Egypt’s Cabinet approved a new draft law modifying income tax on treasuries, which separates income earned on treasuries from corporates’ and banks’ other income sources, according to the Ministry of Finance sources. According to the draft law, income earned on government treasuries will be recorded net of a 20% tax and then will be added to the entity’s taxable income after deducting other treasuries related costs. The total net income will then be subjected to the 22.5% income tax rate. The amendment is expected to result in some EGP10bn in tax revenue to the government. (Al Borsa).
HC’s comment: Currently, banks are taxed at the highest of 22.5% of pre-tax income or 20% of treasury income. Egypt’s Ministry of Finance did not provide further clarification on the actual application of the new tax law. According to HC’s understanding, however, it appears the new law stipulates that banks will be entitled to 80% of treasury returns (net of 20% tax), which will enter the bank’s revenue stream and will later be subjected to 22.5% corporate income tax after deducting operating expenses, implying double taxation. If HC’s understanding is correct, this would imply a lower net profit for banks and possibly lower valuations. For banks under coverage, Abu Dhabi Islamic Bank – Egypt (ADIB EY) and Commercial International Bank (COMI EY) have the highest exposure to government treasuries, constituting c46% and c45% as of 3Q18, respectively, of total deposits, while Crédit Agricole Egypt (CIEB EY) has the lowest exposure to treasuries, constituting c36% of its total deposit base. HC awaits confirmation from domestic banks on their understanding of the new law before adjusting their numbers.
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