The Egyptian tax law treats every company in a group of companies as a separate legal entity. Thus, affiliated companies or subsidiaries cannot shift the profits/losses within the group.
Transfer pricing rules follow the arm’s-length principle, specifying that any transaction between related parties should be at arm’s length (i.e. market value).
The law states that the Egyptian Tax Authority (ETA) may adjust the pricing of transactions between related parties if the transaction involves elements that would not be included in transactions between non-related parties, and whose purpose is to shift the tax burden to tax exempt or non-taxable entities. Where this is the case, the tax authorities may determine the taxable profit on the basis of the neutral price.
On 29 November 2010, the ETA launched the Egyptian Transfer Pricing Guidelines (‘EGTP Guidelines’). The EGTP Guidelines are being issued as a series of parts, the first part of which was issued in final version to the public and provides guidance on the arm’s-length principle, how to establish comparability, choosing the most appropriate transfer pricing method(s), and documentation requirements.
The Egyptian Minister of Finance has issued a Ministerial Decree published in the official Gazette on 22 May 2018, amending some provisions of the executive regulations of the income tax law that relate to the Egyptian regulations. Such amendments were a prelude to the final EGTP Guidelines, which were released on 23 October 2018.
The headline changes presented in the updated EGTP Guidelines are the three-tiered approach to TP documentation and the introduction of the Advance Pricing Arrangement (APA) programme.
The three-tiered approach
The updated EGTP Guidelines introduced the three-tiered approach to TP documentation and include the mandatory filing of namely, the master file, local file, and the country-by-country (CbC) report. Prior to these updates, taxpayers were not required to submit TP documentation, but from now on, the filing of TP documentation would be mandatory on an annual basis.
The CbC report facilitates the reporting process for multinational enterprises (MNEs). The CbC report provides a template for MNEs to report annually and for each jurisdiction the necessary information relating to the MNEs' global allocation of income, taxes paid, and other indicators regarding the economic activity in order to assess the overall related-party transactions taking place between affiliated enterprises within the same group. The thresholds for CbC report filing are as follows:
- Egyptian parented groups with a foreign subsidiary(s) with an annual consolidated group revenue of equal to or exceeding EGP 3 billion will be required to prepare and file a report with the ETA.
- Egyptian subsidiaries of foreign parented groups will be subject to the Organisation for Economic Co-operation and Development's (OECD’s) threshold of 750 million euros (EUR) and required to file a report with the jurisdiction in which the ultimate parent entity is resident of.
The master file should be prepared in accordance to the taxpayer group's ultimate parent's tax return filing date and made available to the ETA in 'due course'. In case the ultimate parent is not required to file a tax return in its country, then the master file should be submitted to the ETA along with the local file.
The entity-by-entity local files must be submitted to the ETA within two months following the date of filing the tax return.
The CbC report should generally be submitted one year following the close of the relevant financial year that it covers, and the CbC report notifications are due before the end of the fiscal year to which the CbC report relates.
Note that free zone entities are required to prepare and submit the CbC report notifications.
Advance Pricing Arrangements (APAs)
The APA system provides Egyptian taxpayers with the benefit of agreeing in advance with the ETA on the methods to be followed by the taxpayer to determine arm's-length arrangements acceptable for tax purposes when it comes to related-party transactions.
Such APA programme should deliver benefits to the taxpayers such as certainty on TP methods, tax outcomes, increased transparency and reduced risks of audits, price adjustments, and penalties.
The APA programme is introduced for the first time in Egypt and, accordingly, the ETA decided to restrict its application to the unilateral APA(s) at this stage and to introduce the bilateral and multilateral APA(s) in the future. In addition, the option to apply for the APA is open to all the taxpayers, subject to the provisions of the law including PEs.
The guidance on the APA programme is contained within a new part two of the EGTP Guidelines, which describes the mechanisms, procedures, and implementation of the programme in Egypt. The process of applying for and concluding the unilateral APA may take between three to six months and this may vary according to the case at hand.
