“Zytna Fe De’ena”

A public campaign to engage companies and individuals in social responsibility
 

Tax Collection 
Tax collection is a necessity in a functioning society so that citizens can claim their rights and fundamental needs, which are in turn provided by the government and collecting authority. The authority collects the taxes for the welfare of the public. Services that taxes fund include education, transportation, infrastructure (roads, bridges), sanitation, etc.

The Role of Civil Associations & Institutions in Egypt 
Civil associations and institutions in Egypt have a very important role in the development process of a nation. They serve and protect citizens as well as defend important issues such as democracy and human rights. There is no doubt that civil society significantly reduces the distance between the government and its citizens, acting as a bridge between both, connecting citizens to the government and government to the citizens. Moreover, civil society fills gaps and meets needs that the government is unable to provide, thus meeting the diverse and varied needs of the Egyptian citizen. Therefore, civil society institutions meet a wide set of citizens needs that the government failed to accomplish, although the government collects taxes for the purpose of meeting these needs.

The Lack of Contributions and Subsidies; Internal & Local Funding Levels of Associations & Institutions 
The details of tax-exempt contributions less net annual profit to Associations and Institutions is explained in the Income Taxes Act, article No. (23), item No.8:

"...costs and expenses are exempted [from net annual profit], in particular donations and subsidies paid to unregistered Egyptian civil associations and institutions, according to the provisions of Egyptian law, and the role of science and hospitals under the supervision of the government, and scientific research institutions of Egypt, as not to exceed 10% of the net annual profit of the taxpayer."

As the law merely allows 10% of net annual profit as tax-exempt, rather than tax-deductible, this law discourages businesses and individuals from giving donations. For example: if a company’s net annual profit is 100,000 EGP, the company is obliged to pay to the government taxes of roughly 20% of its net annual profit, resulting in an amount owed of 20,000 EGP. Through current tax law, the company is allowed to make donations of any amount it chooses, however any amount the company donates, up to 10% of its net annual profit, will be less net annual profit when determining the amount of taxes owed. This differs from other models where the amount of donation is deducted from the total of taxes owed to the government.

In this example, without making any donation, the company would owe 20% of its net annual profit, or 20,000 EGP as taxes payable to the government. With making the tax-exempt allowed amount of charitable donation of 10,000 EGP, the company would derive the amount of taxes it owes after the donation, i.e., on 90,000 EGP (100,000 – 10,000 = 90,000). The amount of taxes owed by the company with a charitable donation would be 18,000 EGP (20% of 90,000 EGP). Thus, the difference between making a donation or making none at all is a mere 2% of the net annual profit, or 2,000 EGP tax relief.

This means current law gives a 2% relief incentive to companies to donate to charitable organizations. This amount is so small that companies can easily overlook it. In fact, the time and money it takes for an accountant to file the paperwork and do the math related to the exemption may not even be cost-effective to save the company the 2% relief.  Moreover, from the original 10,000 EGP donation, the donor will only be rewarded with a tax relief of 20% (2,000 EGP, or 2% of net annual profit before adjustment) and must pay the rest out of pocket, thereby essentially paying 8,000 EGP in order to experience a tax relief of 2,000 EGP.

The proposed project

The proposed project includes an amendment in Article no. 23, Item No. 8 of law No. 91 [year 2005, “Concerning the Law of Income Tax"]. The amendment considers deductions in relation to costs and expenses, as follows:

“...donationsand subsidies paid to Civil Egyptian Associations and Institutions, according to the provisions of Egyptian law governing them; schools, universities, and hospitals under the supervision of the government, and Egyptian scientific research institutions, so not to exceed (10%) of the effective tax value that was computed in tax returns and not from the net annual profit of the taxpayer."  

The amendment, if approved, would relieve the taxpayer the full 10% deduction from taxes owed, rather than an exemption from taxes owed on 10% of net annual profit.  Therefore, companies would have an incentive to donate 10% of the total amount owed. In the previous example cited, if a company owes 20,000 EGP in taxes (on 100,000 EGP net annual profit) the company could donate 2,000 EGP, with the full amount simply deducted from taxes owed.

Project Funding

The total tax in Egypt exceeds 163 billion. EGP; we expect that this project will provide additional funding pumped in to the civil society sector in the amount of 5 billion EGP during the first three years of implementation.  Furthermore, this value can be expected to increase to 10 billion EGP annually after 10 years of implementation. This amount can be realized if companies engage in social responsibility: the principles of charitable donation and participation in the Egyptian civil society by corporations.

Impacts on Tax Revenue & Budget Deficit 
Some opponents to the project believe that this proposal may adversely affect tax revenue and that it will increase the budget deficit. This assumption is false. When this amendment was configured, the state budget and need for revenue was taken in to account. Moreover, the current law allows a maximum limit of 10% donation from net annual profit, while the proposal allows a maximum deduction of 10% from taxes owed.  As the previous examples showed, the amount of tax revenue collected by the state is left untouched. Rather, tax proceeds collected by the state are maintained.

The Volume of Foreign-Funded Civil Associations & Institutions 
Foreign-funding for Egyptian associations and institutions is around half a billion EGP, and is concentrated to approximately only 2% of operating NGOs in Egypt. Smaller NGOs who lack resources are unable to compete for funds from international foundations, but lack local funding sources, so they are driven to compete regardless. The competition for scarce funding drives NGOs to restrict their programming to the desires of international founding sources or the trends in international development agendas, which may not necessarily reflect the needs of Egyptian citizens. Based on the aforementioned, Egyptian society could stand to benefit greatly through additional funds donated by Egyptian companies, whose incentive to donate would be the relative ease of the process as well as the tax-deduction.

Development of the Education System
The project also applies to public schools, which have no additional funding resources. Nourishing Egyptian educational institutions with even a few billions EGP will have a great impact in the improvement and development of the government education system.

 
Development of Health System 
The project also applies to government-owned hospitals, which suffer from lack of resources and funding. Likewise, the relatively small addition of a few billion EGP to our nation’s health institutions will have a great impact on the development of the public health process.

Scientific Research Institutions 
The project also encourages the creation of scientific research institutions. There is no doubt that interest in scientific research and higher education must be a priority for developing nations. Science and technology are fundamental pillars of education and infrastructure development. Financing these areas will encourage their growth, making science and technology attractive sectors for Egyptians, and thus help retain domestic human capital and resources in these fields.

Help in reducing the problem of unemployment 
There is no doubt that the provision of contributions to Egyptian civil society institutions will also ease the burden of youth unemployment. Additional unrestricted funds to associations and institutions would create new projects and many jobs, thereby creating a healthy job market for youth and graduates to expand their skill sets and gain experience.