The 2018 Guidelines introduced the OECD three-tiered TP documentation approach consisting of a Local file, Master file, and Country-by-Country (CbC) report effective for fiscal years ending on or after 31 December 2018. The pre-existing disclosure requirement (which is part of the tax return, see below) has been maintained alongside the three-tiered approach. The previous rules required the contemporaneous preparation of transfer pricing documentation, but the documentation was required to be submitted only upon the request of the tax authorities. In contrast, the 2018 Guidelines require the automatic filing of the transfer pricing documentation. Finally, the Unified Tax Procedures Law adopted in October 2020 introduced a materiality threshold with respect to the preparation and filing of the Master and Local files (see below). The free zone companies are exempt from submitting the Local file and Master file but are required to submit the CbC report.
The standard TP documentation (i.e. Master file and Local file) must be prepared or updated to reflect any changes on an annual basis. In order to reduce the administrative burden on taxpayers, however, the tax authorities accept that searches for benchmarking purposes are renewed every 3 years instead of annually. Nevertheless, the benchmarking analysis is still required to be made annually.
Aside from potential sanctions and penalties for non-compliance, the tax authorities clarified that the diligent preparation of serious transfer pricing documentation is bound to classify the taxpayer in a low-risk category and would, therefore, create a lesser risk of tax auditing.
Egyptian taxpayers are required to disclose information on their related party transactions in a specific section embedded in the corporate tax return.
The standard documentation consists of a Master file and a Local file, which both need to be prepared and submitted automatically to the tax authorities (as opposed to only upon request previously). The Unified Tax Procedures Law adopted in October 2020 introduced a materiality threshold for the requirement to prepare and submit the Master and Local files. Pursuant to the materiality threshold, taxpayers whose aggregate related party transactions do not exceed EGP 8 million during the relevant tax year are exempted from the obligation to prepare and file the Local file.
The Master file needs to be prepared at the level of the parent company of the Group of Associated Enterprises (GAE). It consists of details of related parties and the taxpayer's group structure. The Master file is required to be prepared in accordance with the ultimate parent's tax return filing date, which will vary depending on the country of residence of the ultimate parent. It is required to be submitted to the Transfer Pricing Division of the tax authorities promptly following its preparation.
The contents of the Master file include:
- Details of the MNE's organizational structure, including a chart illustrating the MNE’s legal and ownership structure and geographical location of operating entities;
- Description of the MNE’s business(es), including important drivers of business profit, description of the top five goods or services of the MNE group by revenue, important service arrangements between members of the MNE group, and other information;
- Description of the MNE’s intangibles, including a description of the MNE's strategy regarding intangibles, location of R&D facilities and management, a list of important intangibles of the MNE group, transfer pricing policies regarding R&D and intangibles, and other information;
- Details of the MNE's intercompany financial activities, including how the group is financed, financing agreements with unrelated lenders, group members providing a central financing function for the group, and other information; and
- Information on the MNE's financial and tax positions, including annual consolidated financial statements for the year concerned and a list and description of any existing advance pricing agreements (APA) and tax rulings related to the allocation of income.
The Local file must be prepared at the level of the local Egyptian entity and consists of details of related party transactions, including the following information:
- Details of the local entity, including ownership structure, management structure, a local organization chart, and other information;
- Details of the controlled transactions of the local entity including agreements showing contractual terms of the transactions, business relationships between the transacting parties, functions performed, assets used and risk assumed by the taxpayer and the associated enterprises;
- Details on the industry/market in which the taxpayer operates, and the taxpayer’s policies and business strategies including the taxpayer’s business model, and transfer pricing policy;
- Details on the comparables used including identifying known comparable transactions, criteria for selection of comparables, functional, asset and risk analysis of the comparables, and the selection of the most appropriate method;
- Analysis conducted to evaluate the reliability of data used; and
- Information of any review process put in place to reflect any future changes.
The Local file must be submitted to the Transfer Pricing Division of the tax authorities within 2 months from the local entity’s corporate tax return due date.
The Country-by-Country (CbC) reporting requirements apply to Egyptian parented MNE groups meeting an annual consolidated group revenue threshold of EGP 3 billion or more. The Egyptian constituent entities of foreign MNEs with annual consolidated revenues in excess of EUR 750 million are not required to file a CbC report, but must file a notification with the Egyptian tax authorities indicating the identity of the ultimate parent entity (and the group’s reporting entity if different), as well as the year to which the report relates. The notification must be made by the last day of the tax year to which the CbC report relates using a standard Notification Form released by the Egyptian tax authorities. Where the ultimate foreign parent is resident in a jurisdiction which has adopted a non-euro threshold deemed to correspond to the OECD’s recommended EUR 750 million threshold, then that non-euro threshold shall apply in the relevant situation and required to file a report with the jurisdiction in which the ultimate parent entity is resident.
The CbC reporting requirement applies to tax years ending on or after 31 December 2018 and the report must be filed within 12 months following the end of the reporting fiscal year. According to a CbC Practical Manual released by the Egyptian tax authorities in May 2019, the CbC report should be filed using the standard OECD XML schema. Until such time that the tax authorities have completed the overhaul of their business process and IT infrastructure, they expect the report to be filed in paper format.
The transfer pricing documentation is required to be maintained in the Arabic language. If it is maintained in languages other than Arabic, the taxpayer may be required to submit an official translation of the required documents.
Failure to comply with the transfer pricing requirements attracts the following penalties:
- 1% of the value of the undisclosed related party transactions in the annual corporate tax return of the taxpayer;
- 3% of the value of the related party transactions for non-submission of the local file;
- 3% of the value of the related party transactions for non-submission of the master file; and
- 2% of the value of the related party transactions for failure to submit the CbC Report or the CbC notification.
On failure to meet multiple obligations as listed above, the penalty is capped at 3% of the value of the related party transactions.
If a transfer pricing adjustment is made, the difference between the transaction price and the arm's length price will be taxed and subject to a penalty based on the percentage of the amount of increased tax liability and the total tax due on the transaction.
The penalties are as follows:
- 5% of the tax due on the adjusted amount, if it is equal to between 10% and 20% of the tax legally due;
- 15% of the tax due on the adjusted amount, if it is equal to more than 20% to 50% of the tax legally due; and
- 40% of the tax due on the adjusted amount, if it is equal to more than 50% of the tax legally due.