Acceptable TP methods as per the updated EGTP Guidelines
As per the updated EGTP Guidelines, the acceptable methods are listed as follows:
- Comparable uncontrolled price method (CUP).
- Cost plus method (C+).
- Resale price method (RPM).
- Profit split method (PS).
- Transactional net margin method (TNMM).
Following the updated Guidelines, the hierarchy is no longer applicable in applying TP methods. In addition, the updated EGTP Guidelines allow taxpayers to use other methods in the event that none of the listed methods can be applied on the considered transactions.
However, the ETA expects the taxpayers to first maintain and prepare sufficient documentation to explain the reason why those methods cannot be reliably applied on the transaction. Moreover, the updated EGTP Guidelines include a statement illustrating that the ETA considers the 'Global Formulary apportionment' as the least reliable method to be used in determining the arm's-length price of the controlled transaction. In any case, the comparability analysis should be performed to select the appropriate transfer pricing method in accordance with the arm's-length principle.
Unified Tax Procedures Law
On 19 October 2020, the Egyptian government issued the Unified Tax Procedures Law No. 206 of 2020. Under the Law, taxpayers engaged in commercial or financial related-party transactions of EGP 8 million or more should prepare and submit the master and local file (applicable as of 2018, according to the EGTP Guidelines). For the CbC report threshold, please refer to the above section.
The law has introduced a financial penalty of EGP 3,000 up to EGP 50,000 applicable in case of non-compliance with the transfer pricing three-tier filing requirements, such penalty could be doubled or tripled in case of recurrence.
Taxpayers who fail to disclose their related-party transactions (in the relevant section of the corporate tax return) will be subject to a penalty of 1% imposed on the total value of related-party transactions in the respective year.
In addition to the aforementioned penalty on non-disclosure, non-submission of the master file will be subject to 3%, non-submission of the local file will be subject to 3%, and non-submission of the CbC report and CbC report notifications will be subject to 2% of the total related-party transactions.
The law also depicted that the total amount of penalties that could be imposed on a taxpayer shall not exceed / is capped at 3% of the total value of the related-party transactions in case there are multiple non-submissions.
The Egyptian thin capitalisation rule provided by the Egyptian Income Tax Law dictates that the debt-to-equity ratio is currently 4:1 and will gradually change to reach 2:1 as follows.
4:1 for FY 2023,
3:1 for FY 2024 to 2027, and,
2:1 for FY 2028 onwards.
Accordingly, the Law disallows the deductibility of debit interests of Egyptian companies on loans and advances if such loans and advances are in excess of fourfold the equity average (which is calculated according to the financial statements prepared pursuant to the Egyptian accounting standards). In other words, the excess amount of interest would not be deducted.
Debt includes loans and advances, including bonds and any form of financing by debts, even if through securities with fixed/variable interest.
With respect to the debit interest, it includes all amounts paid by a taxpayer in return for the loans, advances of any kind obtained, bonds, and bills.
For determining the equity, the following items represent the basis for the calculation: the paid-up capital in addition to all reserves and retained earnings reduced by retained losses. In addition, revaluation gains should be excluded from the equation, in case they were not subject to tax. In case of retained or carryforward losses, they must be used to reduce retained earnings and reserves solely; the percentage is calculated on the basis of total loans and advances in proportion to the remaining equity amount, after deducting the retained losses with a minimum of the paid-up capital (in other words, they should be deducted from the retained earnings and reserves, where in case of a net loss balance, debt should be compared to the paid-up capital).
For the purpose of calculating the debt-to-equity ratio, average debt and equity balances are used.
It’s worth noting that the following types of loans should be excluded from the above calculation:
- Interest-free loans.
- Loans with non-taxable interests.
- Loans with a grace period for settling the interest payment solely until the end of the loan period.
Controlled foreign companies (CFCs)
Egypt currently does not define specific rules for CFCs; however, in an effort to exert similar CFC provisions, investments are evaluated according to the Egyptian Accounting Standards and the equity rights method, where the profits generating from the disposal of such investments are determined on the basis of the difference between the cost of investment acquisition and its sale value.