Executive summary

On 22 May 2018, the Egyptian Government issued Ministerial Decree No. 221 of 2018 (the Decree) amending certain provisions of the Income Tax Law Executive Regulations under Ministerial Decree No. 991 of 2005 (the current regulations).

This Alert summarizes the new changes to the current regulations, which are related to the transfer pricing rules and the electronic filing of tax returns.

Detailed discussion

Overview

The amendments were introduced to the Income Tax Law Executive Regulations Articles (38), (39) and (40) with respect to transfer pricing, and to Executive Regulation Article (104) with respect to the electronic filling of tax returns.

The amendments made the following changes:

Transfer Pricing

• The definition of related party transactions is amended under Article (38). The definition is more specific in relation to the tax authority's right to verify the application of arm's-length pricing by associated persons. The application of arm's-length pricing is limited to commercial or financial transactions between associated persons relating to the exchange of goods and services, allocation of cost contribution, royalties, interests and other commercial or financial transactions.
• The amendments added two new methods of determining the arm's length price under Article (39); the Transactional Net Margin Method and the Profit Split method. The three methods previously mentioned are Comparable uncontrolled price method, Resale price method and Cost plus method.
• Amendments to Article (40) introduced the following:
  • The hierarchical approach in selecting Transfer Pricing (TP) methodology was cancelled. The taxpayer has the right to choose one of the methods referred to in Article (39) according to the nature of the transaction and the conditions of dealing and there is no longer a priority in applying a certain method before the other.
  • The taxpayer has the right to follow any appropriate method, provided that adequate documents to support the application of that method are presented.
  • Reference to the OECD TP guidelines regarding the selection of methodology was removed.
  • It is possible to agree in advance with the tax authority on the method that the taxpayer will apply to determine the arm's-length price.
  • The Ministerial Decree ensures that the Minister of Finance will issue guidelines for the application of the arm's-length principle and the selection of the most appropriate pricing method.
  • These guidelines are the primary reference for the application of arm's-length price and shall be complied with. However, the Article provides an exception for not following the guidelines for specific cases, which should be requested by the taxpayer and approved by Head of the Tax Authority.

Submitting the tax return through the electronic government gate

Article (104) has been amended to include natural persons. Also, the submission of the tax return by a taxpayer through the electronic government gate will be considered as submission to the Competent Authority.

The taxpayer (corporate person) is obliged to submit the tax return through the E-government gate (income taxpayers' service) or through any other electronic channel specified by the Ministry of Finance.

The taxpayer (natural person) may submit the tax return in the previous manner.

The taxpayer must register and obtain the electronic password.

The taxpayer shall submit evidence of having settled the tax due based on the tax return, through an approved means of electronic payment, whether by bank transfers smart card, bank network or postal office to which the tax authority agrees.

Decree No. 221 of 2018

Article 1

Under the Decree, the following articles replace the Income Tax Law Executive Regulations Articles (38), (39), (40) and (104) issued by the Ministerial Decree No. 991 of 2005:

Article (38)

The Tax Authority shall have the right to verify the associated person'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.

Article (39)

The arm's-length price prescribed in Article (30) of the law shall be determined according to any of the following methods:

1. Comparable uncontrolled price method
2. Cost plus method
3. Resale price method
4. Profit split method
5. Transactional net margin method

Article (40)

The taxpayer has the right to use any method prescribed in the preceding article according to the nature of the commercial or financial transaction and the transaction circumstances.

In the case of inability to apply any of the methods mentioned in the preceding article, any other method appropriate to the taxpayer may be followed, provided that all adequate documents, which support the application of that method, are presented.

There may be an advance agreement between the Tax Authority and the taxpayer with respect to the method to be followed by the taxpayer to determine the arm's-length price when undertaking a transaction between associated enterprises.

The Minster shall issue guidelines for the application of Article (30) of the law, which includes the application of the arm's-length principle and selecting the most appropriate pricing method, considerations regarding the application of each method, and books and documents that the taxpayers are advised to maintain. These guidelines shall be the primary reference by the Tax Authority when testing the application of the arm's-length price. They are not allowed to be breached except in cases where it is required based on taxpayer's request and after approval from the head of the Tax Authority.

Article (104)

The taxpayer "corporate person" may send its tax return through the electronic government gate (Income Tax Taxpayers Service) or through any other electronic channel to be determined by the Ministry of Finance, providing the taxpayer has registered himself and has obtained a secret password.

The taxpayer shall be considered responsible for what he submits, either through signing a declaration of responsibility when requesting to benefit by that service, or by submitting an electronic signature approved by the tax authority.

The taxpayer "natural person" may send the tax return as prescribed in the preceding paragraph.

In all cases, the taxpayer shall submit evidence of having settled the tax due based on the tax return, through one of the approved electronic means of payment prescribed in Article (82) of the present regulations, or the means to be approved by the Ministry of Finance.

The submission of the tax return by the taxpayer of the manner referred to in this article shall be deemed to be submitted to the Competent Authority.

Article 2

This Decree was published in the Official Gazette dated 22 May 2018 and is effective from this date.

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CONTACTS

For additional information with respect to this Alert, please contact the following:

Ernst & Young (Egypt), Cairo

• Sherif El-Kilany
  sherif.el-kilany@eg.ey.com
• Ahmed El-Sayed
  ahmed.el-sayed@eg.ey.com
• Hossam Nasr
  hossam.nasr@eg.ey.com
• Ahmed Abo El Fotouh
  ahmed.aboelfotouh@eg.ey.com
• Maissa Zidan
  maissa.zidan@eg.ey.com
• Nesreen Maher
  nesreen.maher@eg.ey.com
• Hany El-Gamal
  hany.el-gamal@eg.ey.com

Ernst & Young LLP, Middle East Tax Desk, Houston

• Gareth Lewis
  gareth.lewis1@ey.com

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ATTACHMENT

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