Mona Diaa participated in the Thomson Reuters Foundation’s award-winning programme Wealth of Nations, funded by Norad. As part of the programme she produced an investigation on tax avoidance in Egypt. Her findings then made a major contribution to a change in the law clamping down on tax avoidance. Here she explains how it happened.
When the Thomson Reuters Foundation announced that it was receiving applications for its Wealth of Nations programme, I had the dream of participating in it. I wanted to carry out a major investigation and I like this type of journalism.
However, choosing an idea that could achieve this goal was a big challenge. Since the programme is about illicit finance, tax evasion and tax avoidance, I arranged to meet a leading international tax expert who worked at one of the major tax offices. He told me about the types and methods of tax evasion and avoidance. I asked him about Egypt’s “free zones”, which are not subject to various taxes and fees – it seemed they could act as “mini tax havens”. In response he said: "Of course this happens, but you have to prove it."
This was the beginning. People often speak of free zones being used for customs smuggling, but are there other ways to evade or avoid tax? This question had settled in my mind since the meeting and I started to read about it and gather information. I was preoccupied with how to find proof when it is so difficult to get information about companies operating in free zones – even the government itself cannot obtain this.
When I went to the first Wealth of Nations workshop in April 2016 in Tunisia, hosted by Media Development Centre, we learned about conducting investigations, starting with hypotheses, identifying sources, investigative techniques, obtaining information, and even dealing with numbers, accounts and budgets. This was the starting point. When I returned to Cairo, I had a clear, starting hypothesis that developed during my work on it. But only after 6 full months of working on the investigation did I uncover the truth of the billions being lost by the Egyptian economy. This is due to free zones being transformed into tax havens by linking them to companies inside Egypt and abroad, allowing companies to shift their profits to areas where they were not subject to taxes.
During the investigation, the most difficult thing was measuring the size of these losses. This is what my Thomson Reuters Foundation mentor, Samira Kawar, insisted on – and for this I owe her a lot of credit.
This was hard for me, as I had never studied economics - I am in the media field. But the second Wealth of Nations workshop in Tunisia in August 2016 really changed the course of my work, and helped me to scrutinise the figures much better. I went on to examine the finances of companies in US dollars, which was a new thing for me, and I also analysed official data from the Investment Authority and the Central Bank, as well as research that had been conducted over the previous few years. After this I was able to produce estimates of the revenue losses, and I presented these to five experts to get their feedback.
Through all this, the investigation found that none of the goals for which the free zones were established had materialised. The Egyptian economy loses an average of about US $1 billion annually due to these areas. This loss is not related to smuggling operations, but only represents the deficit in the total trade balance of the free zones because of its dependence on marketing the bulk of its products in the local market and not exporting them abroad.
If we look at the volume of foreign investment in the free zones, which is one of the most important goals for which it was established, we find that the volume of this investment has decreased significantly during the last twenty years. The investigation revealed that this has been replaced by Egyptian investments – in 2015, these amounted to 82% of the capital invested in the free zones (around US $9 billion), compared to just 18% in foreign and Arab investment (around US $2 billion). This confirms the lack of attractiveness of the Egyptian free zones for foreign investment.
As for employment in the free zones, it does not exceed 0.7% of the total labour force in Egypt, which is a small percentage compared with free zones in other countries. In Malaysia the percentage of employment is 4%, while it is 10% in the Dominican Republic, according to a recent study conducted at the end of 2016.
The most important thing here was not the publication of the investigation, but the reactions that ensued. I completed the investigation at a time when the draft investment law was being referred to Parliament for discussion. This is the law which regulates the work of the free zones in Egypt. Two years earlier, the government had outlawed the creation of new free zones due to concerns over smuggling. This new draft law caused great disagreement between the Ministry of Investment, which wanted to reverse this decision, and the Ministry of Finance, which wanted to abolish free zones to stop illicit activities.
Here I should mention the expert who helped me understand the nature of tax avoidance before I took the training course. He has since become the Deputy Minister of Finance for Tax Policy and has the power to act on these issues. He drew on the investigation before it was published to successfully insist on abolishing free zones during discussions with the Cabinet group preparing the law.
But things did not go to plan. A number of businessmen and owners of free zones lobbied hard for free zones to be brought back during the parliamentary discussion of the law. Here, the Ministry of Finance used full sections of my investigation to write a report on the major drawbacks of these companies and the losses to the Egyptian economy.
This ended with the adoption of strict controls on the work of free zones, and an increase in the annual fees paid. This effectively means that any company that does not produce real exports and make a significant profit is unable to continue working in free zones. It also means companies in free zones must present their finances each year to the Ministry of Finance so they can monitor the movement of funds.
The difficulty of this investigation was not only in accessing official data, but also in analysing the data so I could come up with a rigorous result showing the impact on the economy. Without the training and mentoring from Wealth of Nations I would not have been able to do this.
In future I would like to be part of an international team of journalists working on important investigations like this, or the Panama Papers. It is no secret that the investigative press, which aims primarily to expose wrongdoing and correct mistakes in society, is no longer a priority in Egyptian and Arab media. But we will continue to try to do something for our society as long as we live on this earth.
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