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12.4.1. Main Rules

Scope of Application

Article 30 of the Income Tax Law empowers the tax authorities to reassess tax in accordance with arm’s length principle in situations where associated enterprises set conditions in their commercial or financial transactions which deviate from the conditions which would have been set by independent parties, where such conditions lead to either a reduction of the tax base or the shifting of the income from a taxable enterprise to an exempt or non-taxable enterprise. The Executive Regulations to the Income Tax Law further specify that the empowers granted to the tax authorities particularly apply with regard to the exchange of goods and services, allocation of shared expenses, royalties, interest, or other commercial or financial transactions. For those purposes, the term “exchange of goods and services” includes inter alia the sale or purchase of tangible goods (including raw materials and semi-finished or finished goods), capital equipment, provision and receipt of services, and any other commercial transactions.

The transfer pricing rules were further clarified by Guidelines issued by the tax authorities in 2018. Also, the Unified Tax Procedures Law adopted in October 2020 addresses transfer pricing compliance issues.  

Definition of Related Parties

For transfer pricing purposes, a related party is defined as any person whose relationship with the taxpayer may affect a taxpayer's taxable profit. Related parties can include when one party directly or indirectly holds 50% of the other party's capital or voting rights, when one party is related to the other (spouse, other family members), or partners in a partnership. The rules apply regardless of the residence of the parties and may, therefore, cover purely domestic transactions as well.

Transfer Pricing Methods

The main transfer pricing methods accepted by the Egyptian tax authorities include the five standard OECD methods, namely:

  • Comparable uncontrolled price (CUP) method;
  • Cost-plus method;
  • Resale price method;
  • Profit split method; and
  • Transactional net margin method

Prior to the issue of the 2018 Guidelines, the transactional profit methods were allowed only as an alternative to the traditional methods in situations where the latter are not appropriate. Also, a hierarchy of methods was followed with a marked preference for the CUP method. The 2018 Guidelines aligned the rules with the OECD TP Guidelines by adding the transactional profit methods on an equal footing with the traditional methods and removing the hierarchy between the methods. Effective from 22 May 2018, therefore, taxpayers are permitted to use any of the OECD methods, provided they can support the choice of the most appropriate method for reaching a reliable outcome in the specific situation.  Further taxpayers are permitted to use any other method (including the global formulary apportionment method) if none of the five standard OECD methods is appropriate in the specific case. The choice for a method outside the standard OECD methods should, however, be made only as a last resort and the taxpayer must justify the inadequacy of the standard methods and the appropriateness of the other method chosen. In all cases, all supporting documentation must be maintained for 5 years.

Use and Availability of Comparables

Although not specifically addressed by the law, the Guidelines recommend the use of local comparables as a starting point.  When sufficient local comparables are not available, taxpayers may expand the search first to comparables in similar regional markets (e.g. Middle East / Africa), and subsequently, if still necessary, to other markets.