Update of Egypt’s Transfer Pricing

On 21 October 2018, the Minister of Finance issued an updated version of the guidelines governing transfer pricing by virtue of Decision No. 547 of 2018.[1] The update aims to further align Egypt’s Transfer Pricing Guidelines (“Egypt TPG”)[2] with the OECD Transfer Pricing Guidelines of July 2017 (“OECD TPG”)[3] and introduces practical guidance to the mechanisms, procedures and implementation of Advance Pricing Arrangements (“APAs”) in Egypt.

Background

When affiliated companies are transacting with one another, their mutual commercial and financial relations may be subject to special terms that are not directly affected by external market forces. In this regard, both the OECD, and the World Bank recommend that commercial and financial transactions between related companies be valued as if they had been carried out between unrelated parties, each acting in their own best interest. This is referred to as the “arm’s length” principle. Transfer pricing on the other hand refers to the rules and methods set by government for pricing transactions between companies that are under common ownership or control. The first reference to transfer pricing in Egyptian tax legislation was in Income Tax Law No. 91 of 2005 and its Executive Regulations, where the arms-length principle was introduced for the first time. Value Added Tax Law No. 67 of 2016 similarly referred to the arms-length principle. In addition, Egypt’s Transfer Pricing Guidelines – issued in a circular by the Egyptian Tax Authority (“ETA”) in November 2010 – provide a practical guidance for applying the arms-length principle. In May 2018, the Minister of Finance amended the Executive Regulations of the Income Tax Law[4] removing the hierarchy of the transfer pricing methods to be adopted in applying the arms-length principle, and leaving the choice between four methods listed in the law to be determined by the taxpayer depending on the nature of the transaction. This is referred to as the “most appropriate method” approach, and is in line with current OECD guidance. The amendment of the Executive Regulations also provided that the Minister of Finance will issue an implementation guide to be the main reference that the tax authority has to abide by when determining whether the arm’s length price has been adopted. For more details on the amendment of transfer-pricing related provisions in the Executive Regulations of the Income Tax Law introduced last May, please refer to the Egypt Legal Update Issue of May 2018, Week 5. The recently issued Decision No. 547 of 2018 is the latest update to the Egypt Transfer-Pricing Guidelines.

Main updates in Egypt’s TPG

• Most Appropriate Method

Similar to the amendment of the Income Tax Law, the updated Egypt TPG abolishes the hierarchy in transfer pricing methods. It further sets four criteria to guide taxpayers when selecting the most appropriate transfer pricing method to be applied on controlled transactions. The criteria include the:

1. strengths and weaknesses of the recognized transfer pricing methods;
2. validity of the selected method in light of the controlled transaction’s nature and the performed functional analysis;[5]
3. availability of reliable information ensuring the possible application of the selected method; and
4. comparability between the controlled and the uncontrolled transactions, while taking into account the reliability of any comparability adjustments.

• The Four Minimum Standards

In 30 June 2016, the inaugural meeting of the Inclusive Framework for the global implementation of the OECD/ G20 Base Erosion and Profit Shifting (BEPS) Package was held in Kyoto, Japan. The framework – which Egypt is a member of – committed to the implementation of four minimum standards: (1) countering harmful tax practices, (2) countering tax treaty abuse, (3) transfer pricing documentation and country-by-country reporting, and (4) improving dispute resolution mechanisms. The updated Egypt TPG aims to comply with the four minimum standards. It includes a template for country-by-country reporting, and endorses the principles of the OECD TPG by adopting standardized three-layered documentation.[6]

• Advance Pricing Arrangements

The Income Tax Law grants taxpayers the right to conclude APAs with ETA regarding the method to be applied for the purposes of determining arm’s length pricing in their related-party transactions. However, the APA program was never enforced due to a lack of implementation guidance on procedural aspects. Recently, ETA engaged with the OECD to update Egypt’s TPG by introducing a practical guide on the process of concluding APAs with ETA. The main highlights from the guidance introducing the APA program are as follows:

1. at this stage, ETA decided to only introduce unilateral APAs;
2. the process of applying for, filing and concluding a unilateral APA will take between three to six months; and
3. a coverage of the procedural aspects related to the processing, negotiation, completion, revocation and/or cancelation of a unilateral APA.

• Other guidelines

The updated Egypt TPG is to be followed by subsequent publications to guide taxpayers on practical implementation. These are expected to address the tax treatment of intangibles, permanent establishments, Cost Contribution Arrangements, and industry specifics on transfer pricing.

Conclusion

Until recently, Egypt did not take any active measures towards applying relevant transfer pricing legislation. However, with plans of raising tax revenues as a percentage of GDP,[7] the government engaged with the European Union and the OECD in programs to provide resources and tailor-made support programmes for ETA officials and auditors. These programs aim to properly implement international tax standards with specific focus on transfer pricing. The most recent updates therefore are meant to enable the ETA to actively assess taxpayer compliance with the adoption of the arm’s length principle in related-party transactions.   [1] Minister of Finance Decision No. 547/2018 issuing the practical guide of Article (30) of the Income Tax Law No. 91/2005, Egyptian Gazette, Issue No. 236 (cont.) (c), 21 October 2018. [2] Egyptian Tax Authority, “Egyptian Transfer Pricing Guidelines”, available through this link. [3] The OECD TPG is a basic reference to Egypt’s TPG. Therefore, the OECD TPG should be consulted for further details regarding the concepts in Egypt’s TPG. [4] Minister of Finance Decision No. 221/2018 amending certain provisions of the Executive Regulations of the Income Tax Law issued by virtue of Minister of Finance Decision No. 991/2005, Egyptian Gazette, Issue No. 117 (cont.), 22 May 2018. [5] ETA will apply the guidance of the OECD TPG under the Base Erosion and Profit Shifting (BEPS) project on the allocation of risks, including the six-step process for identifying and analysing risks in a controlled transaction. [6] In line with Chapter V of the OECD TPG titled “Documentation”. [7] International Monetary Fund, Press Release No. 17/164 “IMF Reaches Staff-Level Agreement for Completion of the First Review of Egypt’s Extended Fund Facility”, 12 May 2017, available through this link.