Orascom settles Egyptian tax dispute

Orascom Construction Industries, Egypt’s biggest listed company by market capitalisation, has reached a settlement with the Egyptian authorities over a controversial tax claim arising out of the sale of its cement arm to Lafarge of France in 2007.

OCI, a construction and fertiliser group with extensive global interests, said on Tuesday it had agreed to pay E£7bn ($1bn) to the tax authority in 10 scheduled instalments ending in 2017. The first payment of E£2.5bn will be made before the end of June.

OCI is a subsidiary of OCI NV, a Netherlands-based company formed earlier this year with $1bn of participation from US investors including Bill Gates. The funds to pay the tax claim, said OCI, would be borrowed from its parent company, which trades on the NYSE Euronext in Amsterdam.

“OCI NV will make some divestments to strengthen its balance sheet”, Nassef Sawiris, the company’s chief executive, told the Financial Times.

The establishment of OCI NV has in effect meant that the primary listing of OCI has moved to the Netherlands – something that has irked the Egyptian authorities, contributing to the sense of crisis surrounding the tax claim.

Mr Sawiris said that OCI continued to believe it had not broken any tax laws but had agreed to settle the claim to avoid a lengthy litigation process.

“There is agreement [with the authorities] that there was no tax evasion,” he said. “We [chose] a certainty process over a prolonged [legal] process.”

Wael Ziada, head of research at EFG-Hermes, the regional investment bank, said the company had no choice because “they have assets in Egypt and could have lost their entire value if they went against the state in a situation where there are doubts that it is a level playing field”.

In a further sign of the breakthrough in relations between OCI and the authorities, the company also said on Tuesday that it has received previously withheld regulatory approval of its last extraordinary general meeting, clearing the way for OCI NV to launch a tender offer for OCI’s shares on the Egyptian bourse.

A travel ban on Mr Sawiris and his father Onsi, the previous chairman of the company, has also been lifted. Both men have been outside Egypt, but they faced arrest on their return.

The tax claim arises from the sale by OCI in 2007 to Lafarge of France of what was then its cement arm, including factories in Egypt, Algeria, Pakistan and Turkey.

The transaction was executed on the Egyptian stock exchange two months after OCI listed the cement subsidiary, allowing it to benefit from legal provisions exempting bourse transactions from tax.

The Egyptian authorities did not dispute the exemption until last year when they said that former tax officials committed “errors” in examining the company’s records.

But the sudden introduction of the demand five years after the sale elicited sharp criticism from analysts and the business community who said it sent negative signals at a time when Egypt needed investment to salvage its floundering economy.

They saw an inexperienced and cash-strapped government going aggressively after companies that thrived under the regime ousted in 2011, even at the cost of damaging the investment climate.

Mohamed Morsi, Egypt’s Islamist president, had first mentioned the tax claim during a speech to the nation in October which included references to corrupt companies defrauding the state of billions of pounds. Though he did not name OCI, he hinted at its identity, causing its stock to plummet when the market opened the next day.

“The dispute has had a negative impact,” said Mr Ziada. “The way it was addressed and brought up as a tax fraud and the repercussions on the company did not signal to investors that the country was looking for amicable solutions to fix an issue which did not arise from fraud.”