The domestic law does not provide specific rules for determining the arm’s length price of intra-group services, financial transactions, and cost contribution agreements and relies on the OECD transfer pricing guidelines.
The Egyptian Guidelines specify that the tax authorities will apply the OECD guidance on the allocation of risks in controlled transactions as derived from the BEPS project and reflected in the 2017 OECD TP Guidelines. In this regard, the tax authorities recommend a six-step approach for identifying and analysing risk for the purposes of the functional analysis, as follows:
- Identification of economically significant risks, with specificity;
- Determination of contractual assumption of the specific, economically significant risks assumed by the associated enterprises;
- Functional analysis to determine the capacity (e.g. risk/control mitigation, financial capacity) in which the associated enterprises that are party to the controlled transaction operate in respect to the assumption and management of the specific, economically significant risks;
- Interpreting the above steps to determine whether the contractual assumption of the economically significant risks is consistent with the conduct of the associated enterprises;
- Re-allocation of risks where inconsistencies are identified (i.e. when the associated enterprise assuming the risk does not control/have the financial capacity to assume the risk); and
- Pricing of the controlled transaction taking into account the risk allocation, including financial and other consequences of risk assumption, and appropriately compensating risk management functions.
The Egyptian transfer pricing regulations provide limited information for transactions relating to intangibles and require taxpayers to follow the OECD transfer pricing guidelines.
As per the domestic law, the following factors are to be considered while determining the arm’s length price for transactions involving intangibles:
- Whether the transaction is in the form of licensing or sale/ transfer of intangible property;
- The type of intangible whether patent, trademark, or know-how;
- The duration and degree of protection of the intangible property; and
- The expected benefits from the intangible property.
Under the Authorized OECD Approach (AOA), the OECD has published guidelines for the allocation of profits to permanent establishments. Currently, none of the tax treaties of Egypt have incorporated the latest Authorised OECD Approach (AOA).