -32 Banks -- -- -- -2,126 -198 1,034 227 -493.4 Other -- -- -- -1,966 -2,891 -3,298 -2,174 -2542.3 Other Liabilities -177 1,221 1,769 147 -654 739 -439 -59.3 CBE -- -- -- -200 -3 495 7 3.7 Banks -- -- -- 347 -651 238 -446 -63 Net Errors & Omissions -261 -247 -1,043 -1,312 -644 -296 67 1396.7 Overall Balance 571 1,913 -135 -2,117 -3,027 -871 -456.4 546 Change in Reserve Assets (increase = -) -571 -1,913 135 2,117 3,027 871 456.4 -546 Source: Ministry of Foreign Trade, August 2003 * Includes the Eurobond issued in July 2001 of US$1.5 billion. The figures above exclude amounts held by resident institutions. -9 Development Associates, Inc. July 29, 2004 Corporate Tax Activity Final Evaluation III APPENDIX III: AN OVERVIEW OF EGYPT’S ECONOMY26 Egypt’s economy passed through two distinct phases between 1995 and 2003. The first, from about 1995 to 200027, exhibited strong economic growth and substantial structural change as a result of significant economic reforms implemented in the late 1980’s and early 1990’s. From 2000 onwards, however, growth and structural change slowed, largely from the effects of global recession and regional political uncertainties. Data from 199628 to 2000 show the average annual rate of real economic growth was 5.2 percent, unprecedented when compared with the prior three decades of Egypt’s economic performance and quite respectable compared to other countries in similar circumstances. Industrial production and mining, electricity, finance and insurance grew by more than 8 percent annually while tourism and real estate ownership followed closely at over 7 percent. More importantly, from a structural perspective, there was a dramatic shift away from state provision of goods and services to private sector production. 29 The real value of public sector production in industry and mining, transportation and communication, trade and tourism declined during the period while the private sector’s provision of these goods and services grew substantially. During this period, the private sector became an important player in the provision of telecommunication services and initiated its first involvement in the production of electricity. Overall, the private sector increased its recorded share of GDP by 6.5 percentage points, to 74.5 percent of GDP.30 From July 2001 through June 2003, the average annual rate of growth slowed to 3.2 percent. With no significant reversals in the domestic economic reform program, Egypt’s expansion was constrained by world recession and political insecurity in the Middle East. In the commodity sectors, the public sector showed no overall growth while private sector growth dropped from an annual rate of 7.7 percent to only 2.5 percent. Structural change continued 26 This Appendix is a revision of a description produced for the evaluation of USAID’s Private Sector Commodity Import Program, conducted in December 2003. 27 Dates refer to the start of the Egyptian fiscal year beginning July 1. 28 Data from 1995 were not used because they are based on constant prices for 1990/91, which would have introduced data discontinuities. 29 Egyptian data report production as “public sector” or “private sector” according to the law under which the production is organized. Governmental entities and production organized under public sector company law is reported as “public sector.” Production organized under a private sector company law is reported as “private sector.” However, there are a number of government owned entities (some rather large) that are organized under private sector law and are thus included in the data under the “private sector” heading. There is no firm estimate of the size of the government’s ownership of the private sector. In banking and tourism, the government’s share of “private sector” production has clearly shrunk. In industry, it has shifted from active management toward portfolio investment. Government owned companies in the “private sector” no longer seem to have special benefits or privileges as a result of the government’s equity interest. 30 See Annex II Table (5). Data used to calculate sector shares and growth rates within each of the two periods are based on constant prices for each period. The first period uses 1996/97 prices for the Egyptian fiscal years from 1996 through 2000. Data for 2001and 2002 are stated in 2001 prices. Consequently, real growth rates between the two periods cannot be calculated. In addition, the updating of the constant price base produces a slight shift in the relative importance of sectors and the shares that are public and private. Thus the private sector’s contribution to GDP may not have actually declined between 2000 and 2001. Rather, the 2001 data based on a more current constant price may more accurately reflect the relative worth of GDP components in 2001 than does the 1996/97 base captured for the year 2000. -1 Development Associates, Inc. July 29, 2004 Corporate Tax Activity Final Evaluation III with noticeable expansion of private sector activity in electricity and insurance, but