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Wednesday, 28 November 2018

Change in tax treatment of treasury holdings won’t take effect until measure passes Egypt’s House; expect more news today

Change in tax treatment of treasury holdings won’t take effect until measure passes the House; expect more news today: The Federation of Egyptian Banks (FEB) appear to be closing in on an agreement on a new tax treatment of bank income from their holdings of state treasuries. Details of talks between the FEB and the government over the weekend, released by CIB in an EGX disclosure on Tuesday (pdf), suggest that a preliminary agreement will see the new treatment apply only to treasuries purchased after the change in treatment is approved.

New tax treatment will need House approval: The statement also noted that “the tax will come into effect as soon as the House of Representatives signs off on it,” meaning the story could have legs for some weeks to come.

What the investors are hearing: “Tax picture may not be as bad as initial draft law suggested; full impact not until FY2020,” write EFG Hermes analysts Elena Sanchez-Cabezudo and Ahmed El Shazly in a note out yesterday after hosting an investor call with CIB. “The positive message from the call … is that there will be no retroactive implementation and the changes will only be applied to T-Bill/T-Bonds bought after the law is approved, not to the existing stock.”

Expect more news today: CIB told investors on the call that the Federation and the Finance Ministry are due to meet today to “potentially finalize the tax law changes.”

The kicker: All of this will push banks to shift to consumer loans and central bank CDs, EFG Hermes says, particularly amid expectations that interest rates will start to come down in 2019.

Background: The Madbouly Cabinet approved last week a new tax treatment for banks that would separately tax their earnings from government debt. Analysts have been debating the impact of the change in accounting, with Shuaa Securities Egypt suggesting that the effective tax rate of a model bank could skyrocket to 37% against 24% under the system now in effect. Government sources speaking to the foreign press say the new formula could raise taxes to the sector by EGP 10 bn.

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