Egypt’s biggest construction firm agrees to pay controversial levy to avoid protracted legal battle.
3 May 2013
After months of "challenging" negotiations, Egypt’s biggest construction firm, Orascom Construction Industries (OCI), has settled a large and controversial tax claim levied by the Egyptian government.
In late 2012 Egypt’s new government, led by the Muslim Brotherhood’s Mohamed Morsi, claimed OCI had evaded $2 billion in tax from the sale of its cement business to Lafarge in 2007.
OCI strongly denied it owed any money, saying that under Egyptian law, capital gains resulting from the sale of shares listed on the Egyptian Stock Exchange were tax exempt.
Investors worried that the claim by the cash-strapped government signalled its hostility toward companies who had thrived under the corrupt authoritarian government of Hosni Mubarak.
For some time rumours have been circulating that a deal between the government and the company was close, and on 30 April OCI announced that it had agreed to pay approximately $1 billion over four years to settle the dispute
"The settlement amount was reached following months of challenging negotiations," the company said in a statement, adding, "In conjunction with this agreement, the ETA has determined that there was no tax evasion by the company and is exonerating management and the company from any wrongdoing related to the transaction."
OCI chief executive Nassef Sawiris (Credit: Orascom)
In Cairo, OCI’s shares rose just over 3% at the news.
OCI will pay the Egyptian Tax Authority (ETA) what it owes in 10 instalments between now and 2017.
"Having concluded this matter, OCI and its management look forward to a positive relationship with the Egyptian Government where our investments in Egypt can prosper and the company is able to channel its resources towards growth and potential new investments," said Mike Bennett, chairman of OCI’s parent company, Netherlands-headquartered OCI N.V.
OCI N.V. Chief executive Nassef Sawiris said: "As we end the prolonged period of uncertainty, the company will now regain its focus on growth initiatives."
Commenting on its decision to settle the dispute with a payment, OCI said in a statement that it faced two choices: fight a prolonged legal battle "with unpredictable outcomes", or make the payment "despite the unified view by the board, management and auditors KPMG that all laws and regulations were soundly applied and followed at all times".
OCI said it decided that a legal battle would not be in the best interests of the company’s stakeholders, including 45,000 employees in Egypt.
It added that a prolonged legal battle process would "take up a significant part of management’s time and attention, stall our future investment and growth plans, and cause greater uncertainty for our shareholders, creditors and other stakeholders".