the value of this expansion was a small component of GDP. Despite short-term setbacks after September 11, 2001 and during the Iraq conflict, the growth in tourism, now primarily in the private sector, remained high. However, overall, the government share of GDP remained essentially unchanged due to expanded government services and increased revenue from the Suez Canal31. Balance of Payments Egypt’s balance of payments account is characteristic of emerging market economies, in that imports significantly exceed exports for some period after changes in policy and law shifted the economic paradigm from a closed, import substitution system to an open market economy. This reflects not only pent-up demand, but also the lag between importing capital goods and raw materials and the export of their products. It also reflects the time required to implement a number of structural changes in the economy, such as shifting from domestic market standards to those required for international trade. Between 1994 and 199832, the balance of trade worsened. Petroleum revenues declined but were not compensated for by the continuous rise in non-petroleum exports. In addition, important tourist revenues in 1997 and 1998 were far below their growth trend line, reflecting perceived security threats in the region. However, with exports rising and imports shrinking, the balance of trade improved for the remainder of the period and the current account balance became positive in 2000. It has remained positive despite the sharp, temporary decline in tourism revenues after the events of September 11, 2001. Since the year 2000, non-petroleum exports have become the single most important source of current account revenues, surpassing tourism and worker remittances, although tourism should rebound to the lead position as the perceived security situation in the region improves33. On the capital account, the structural change in the economy occurring between 1995 and 1999 is reflected in the significant rise in new foreign direct investment inflows, which peaked at $1,656 million in 1999. World recessionary conditions reduced this source of capital by more than 60 percent for the next several years, but some slight recovery occurred in 2002. Similarly, but lagged by one year, Egypt’s earnings from investments abroad declined by a total of almost 60 percent34. The Budget Since well before the economic reform program was initiated, the GOE has struggled to rein in expenditures and increase revenues. Budget imbalances became acute in the 1980’s and, along with chronic foreign exchange shortages and very low levels of investment, were a fundamental part of the incentive to undertake reform. Since the early 1990’s, the consolidated budget deficit has declined and is now (barely) in the manageable range. On the revenue side, the sales tax has become a principal source of revenue and the importance of 31 See Annex II Table (6) 32 Dates refer to the start of the Egyptian fiscal year beginning July 1. 33 See Annex II Table (7) 34 See Annex II Table (8) -2 Development Associates, Inc. July 29, 2004 Corporate Tax Activity Final Evaluation III customs revenue has been reduced, consistent with the GOE’s policy favoring export-led growth. On the expenditure side, there has been a sharp curtailment in public sector capital expenditures. Also, some categories of budget expenditures are now partly undertaken by the private sector, such as in electricity (the Build, Own, Operate and Transfer program—BOOT) and in telecommunications. Nevertheless, the budget remains in deficit and the GOE continues to search for new sources of revenue, believing that significant expenditure cuts would be socially and politically unwise. The problem has been exacerbated since 2001 as the recession negatively impacted sales tax receipts while government-provided services and debt amortization rose35. Foreign Trade During the 1990’s, foreign exchange became readily available to finance imports compared to the previous decade. By the end of the decade, Egypt’s foreign currency reserves were sufficient to finance well over a year’s worth of imports. However, with the recession and the decline in tourist revenues, foreign exchange is seen to have become scarcer, and the CBE has taken measures to prioritize imports. GOE authorities feel that luxury imports have become excessive and contribute to the tight foreign exchange situation. For example, there has been a 600+ percent rise since 1995 in the import category of footwear, headgear, umbrellas and artificial flowers, and imported luxury cars are very visible. While these items still constitute a relative small percent of imports, the CBE imposed an import priority list with the aim of focusing scarce foreign exchange on essential food commodities and inputs to manufactured goods. Traders, who are seen as the source of the luxury goods problem, were essentially excluded in 2003 from purchasing foreign exchange from the banks and are forced to use the higher priced parallel market that has emerged in