Transfer pricing - Egypt

Transfer Pricing in Egypt is regulated by Article (30) of Income Tax Law No. 91 of 2005 and the Articles (38), (39) and (40) of the Executive Regulations, as well as the unified tax procedures law (UTLP), its amendments under Law No. 211 of 2020, and its executive regulations issued in June 2021.

The transfer pricing rules apply to domestic and cross-border commercial or financial transactions between related parties. In the event where conditions agreed between related parties in their commercial or financial transactions differ from those that would be agreed between unrelated parties, in a way that results in the reduction of the tax base or the shifting of tax burden from a taxable person to a tax-exempt person, the ETA can determine taxable profits based on the arm’s length price. 

The legal definition of a related party is complex and can be widely interpreted. It starts with relationships affecting the determination of the tax base based on at least 50% direct or indirect ownership, voting or management rights, dividend distribution rights, or capital rights, and extends to more general terms. The law indicates that two persons are generally related if the relationship between them reaches the extent that there is a possibility that one of the two persons/ or both persons would act in accordance with the directions, requests, suggestions or will of the other person or a third person. 

All commercial and financial transactions fall under the scope of controlled transactions, including but not limited to buying and selling all types of goods, services and assets; expense reimbursements and payments on behalf; royalties; loans with all different types; buying or selling financial instruments, including the transfer of shares; buying or selling intangible assets; and, buying or selling contracts or relinquishing them. Dividends distributions are not considered related party transactions. Related party transactions that have an impact on a taxpayers’ financial position statement (balance sheet transactions) are to be considered as part of a taxpayer’s related party transactions.   

• The Egyptian Transfer Pricing Guidelines ('ETPG') of October 2018, which amend those first issued in 2010 by the Egyptian Tax Authority ('TA'), govern the application of transfer pricing rules in Egypt. The ETPG is largely consistent with the OECD transfer pricing guidelines, however the ETPG is the primary reference for guidance in applying legislation related to transfer pricing. It provides taxpayers with guidance on the application of the arm’s length principle, and discusses the documentation that taxpayers are required to develop in order to demonstrate to the ETA their compliance with said principle.
• The preface to the ETPG indicates that the guidelines reflect the views of the ETA on the application of the transfer pricing rules under the law, and that the OECD guidelines should be consulted for a more detailed description of principles, if required.

• Article no. (30) of the Law stipulates that the pricing methods that are to be used in establishing arm's length prices for the financial and commercial relations between associated enterprises are stated in the Executive Regulations of the Law, which in turn also refer to the ETPG.
• Transfer Pricing methods in the ETPG are in line with the methods recognized in the OECD transfer pricing guidelines. Additionally, the ETPG follows the “most appropriate method” standard to select and apply methods to each tested transaction.
• Where none of the OECD transfer pricing methods could be used, the ETA acknowledges that taxpayers may resort to using other methods they consider more appropriate to the facts and circumstances of the case. The ETPG mentions the global formulary apportionment method and its possible use, however, indicates that it is viewed by the ETA as the least reliable method. Taxpayers are therefore expected to use this method only in the case where none of the other methods prescribed under the executive regulations and the OECD Transfer Pricing Guidelines can be reliably used; and taxpayers are advised to provide an explanation for the reasons behind the inapplicability of all other methods.

• Egypt has a self-assessment regime, where the burden of proof is on the taxpayer to ensure that TP regulations are adhered to. Taxpayers are required to disclose the details of their related party transactions in a schedule within the corporate tax return, including the value, nature and parties involved in each related party transaction. The values within this disclosure will then determine the taxpayer’s liability to submit TP documentation. When transfer pricing documentation is submitted, the burden of proof shifts to the ETA.

• Egypt follows the three-tiered approach to transfer pricing documentation: (i) master file, (ii) local file, and (iii) CbCR and/or CbCr notification.
• All taxpayers with related party transactions exceeding EGP 15 million in overall value within a taxable year must submit a local file and a master file.
• Transfer pricing documentation is accepted in English and translation is to be provided upon request.
• CbCRs must be filed with the ETA no later than 12 months after the last day of the fiscal year to which the CbCR relates. CbCR notifications must be filed by the end of each fiscal year to notify the ETA of where and when the CbCR for this fiscal year will be submitted.
• CbC Reporting requirements apply to MNE Groups differently depending on whether the Ultimate Parent Entity (UPE) is an Egyptian entity:
  • Where the UPE of an MNE Group is tax resident in Egypt, the UPE is obliged to file a CbCR with ETA if the consolidated group revenue of the MNE Group is equal to or exceeding EGP 3 billion.
  • Where the UPE of an MNE Group is tax resident in other jurisdictions, the threshold of Euro 750 million applies according to the BEPS Action 13 standard. 

