Books – Mustafa Eid:
Analysts expect that the state of decline in the stock market indicators and trading values will continue during the upcoming sessions until a clear picture is reached regarding the application of capital gains tax on the stock exchange, its postponement or even its cancellation, and the absorption of what may be agreed upon by the market parties.
The Egyptian stock market indices fell during the trading session yesterday, Sunday, in the first reaction after the publication of an indicative guide to the rules of tax transactions on capital gains, including the application on securities.
The main index of the stock exchange EGX30 fell at the end of trading on Sunday, the first session of the week, by 1.85% to the level of 11095 points, driven by the sales of Egyptian investors.
The EGX70EWI index for small and medium shares also fell by 3.75%, and the broader EGX100EWI index by 3.49%.
Last Friday, the Official Gazette published Ministry of Finance Decision No. 428 of 2021 regarding the issuance of a guide to the rules for tax treatment of capital gains resulting from the disposal of securities, shares, treasury bills and stamp tax on dealing in securities.
The guide stipulates the application of a 10% tax on the net profits of trading in the stock exchange on residents, from January 1, 2022.
To reassure the market, Minister of Finance, Dr. Mohamed Maait, affirmed, in a statement today, Monday, that no new taxes have been imposed on the stock exchange and there is no intention to do so, as the imposition of laws is only done through legislation approved by the Council of Ministers and approved by the House of Representatives, and not Ministerial decisions.
The minister explained that Ministerial Resolution No. 428 of 2021, which came in implementation of the provisions of the laws in force, and which are now in force, includes only the rules and instructions for the tax treatment of capital gains resulting from the disposal of securities, shares and treasury bills, as well as the stamp tax on dealing in securities.
He stated that the decision aims to clarify and simplify the procedures and tax treatment of the various traded securities to facilitate for financiers and lay the foundations for transparency, in a way that contributes to spreading tax awareness.
The government had approved the application of the capital gains tax on the stock exchange at a rate of 10% in July of 2014, but the tax led to turmoil in the money market and a crisis in the way it was calculated, which forced the government to postpone the tax for two years in May 2015.
The controversy over the tax returned with the end of the first postponement period in 2017, and the government postponed it again for 3 years, but in return it imposed an upward stamp tax on transactions.
Last year, the government postponed the implementation of the capital gains tax on the stock exchange for the third time until the end of 2021. It also reduced and canceled the stamp tax on stock exchange transactions on buying and selling on the same day. The controversy resurfaced after the publication of the guide to the rules of tax transactions for capital gains in the Official Gazette.
What is the expected impact of the potential application of the tax on the market?
Hanan Ramses, a financial market expert at Al-Hurriya Securities Brokerage Company, told Masrawy that the reactions to the possibility of applying the capital gains tax on the stock exchange are expected to be strong, especially since yesterday’s session did not witness a great concentration of investors on trading, and despite that, there were declines in Indications which means a complete rejection of this application.
Hanan Ramses added that the negative impact will continue until the picture becomes clear about the application of this tax or not, especially with the insistence of dealers to reject the tax and thus pressure through market transactions.
She stated that the market is going through a difficult situation with the return of the application of price limits at 20%, accompanied by the lack of clarity in the mechanism of applying the closing price of shares, which may cause a state of confusion in the market during the current period.
Yesterday, the stock exchange began implementing its management’s decision to raise the price limits for shares to 20% during one session from the last closing price of the main market (instead of 10%) with the application of the temporary suspension at 10% (instead of 5%).
Radwa Al-Swaify, head of the research department at Al-Ahly Pharos Securities Brokerage Company, told Masrawy that the declines in the stock market during yesterday’s trading session reflect the market’s investors’ dissatisfaction with the possibility of applying capital gains tax on the stock exchange at the beginning of the new year.
Radwa Al-Swaify added that investors in the stock exchange during the current period do not achieve large profits, as happened after the flotation, and that the large shares in the stock exchange have witnessed poor performance during the recent period, and therefore it is natural that the decision leads to some kind of discomfort.
Al-Swaify expected that the declines witnessed by the stock exchange today will continue for a period until investors understand the idea of a capital gains tax or until there is a clear and decisive decision to apply or postpone it during the coming period, but it will not be a long wave of declines.
Hanan Ramses said that companies may reconsider the propositions that are likely to occur in the stock market during the current time, with the expected decline in trading values and indices during the coming period due to news of the application of the tax.