the past several years. In March 2003, the CBE also required exporters and the tourist companies to sell 75 percent of their foreign exchange earnings to the banks. This was a significant reversal of a 1994 reform that allowed companies to retain all their foreign exchange if they so desired. To overcome resistance to this measure, the CBE is now guaranteeing these companies the foreign exchange for their needed imports even if it is not available at their banks. While inputs for manufacturing and commercial agriculture are growing, essential food commodities for domestic consumption are still a significant component of imports. Commodity exports have grown, and the growth in a number of non-traditional exports, such as fresh vegetables and fruits, is frequently pointed to as a sign of success in economic restructuring. However, overall, commodity export earnings still largely arise from traditional exports and much of this, such as extracted minerals and metals, remains in the public sector. In January 2003, the GOE floated the Egyptian pound (LE) to let the market realign its price. However, given the tight foreign exchange market and the GOE’s aversion to price increases 35 See Annex II Table (2) -3 Development Associates, Inc. July 29, 2004 Corporate Tax Activity Final Evaluation III in the local market, the LE is still a managed currency, requiring restrictions and interventions to maintain some semblance of stability. The Private Sector The GDP data, discussed above, clearly evidence the increasing importance of the private sector. By Egyptian standards, many medium-sized firms have become large, and domestic producers are looking for export markets. Nevertheless, the private sector is still in its early stages of development, particularly vis-à-vis competing in the global economy. However, today, one is as likely to hear company management complain about the recession or other market conditions as about continued government interference or policy obstructions. Previously, the private sector was only preoccupied with eliminating the stifling effects of government rules, regulations and policies. Distribution of Income The transformation of Eastern Europe and the former Soviet Union resulted in a significant increase in the disparity of incomes and wealth. Before the transformation, private wealth was suppressed and the lower income majority was provided with a relatively uniform level of low quality goods and services. That the same process should occur in Egypt as policy changes shifted the economy from command to market should come as no surprise to GOE officials, the donor community and other knowledgeable observers of the economy. Egypt’s economy was largely patterned after Eastern Europe, albeit without the depth and fervor of Eastern Europe’s Marxist ideology. A core component of the economic reform program was the reduction of subsidies, raising the prices of many wage goods and basic services relative to the prices of goods typically consumed by the wealthy. In addition, the opening of the economy initially provided more opportunities to those who had capital or higher skill levels. In a World Bank study36 by El-laithy, Lokshin and Banerji in 2003, the rapid growth of Egypt’s economy during the second half of the 1990’s tended to reduce poverty but slightly increase the disparity in the distribution of income. 36 World Bank, Development Research Group, Poverty Team, Policy Research Working Paper 3068, Poverty and Economic Growth in Egypt 1995-2000, prepared by Heba El-laithy, Michael Lokshin and Arup Banerji, June, 2003. -4 Development Associates, Inc. July 29, 2004 Corporate Tax Activity Final Evaluation IV APPENDIX IV: INCOME TAX REFORM PROGRAM -1 Development Associates, Inc. July 29, 2004 Corporate Tax Activity Final Evaluation IV -2 Development Associates, Inc. July 29, 2004 Corporate Tax Activity Final Evaluation IV -3 Development Associates, Inc. July 29, 2004 Corporate Tax Activity Final Evaluation IV -4 Development Associates, Inc. July 29, 2004 Corporate Tax Activity Final Evaluation IV -5 Development Associates, Inc. July 29, 2004 Corporate Tax Activity Final Evaluation IV -6 Development Associates, Inc. July 29, 2004 Corporate Tax Activity Final Evaluation IV -7 Development Associates, Inc. July 29, 2004 Corporate Tax Activity Final Evaluation IV -8 Development Associates, Inc. July 29, 2004 Corporate Tax Activity Final Evaluation IV -9 Development Associates, Inc. July 29, 2004 Corporate Tax Activity Final Evaluation IV -10 Development Associates, Inc. July 29, 2004 Corporate Tax Activity Final Evaluation IV -11 Development Associates, Inc. July 29, 2004 Corporate Tax Activity Final Evaluation IV -12 Development Associates, Inc. July 29, 2004 Corporate Tax Activity Final Evaluation V APPENDIX V: ORGANIZATIONAL STRUCTURE OF TAX DEPARTMENTS (Income Tax) -1 Development Associates, Inc. July 29, 2004 Corporate Tax Activity Final Evaluation V Sales Tax Department -2 Development Associates, Inc. July 29, 2004 Corporate Tax Activity Final Evaluation V-3