• Taxpayers with related party transactions exceeding EGP 15 million in overall value within a taxable year must submit their local file within two months following the filing of their income tax return. An amended CTR is considered to be the original CTR, if the amended CTR is filed within a month from the date of filing the original CTR, as per Article 33 of the Law. In that case, the local file is to be filed within two months from the date of filing the amended CTR. In case the taxpayer filed an extension request for the CTR, the deadline for submitting the local file would consequently be within two months from the date of filing the amended CTR.
• These taxpayers are also required to submit their master file prior to the submission deadline in the UPE country. In cases where there is no deadline in the UPE country the master file deadline becomes the submission deadline of the local file in Egypt. 
• Affiliate entities of a free zone parent or holding company must prepare and submit the Master file at the time of Local File submission.
• The ETPG outline a four-step procedure for compiling the local file, as follows:
  • Step 1: Identifying the controlled transactions and understanding the nature of such transactions; 
  • Step 2: Selecting the most appropriate transfer pricing method;
  • Step 3: Applying the selected pricing method and
  • Step 4: Determining the arm's-length amount and introducing a review process to reflect any future changes.
• The contents of a local file as required under the four-step approach correspond to the standard OECD local file requirements as updated under the BEPS project and the 2022 OECD Guidelines.
• The master file should provide a high-level overview of the business of the group of associated enterprises (GAE) - a term similar to "multinational enterprise group" under BEPS Action 13. The information provided should give relevant global economic, legal and financial context to the GAE's transfer pricing practices. The recommended information is similar to an OECD master file.

• Significant payments to related parties in low-tax jurisdictions or tax havens.
• Material transactions - constituting a large portion of the company’s revenues or costs, depending on the nature of the transaction. Examples include companies selling huge volumes of products or services to related parties that contribute a significant portion of the company’s total revenues.
• Profitability trends – the level of profitability of a company could be compared to industry norms or comparable companies by the tax authorities. Where CbC reports are accessible, the profitability of local entities as opposed to wider group performance may be assessed. When a large deviation is found, this may be a strong indicator of a high transfer pricing risk. Likewise, an inconsistent profitability trend and/or consistent losses over a number of years raises another risk flag.
• Excessive debt - that exceeds the amount which a company could borrow if it were an independent entity, or excessive interest expenses may be an indicator of transfer pricing risk.
• Transfer pricing policies - involving significant year-end adjustments, particularly those involving true-down adjustments at a local entity level.
• Business restructurings – involving the internal reallocation of functions, assets or risks among the group.
• Low quality of contemporaneous transfer pricing documentation.

Transfer pricing specific penalties have been introduced under the second clause of Article 13 of Law No. 211 of 2020 in case of non-submission or late submission of transfer pricing documentation at the specified deadlines.

• Failure to complete/declare all related party transactions within the taxpayer’s Corporate Income Tax return, in accordance with the return’s template, results in a penalty of 1% of the total value of the undeclared related party transactions in which the taxpayer has engaged during the respective taxable year;
• Failure to submit the Masterfile results in a penalty of 3% of the total value of related party transactions entered into by the taxpayer during the respective taxable year;
• Failure to submit the Local File results in a penalty of 3% of the total value of related party transactions entered into by the taxpayer during the respective taxable year; and
• Failure to submit the CbC Report (in case the Egyptian resident taxpayer is the Ultimate Parent Entity of a Multinational Group of Enterprises (MNE)) or corresponding CbC Reporting notification forms (in case the Egyptian resident taxpayer is a subsidiary of a foreign parented MNE) on the basis of the pre-determined thresholds, results in a penalty of 2% of the total value of related party transactions entered into by the taxpayer during the respective taxable year.

The penalties applicable, an overall basis, should not exceed 3% of the total value of the related party transactions entered into by the taxpayer during a respective taxable year. Penalties against failure to submit transfer pricing documentation, as outlined under Article 13 of the Unified Tax Procedure Law, are not subject to delay fines as outlined under Article 110 of the Corporate Income Tax Law.

• Over the past few years, the ETA has made significant investments into transfer pricing, focusing on capacity building and the upskilling of auditors, as well as on the continuous development of the legislative framework. The boost in transfer pricing capabilities has driven a high increase in the number of transfer pricing audits.
• A transfer pricing audit can take place on a standalone basis or through the corporate income tax audit. This means the probability of an audit is quite high, especially for large taxpayers.
• Based on a risk assessment, intercompany transactions are generally highly challenged within the corporate income tax audit process, and usually results in an adjustment. Taxpayers will either settle or object to the transfer pricing adjustments through the normal controversy routs leading to a specialized transfer pricing audit.
• In response to the recent legislative changes involving penalties, taxpayers are now fully committed to the contemporaneous documentation requirement.  Companies are also running transfer pricing health checks to assess the efficiency of their overall documentation process, as well as considering whether their transfer pricing policies are up to date and fit for purpose.

• On 19th of September 2023, the Egyptian Tax Authority issued an Explanatory Guide on the Unified Tax Procedures Law, Law No. 206 of 2020, and its amendments under Law No. 211 of 2020 related to the specific Transfer Pricing Law Articles, i.e. Articles 12 and 13.
• The guide defines a JV as a contractual arrangement resulting from an agreement between resident persons, between branches of non-resident companies, or between a resident person and a branch of a foreign company, each according to the percentage of participation in the profits for the purpose of implementing a specific project. 
• This arrangement expires with the completion of this project, and the rights and duties for this project are limited to the division of profits and losses that arise from the work of this JV. Accordingly, any group affiliates to any one of the parties of the JV are considered related to the said JV party, as per the definition of a “related person” under the Unified Tax Procedures Law. 
• It further clarifies that group affiliates to any one of the parties of the JV are considered related to the said JV party, as per the definition of a “related person” under the Unified Tax Procedures Law. As such, any transactions between the JV and the Group affiliates should be disclosed under Schedule 508 of the said party’s CIT returns, within the percentage of participation in the JV. 
• Likewise, the affiliated entity to the JV party should also disclose the transaction under table 508.