Introduction
This text sets out the views of the Egyptian Tax Authority (ETA) on the application of transfer pricing rules according to Article (30) of Income Tax Law No. 91 of 2005 (“the Law”) and the amended Articles (38), (39) and (40) of the Executive Regulations thereof. The circular quoted is an update of the “Egyptian Transfer Pricing Guidelines” issued in 2010, and will be updated regularly in accordance with the legislative requirements and practical application.
What has changed
A large part of the updates relate to the introduction of the three-tiered approach to TP documentation in order to enhance transparency.
The requirements for each of these three tiers are given in Part 1 Chapter 5 of the ETPG, and are broadly in line with those set out in the OECD Guidelines.
The ETPG confirms that the new documentation requirements will be implemented for FYs (i.e. consolidated reporting periods for financial statement purposes) ending 31 December 2018. This is therefore unaffected by taxable years or financial reporting periods of subsidiary entities.
The thresholds for Country-by-Country Reporting (“CbCR”) have been set out in the ETPG.
- Egyptian parented groups with a foreign subsidiary / subsidiaries, with an annual consolidated group revenue of equal to or exceeding EGP 3 billion (approx. EUR 145 million) will be required to prepare and file a report with the ETA.
- Egyptian subsidiaries of foreign-parented groups will be subject to the OECD threshold of EUR 750 million, and are required to file a report with the jurisdiction of tax residence of the ultimate parent entity.
Documentation filing deadlines
The ETPG confirms that taxpayers are now required to submit their TP documentation on an annual basis. (Previously, the ETA did not require taxpayers to submit their TP records and documents at the time they filed their tax returns. Instead, documentation was to be submitted to the ETA on request in a timely manner for tax audit purposes).
Master file – in line with the group ultimate parent’s tax return filing date
Local file – within 2 months of filing the tax return
CbCR – within 1 year of the year-end to which the report relates. The first report should be prepared for the group’s fiscal year ending 31 December 2018.
The four-step approach
Taxpayers are advised to follow the four-step process described below, in order to price their controlled transactions according to the arm’s length principle:
- Identifying any controlled transactions and understanding the nature of such transactions;
- Selecting the most appropriate pricing method(s);
- Applying the selected pricing method(s);
- Determining the arm’s length amount and introducing a review process to reflect any future changes.
Comparability analysis
- The role of the comparability analysis has been highlighted as a fundamental tool in applying the arm’s length principle to controlled transactions.
- The first and the third steps of the four-step approach require taxpayers to conduct a comparability analysis as one of the critical measures through which they can appropriately select comparable uncontrolled transactions and thus be capable of establishing reliable arm’s length prices for their controlled transactions.
- The main aim of this is therefore to provide taxpayers with more practical details on the significance of the comparability analysis, how to conduct such an analysis, and which factors to consider.
Pricing methods
Keeping in mind that the second and the third steps of the four-step approach were all about guiding taxpayers to select and apply the appropriate pricing method to set arm’s length prices for their controlled transactions, this chapter of the EPTG discusses the acceptable transfer pricing methods under the Law. Taxpayers should be aware of highly significant issues, such as the pricing methods available, the characteristics of each method, the factors for determining the most appropriate transfer pricing method to be applied, and which methods are highly recommended to be used in particular cases.
Conclusion
The steps taken by the ETA to provide updated Guidelines demonstrate its commitment to implementing the minimum standards under the BEPS Inclusive Framework and enhancing transparency. The updated ETPG are also welcome in that they provide greater clarity to taxpayers in some areas, for example on the application of the arm’s length principle, the choice of TP methods, and the general compliance requirements. Finally, the newly introduced APA regime is good news for taxpayers looking to gain certainty over their TP methods and tax outcomes.
However, there are some pertinent aspects for taxpayers to consider, including:
- Annual preparation, and mandatory filing, of three tiers of documentation
- Incorporating the search for appropriate local or regional comparable in line with the Guidelines
- The unique compliance requirement for smaller Egypt-parented groups resulting from a significantly lower CbCR threshold (approx. EUR 145m compared to the OECD threshold of EUR 750m)
- Consequences of non-compliance with the rules, including the risk of audit and therefore adjustments and penalties
- Application of the TP rules to include transactions between associated enterprises resident in Egypt
- Experience of TP audits in Egypt, while awaiting further guidance in the Unified Tax Procedures Law
- Managing the APA process while practical experience in using the Guidelines develops
There are also significant questions on the practical application of the rules in other areas, though these may be addressed as future guidance is released by the ETA.
One thing is clear: taxpayers should plan and execute especially carefully, with the onus firmly on them to be compliant, and to be able to demonstrate compliance, with the laws. They should view these updates as a signal of change, as well as an opportunity to review their transfer pricing practices accordingly.
