Base erosion and profit shifting (BEPS)
Egypt signed an inclusive framework agreement with the OECD, to become a member to the BEPS Project. Accordingly, Egypt has signed the multilateral instrument (MLI) agreement with the BEPS member countries, which is currently enforced. Such agreement requires the implementation of the four minimum standards action points of the BEPS Project in order to cope with the dramatic changes being introduced to the tax environment. The four minimum standard actions address the following:
- Harmful tax practices.
- Transfer pricing documentation.
- Treaty abuse.
- Dispute resolution.
As mentioned earlier, Egypt signed the MLI on 7 June 2017 and opted to apply the principal purpose test (PPT) to its covered tax agreements. As the MLI has been ratified in March 2021, this entails that any covered tax agreement under Egypt's MLI has automatically changed to reflect the MLI provisions.
In turn, any DTT that is covered under Egypt's MLI should be modified to include a PPT denying treaty benefits where the principal purpose of a structure is to secure a tax advantage.
In effect to the ratification of the MLI and once it becomes integrated in the Egyptian income tax law provisions, the ETA would most likely impose stricter substance requirements on the claimants of DTTs’ benefits in order to apply the relevant DTT’s benefits. There is no guidance yet on what the ETA would require as a proof of sufficient substance. In any case, it is recommended to have a solid business and economic substance in the country where the DTT benefit claimant is resident in order to mitigate the risk of denying the DTT benefits in Egypt.