OCI tax debacle in Egypt stokes concern over who’s next

FILE - In this Wednesday, Jan. 2, 2013 file photo, Egyptian brokers work at the stock market in Cairo, Egypt. (AP Photo/Khalil Hamra, File)

Egypt’s decision to go after its biggest publicly traded company on a tax-evasion claim is deterring investors that regard the case as a possible precedent setter, EFG-Hermes Holding SAE’s head researcher said.

Orascom Construction Industries, which accounts for a quarter of the value of the benchmark EGX 30 Index, has been in talks with tax officials to settle a 14 billion Egyptian pound ($2 billion) claim stemming from the 2007 sale of its cement business. The company didn’t pay taxes on the transaction because it listed the business on the bourse two months prior to the sale, it said in a March 8 statement. Egypt didn’t have a capital gains tax at the time, which remained the case Friday.

Egypt aims to “take more measures to improve the investment environment” by developing the legislative framework, providing new incentives for investment and developing vocational training and education, the Cabinet said in an emailed statement Thursday. The government wants to increase economic growth to 4.1 percent next year from 3 percent this year, including a 59 percent contribution from the private sector to its 291 billion pound investment target.

“The government is talking about attracting foreign investment but its actions aren’t consistent with that,” Wael Ziada, head of research at the Cairo-based investment bank, said by phone. “A settlement would be a positive development in the medium term, but it doesn’t mean we won’t see similar cases in the future, which is what concerns potential investors.”

The case of Orascom Construction, or OCI, is the latest in a series of charges brought against investors that thrived under the rule of former President Hosni Mubarak.

Damac Properties Co., a Dubai-based developer, filed for international arbitration in 2011 after Egypt seized land the company purchased in 2006 and sentenced its chairman to five years in prison with hard labor. Ezz Steel’s former chairman Ahmad Ezz received a 37-year prison sentence this month for profiteering and squandering of public funds in his company’s acquisition of another steelmaker, El-Ezz Aldekhela Steel.

“The government is making some mistakes,” said Mohammed al-Demerdash, board member of prominent Islamist businessman Hasan Malek’s Egyptian Business Development Association. “However, the challenge is not that easy: to create a business-friendly investment environment, while applying social justice and the rule of law. The short-term is really challenging. It’s a bumpy road, and that’s a byproduct of the democratic transition.”

Government policies are eroding investor confidence, Cairo-based investment bank Beltone said in a report Friday. Its investor confidence index retreated to 51.7 points in the week that ended March 16 from 54.3 points the week before, economists Nada Farid and Mohammad Hosny wrote. The drop is “mainly due to stumbling government policies,” they said.

“The investment environment is very negative,” Magdi Tolba, chairman of Cairo Cotton Group, an exporter to Levi Strauss, Wrangler Lee and other international brands, said by phone. “The country is not ready for such surprises, and aggressive attacks.”

OCI offered the Egyptian Tax Authority 7 billion pounds to settle the dispute, Ahmad Abdel-Rahman, head of the authority’s tax-evasion unit said in a phone interview Friday.

A version of this article appeared in the print edition of The Daily Star on March 23, 2013, on page 4.




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