On May 22, 2018, Egypt’s Ministry of Finance issued Ministerial Decree No. 221 of 2018 (the “2018 Decree”) to amend the country’s transfer pricing rules. The 2018 Decree entered into force on May 22, 2018.
Background
In 2005, Egypt became the first country in the Middle East to introduce transfer pricing legislation (Article 30 of Income Tax Law (ITL)) with the passage of Law No. 91 of 2005.
On November 29, 2010, Egypt’s tax authorities issued the country’s first transfer pricing guidelines, which closely follow the OECD Transfer Pricing Guidelines. The tax authorities are permitted to determine profitability using the arm’s-length standard. The 2010 transfer pricing guidelines were issued as part of a series, with anticipated guidelines for transactions involving intellectual property, intragroup services, cost contribution arrangements (CCAs), and advanced pricing agreements (APAs).
While Egypt’s transfer pricing rules do not have specific penalties, the tax authorities may adjust the pricing of transactions in cases where unrelated parties would not enter into these transactions, and where the purpose of the transactions is to shift the tax burden to tax-exempt or non-taxable entities.
2018 Amendments
The 2018 Decree amends Article 30 of the ITL to define related-party transactions to include commercial and financial transactions between associated parties for the exchange of goods and services, allocation of cost contribution, royalties, interest, and other commercial or financial transactions.
The 2018 Decree includes the transactional net margin and profit split as permissible transfer pricing methods under Article 30 of the ITL. The existing transfer pricing methods are the comparable uncontrolled price, resale price, and cost-plus methods. According to the 2018 Decree, taxpayers can use other appropriate transfer pricing methods, as long as they maintain supporting documentation. The 2018 Decree authorizes the tax authorities to issue guidance on supporting documentation, and application of the foregoing transfer pricing methods.
The 2018 Decree also amends Article 30 of the ITL by permitting taxpayers to enter into APAs, covering related-party transactions, with the tax authorities. However, the 2018 Decree does not provide specific details for APAs, such as administrative procedures.
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