However, Radwa Al-Swaify indicated that news of the application of the current tax may affect those who intended to launch his company at the beginning of the new year, with the picture unclear, and the proposals that may have been prepared for implementation are difficult to postpone at the present time, especially if the company itself or its sector represents a good opportunity. for investors.
Why was the stock market affected by the news of the application of the tax?
Hanan Ramses said the exchange is known to be sensitive to any news related to the application of fees or taxes.
She added that in light of the non-ending of the Corona crisis and the possibility of the economy being subjected to partial closure as part of the precautionary measures that may be taken in light of the fourth wave, in addition to the possibility of the spread of the Delta Plus mutated, the market is still affected by these factors, while the imposition of a tax on dealers is being considered.
Hanan Ramses indicated that the investor cannot think of any new burdens on him in the current period at a time when he seeks to raise his trading in order to achieve any capital gains in light of the low purchasing value of money due to inflation and low interest rates.
She stated that this news comes at the same time that the stock exchange is working on a number of measures in order to activate trading in the stock exchange, attract new dealers to it and enhance their confidence in it, as well as attract new companies in order to offer them for trading in the stock exchange, which exposes the positive effects of these efforts to loss.
Ramses explained that those in charge of the economic file know that most of the investors who trade shares in the stock exchange are individuals and therefore taxes must be imposed on them like others, but these investors also pay taxes outside the stock exchange, whether income tax or value added.
Radwa Al-Swaify believes that the application of the capital gains tax on the stock exchange may aim to increase the quality of medium and long-term investors compared to the owners of daily trading.
But at the same time, dealers in the money market in general are not satisfied with the decision because the market has not recovered as required and there are plans for upcoming proposals and a desire to motivate investors to enter the stock exchange and invest in it, and therefore there are current demands to postpone the tax or cancel it permanently, according to Al-Swaify.
She pointed out that the publication of the guide to dealing with the tax now may have come 4 months before the application so that the market fully absorbs the idea in a sufficient period, and that the abolition of the stamp tax on residents’ transactions at the beginning of the new year is a positive matter, but those dealing with the market prefer the continuation of the application of the stamp tax and not Impose capital gains tax.
Hanan Ramses called on the government to consider the impact of such a decision on the competitiveness of the Egyptian Stock Exchange, especially with the presence of Arab stock exchanges characterized by low costs for investment and trading, at a time when the state announces that it is working to activate trading in the stock market.
She said that it was one of the first to take steps prior to imposing the tax by strengthening the market with new proposals and attracting new dealers who can achieve gains for a good period of time, and then raising the issue of imposing the tax for societal dialogue after that.
On the other hand, Ramses stated that the government can resort to other solutions at the present time to avoid imposing a tax, such as offering shares of government companies in the stock market within the government offering program, which will return large returns to the public treasury amounting to billions, which suffices it from the proceeds of applying the tax on the stock market, even if only in a way. temporary.
She explained that at the same time, a stamp tax is applied to all transactions in the stock exchange, whether the customer is a winner or a loser from the transaction, as it is imposed on the seller and buyer, which achieves a return for the state as well.
Hanan Ramses stressed the need for no new tax to be imposed at the present time, with the suffering of dealers in trading since the global financial crisis in 2008 until the recent Corona crisis.
The possibility of applying or postponing the tax again depends on the extent to which investors will accept the matter during the coming period and the possibility of them achieving profits that exceed the tax, with which they can bear the imposition of this tax or that they are vacillating between gain and loss, and thus the difficulty of accepting this tax on what they have won, ruling out the possibility of taking a decision to cancel the tax because it is practical. Takes a long time.
Publishing a tax guide does not mean that it should be applied
Ragab Mahrous, advisor to the head of the Egyptian Tax Authority, told Masrawy that the publication of the guide to dealing with capital gains tax came as a guide for investors and accountants with the latest updates for reference in the event of the tax being applied.
Mahrous added that the Tax Authority and the Ministry of Finance are preparing guidelines for some tax transactions, and this guide is a compilation of the tax treatment of capital gains from 2005 to 2021.
He stressed that the timing of publishing the guide at the present time with the approaching deadline for postponing the capital gains tax on the stock exchange and coinciding with the application of the new price limits for shares is not intended.
Mahrous indicated that there is another guide issued 6 months ago, but it has been updated in this latest version to include the transactions of Law No. 199 of 2020 amending the Stamp Tax and Income Tax Laws.
He explained that the issuance of this guide has nothing to do with the necessity of applying the tax on the stock exchange or the possibility of postponing it, pointing out that the Tax Authority is an executive body that applies what is issued by the House of Representatives.