Transfer Pricing is that basis used by the Tax authority to determine the price to be used when determining the taxable profit among non-related parties, where such price is determined in accordance with the market and the circumstances of dealings and transactions, and the related party is that party who has a relationship with a Tax Payer, and such relationship affects the determination of the tax base.
Lately, in 2018, new regulations and controls were issued in order to regulate the Transfer Pricing in Egypt to prevent the tax evasion of some Tax Payers and to regulate the Transfer Price process among the Tax Payers and make such process clearer and fairer.
- Income Tax Law No.91 of the year 2005 and its Executive Regulation issued by virtue of Decree No. 991 of the year 2005 by the Minister of Finance;
- Decree No. 221 of the year 2018, issued by the Ministry of Finance amending some provisions in the Executive Regulation of the Income Tax Law, issued by virtue of Decree No. 991 of the year 2005 by the Minister of Finance;
- Decree No.547 of the year 2018 with the issuance of the Practical Guide of Article 30 of the Income Tax Law No.91 of the year 2005.
In 2018, the Egyptian Government issued Ministerial Decree No. 221 of 2018, amending certain provisions of the Income Tax Law Executive Regulations under Ministerial Decree No. 991 of 2005, where this Decree was published in the Official Gazette dated 22 May 2018 and is effective from this date.
This Decree summarizes the new changes to the current regulations, which are related to the transfer pricing rules and the electronic filing of tax returns.
The above-mentioned decree amended Articles “38, 39, 40 and 104 “of the Income Tax Law Executive Regulation, and below are the amendments made to those Articles.
Article 38 after being amended, provides that the Tax Authority shall have the right to verify the related party’s application with regard to the arm’s-length price in the commercial or financial transactions carried out between them, specifically the exchange of goods, services, allocation of cost contributions, royalties, interest and other commercial or financial transactions.
The amendments made to “Article 39 “provided two new methods for determining the Arm’s-Length Price, in addition to the other three methods stated in the Executive Regulation; those newly added methods are the Profit Split method and Transactional Net Margin method. However, this article’s provision did not include the definition of the new methods.
The new provision of “Article 40” provided the Tax Payer has the right to use any of the five methods, whether the two newly added methods or the three old methods mentioned in the Executive Regulation for the sake of determining the Transfer Pricing, where this will be decided according to the nature of the transaction and the circumstances. However, there is a possibility that the Tax Payer follows any other appropriate method other than the abovementioned methods, but this is in case he has all the documents supporting the application of the method proposed. In addition, the Article added that there might be a pre-agreement between the Tax Authority and the Tax Payer where they agree to the method to be followed by the Tax Payer in order to determine the arm’s-length price when dealing with the associated enterprises.
– The amendment of this Article included an obligation on the Tax Payer’s “Juristic Person” side, which is to send the Tax Return through the Electronic Government Gate, or through any other electronic channel determined by the Ministry of Finance, where the Tax Payer has to register himself and obtain a secret password. In addition, the Tax Payer will be responsible for what he submits, through signing a declaration when requesting benefiting from such service or through submitting an electronic signature approved by the Tax Authority.
– The article also provides that the Tax payer (Natural Person) may send the Tax Return by the same above-mentioned method and that in all circumstances, the Tax Payer must submit what provides the settlement of all tax dues by virtue of the Tax Return, through one of the approved means prescribed in “Article 82” from such regulation or what is provided by the Ministry of Finance.
Those were the amendments made to the Income Tax Law Executive Regulation, however, those amendments and the decree did not include the way of application of the Arm’s Length price methods, so its stated in the decree that the Minister shall issue a Practical Guide for “Article 30” of the Income Tax Law stating the guidelines for applying the above-mentioned methods and what should a Tax Payer put into consideration while applying each method, the documents and books the Tax Payer shall maintain, where this practical guide will be considered as the main reference in testing the applications of the Tax Payers so as to apply the Arm’s Length method and the exceptions to breach such applications will be when the Tax Payer chooses to do so and after the Tax Authority’s head approval.
As an application of the above-mentioned instructions, Decree No.547 of the year 2018 with the issuance of the Practical Guide of “Article 30 “of the Income Tax Law No.91 of the year 2005 was issued. Such decree is the main reference in applying the Arm’s Length Price in commercial or financial transactions between related parties and in commodities, goods and services exchange and in distributing joint expenses, interests and other financial or commercial transactions.
As concluded from the aforementioned updates and changes to the articles related to the Transfer Pricing, there is a significant importance from such updates where it provides Tax Payers an opportunity to choose the most appropriate method among different methods to apply the transfer Price in accordance with their business nature and avoid tax evasion by transferring the profits to the companies’ branches outside Egypt. Therefore, the new regulations and restrictions are intended to ensure the fairness of Transfer Pricing among related entities.