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UNCERTAINTY SURROUNDS PRIVATE SCHOOL TAXATION
BY LOUIS WASSER
It’s no secret that the government has been unable to provide adequate education facilities for its growing young population. In the 1980s and 90s, with state schools and universities bursting at the seams, it turned to the private sector for assistance.
To encourage private investment in education, it offered a tax exemption on the 15 percent of gross income these private educational institutions are permitted as profit. All private educational institutions in Egypt – with the exception of international schools – were eligible for this tax exemption. Now, with over a dozen private universities and more than 3,000 private schools operating in Egypt, the government has decided that private education is healthy enough to manage without this subsidy.
On May 5, as part of a raft of measures passed by parliament to fund the 30-percent wage increased promised to government employees, as well as other increased government spending, the tax breaks for private educational institutions were scrapped. Critics fear Law 114/2008, which opposition groups say was rammed through the People’s Assembly, could end up hurting education by pushing up fees for parents while discouraging future investment in these institutions. “You need stimulus, you don’t need added burdens,” said one private school owner.
Youssry El Gamal, the minister of education, denies that the removal of the tax exemption will create a burden on parents. He explains that private schools and universities, which constitute only 8.2 percent of the Egyptian educational system, previously benefited from a tax exemption on their gross income. These institutions must now “pay 20 percent of the profit, not of the activities, as taxes to help raise the standards of salaries for government employees,” he told Business Monthly. “All that happened is that of this 15 percent [profit], they are allowed to take 12 percent [as profit], and pay 3 percent to the government. This is the only change.”
Not all private schools and universities are affected by the decision. Some were already paying taxes on profits, and will continue to do so, while others will continue to be exempt because of their special legal status, such as affiliation with an embassy. “Before Law 114/2008, schools that were established under the supervision and regulations of the Social Affairs Authority and the Ministry of Education were exempted from corporate taxes,” explains Mohanad Khaled, partner at BDO Khaled & Co. – a firm offering accounting and other professional services. “Accordingly, the majority of schools were established as so. Nevertheless, if an educational institution was established differently, then it was already subject to corporate tax, which is currently 20 percent.”
One exception may be the case where an institution has been established in affiliation with an embassy or consulate. The American University in Cairo (AUC), meanwhile, claims it has a unique status because it is a nonprofit institution – although it is as yet unclear as to how such institutions will be affected by this decision.
If it seems confusing, it is. Legal experts say Law 114/2008 does little to clarify the situation. “The article [on private schools’ tax exemptions] is only one line,” notes Ali Hozain, tax partner at Baker Tilly Wahid Abdel Ghaffar & Co. “This is a very strange law. I’ve been working for 25 years in this field, but this is the first time I’ve seen a law like this.”
He points out that the law was drafted and passed very quickly, and that it is unique in that it lumps together provisions on a variety of products, services and even sectors. Apart from scrapping tax breaks for private universities, Law 114/2008 also increases the prices of fuel, vehicle registration and cigarettes, while reducing tax breaks for energy-intensive industries in the free zones.
Private educational institutions seemingly affected by the decision say they have not received any direction as to how the tax will be implemented. “Until now we haven’t had anything concrete, nothing definite, from the government telling us what to do and how to do it,” explains Namir Isaac Younan, owner of Manor House School, a private school with approximately 3,000 students.
While the education minister insists that only profits will be taxed, some speculate that the tax will also be applied to other items, such as rent. Certainly, the lines become hazy when schools are owned by other entities. Ahmad El Shawy, chairman of Talimia Group, which runs two schools in Egypt, suspects that the government will attempt to tax not only the 15 percent profit it collects from each school, but also the rent those schools pay to the group.
One fear is that by increasing taxes on educational institutions, the government may discourage private investment in the education sector. After all, the tax exemptions were originally provided as a much-needed incentive to invest in the sector. “The main reason that had been put on the table for exempting educational organizations was we wanted to encourage [investment in] them,” says Sherif El Kilany, senior partner for tax services at Allied for Accounting & Auditing, an affiliate of Ernst & Young. “My concern is that the management of these schools will start to find [teachers for lower salaries and] lower quality to [maintain] the same profit margin out of the school – if they look at it from a business point of view.”
It could also discourage schools owners from investing in costly improvements of their facilities, warns El Shawy. “We’re in the market of furnishing schools,” he says. “From our talking to all the school owners, [it is apparent that] they are not interested anymore in this business.”
Hozain dismisses suggestions that the taxation changes will discourage school owners from reinvesting revenues into their facilities or affect the way schools are operated. More likely, he says, schools will pass along the added costs to parents by hiking tuition fees. In fact, some schools are reported to have already notified parents in writing that over and above the annual increase in tuition, the coming year’s tuition increase will reflect the taxes that the school will have to pay to the government.
The education minister, however, is adamant that private educational institutions will not be permitted to raise tuition rates to offset their new tax liability. “It shouldn’t affect the tuition fees,” El Gamal says. Profits will be taxed without schools being permitted to “regain this amount by raising tuition fees, so that they do not increase the burden on parents.”
Under Egyptian law, private institutions are permitted to increase their tuition fees by 5 percent annually. All tuition fee increases, however, must be approved by the General Directorate of Private Education. The government has the authority to seize control of a school’s operations temporarily if it is found to be violating the tuition rules. “We [maintain] full supervision of the tuition fees of all private schools,” El Gamal emphasizes.
Strict monitoring and enforcement, including several school seizures in recent memory, should be enough to discourage illegal tuition fee increases, argues Younan. “If anybody tells you they could [raise their fees without permission,] it’s absolute rot,” he says. “Maybe there are some schools that do it, but this is too damn risky. Personally, I don’t think it’s worth the risk.”
But others suggest that schools will find a way to circumvent the restrictions on raising tuition – whether by raising fees on non-tuition items such as books and buses, or by demanding a separate cash payment without receipt. “It will be like a black market,” explains El Shawy. “[For example,] you pay LE 1,000 legally and then LE 1,000 illegally.”
Like many, he believes the extra costs will inevitably be passed along to parents. “They will raise the fees illegally and the government will not be able to do anything about it because it’s an open market,” he argues. “[The government] can say whatever it wants, but parents will pay this tax.”
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