Thirty Million Pound Rule and Arm’s Length Price in Egypt
The arm’s length price in the Egyptian tax system is no longer a theoretical concept or a technical tool invoked only when preparing transfer pricing files. Rather, it has become a central element in tax risk management and in the way the tax authority approaches the taxable base. Disputes over the arm’s length price do not usually arise from disagreement over a mere number, but from a deeper disagreement over the characterization of the company’s economic role within the group, and over the taxpayer’s ability to prove that its pricing reflects market reality rather than the effect of the related-party relationship.
The question governing any serious audit is no longer: Is the price close to the market? It has become: Can this price be defended before an audit authority that looks for evidence, consistency, and a coherent economic identity?
Raising the threshold for the obligation to submit a transfer pricing study for related-party transactions to thirty million pounds does not affect the substance of the arm’s length principle, nor does it create an exception to its application. Rather, it redistributes the burden of documentation and procedural compliance. The arm’s length price remains mandatory whenever a related-party relationship and a transaction with tax impact exist, whether or not the transactions exceed this threshold.
The true significance of the figure lies in the expected level of scrutiny and the nature of the required file. Companies exceeding this threshold effectively fall within the scope of expectations for a more detailed audit, and the transfer pricing file is viewed as a core element in assessing the taxable base. Companies whose transactions fall below this threshold are not exempt from accountability, but they are relatively relieved from the burden of submitting a complete file in advance, while the burden of justification remains when questioned.
The Arm’s Length Price as a Rule of Proof Rather Than a Commercial Benchmark
A common misconception in practical application is treating the arm’s length price as a purely commercial benchmark, whereas the tax reality makes it, first and foremost, a rule of proof. The tax authority does not need to prove bad faith or explicit manipulation; it is sufficient to conclude that the taxpayer’s narrative is incomplete or inconsistent with economic reality in order to move from discussing the price to reconstructing the taxable base.
At this point, the burden effectively shifts to the taxpayer, who finds themselves required to prove that what they have done was not the result of the related-party relationship, but rather the outcome of independent economic logic. The weaker, later, or more contradictory this proof is, the wider the margin of discretion granted to the audit authority.
Recharacterization of the Transaction as a Pivotal Point in the Dispute
The most serious risk facing any transfer pricing file is not an objection to a margin percentage or a comparable company, but the audit’s shift toward recharacterizing the transaction or the company’s economic role. When the audit authority considers that the description on which the taxpayer based its pricing does not reflect reality, it is not bound by the methodology or comparable used, but instead recharacterizes the activity in its entirety.
A company may be transformed from a limited-risk distributor into a full-risk distributor, from a provider of support services into an entity that creates core operational value, or from a contract manufacturer into a producer bearing market risks. With this shift, the entire computational structure collapses, because its descriptive foundation is no longer acceptable.
Why Do “Well-Written” Transfer Pricing Files Fail in Audits?
Many transfer pricing files collapse despite their formal professionalism because they are written with a defensive, ex post logic rather than a logic of prior proof. The audit does not test language or methodology as much as it tests consistency between the written narrative and the operational and accounting reality.
When a company claims it does not bear market risks, while the financial statements show profitability fluctuations directly linked to the local market, a fatal contradiction arises. When it describes itself as a low-risk entity while it sets prices, manages customer relationships, and bears receivables, the description becomes implausible. Such contradictions are not resolved by further explanation, but by changing the perspective on how the file is built from the outset.
Who Creates Economic Value as a Decisive Criterion
At the end of every analysis, the tax authority returns to one fundamental question: Who created the value? This question transcends methodologies and comparable and goes directly to the core of the activity. Profit, in modern tax logic, should accrue to the entity that performs the core functions, bears the risks, and owns or controls the relevant assets.
Any attempt to separate profit from these elements weakens the legal position, regardless of how precise the calculations may be.
For this reason, one of the most serious errors is building pricing that satisfies the mathematical equation while ignoring economic reality.
Intra-Group Services as the Most Common Focal Point of Disputes
Intra-group services represent one of the most complex paths of dispute, not because they are illegitimate, but because they require composite proof. The existence of a contract or an invoice is not sufficient; actual benefit must be demonstrated, along with the absence of duplication with local functions, the reasonableness of the cost, and the method of its allocation.
The absence of any of these elements opens the door to recharacterizing the service as an artificial shifting of profits rather than a genuine economic activity. Accordingly, treating such transactions with a purely accounting mindset, without an operational dimension, is a ready-made recipe for dispute.
In intra-group loans, scrutiny is not limited to the interest rate, but extends to the existence of the loan itself, its economic rationale, and the company’s capacity to bear it. In royalties, it is not sufficient to prove legal ownership of the intangible asset; economic control and actual contribution to value creation must also be proven.
The distinction between legal ownership and economic ownership is one of the most sensitive points in an audit, and any confusion between the two substantially weakens the defensive position.
Dispute Management Begins with the First Audit Question
A dispute does not begin with an assessment decision; it begins with a question. The way the initial questions are answered often determines the entire course of the file. Late, generic, or unsupported responses are interpreted as indicators of a lack of transparency and push the audit toward stricter scrutiny. Early, consistent responses supported by operational documentation often prevent escalation.
Here, the difference becomes clear between a company that manages the arm’s length price as a governance system and one that treats it as an ex post defensive file.
Good Faith as a Structural Element, not a Slogan
In transfer pricing, good faith is not inferred from statements, but from the internal structure of decisions. The existence of a written pricing policy, prior approval of transactions, periodic review, and documentation of decisions are all elements read as indicators of compliance rather than mere formal procedures.
The more the file appears to reflect a system that existed before the audit, rather than a reaction to it, the narrower the scope of dispute becomes, even where differences of opinion exist.
Conclusion
The arm’s length price in Egypt is no longer an isolated technical matter, but a comprehensive framework where economics, law, and procedures intersect. The thirty-million-pound threshold reorganizes procedural compliance, but it does not change the fact that the real battle is decided at the level of economic characterization and evidentiary robustness.
Companies that build their pricing on a deep understanding of their true role within the group, and document this understanding before an audit, do not fear accountability. Those that rely on formalistic solutions or ex post defenses will remain exposed to recharacterization and reassessment of the taxable base, regardless of how the figures and thresholds change.
Frequently Asked Questions
What is the arm’s length price in Egypt?
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In Egypt, the arm’s length price is no longer a theoretical transfer pricing concept but a central tool in tax risk management. The focus is less on whether a number looks like a market price and more on whether the company’s economic role within the group is correctly characterized and consistently documented. The key audit question becomes whether this price can be defended with evidence, consistency, and a coherent economic story.
What is the thirty million pound rule in Egypt?
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The thirty million pound rule is the threshold for the obligation to submit a transfer pricing study for related party transactions in Egypt. It does not change the arm’s length principle or exempt smaller transactions from it. Instead, it redistributes the documentation burden. Above this threshold, companies are expected to have a detailed transfer pricing file and face deeper audits. Below it, companies are relatively relieved from filing a full study in advance, but they must still justify their pricing when questioned.
How is arm’s length price tested in Egypt tax audits?
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In Egyptian tax audits, arm’s length price functions mainly as a rule of proof rather than a simple commercial benchmark. The tax authority does not need to prove bad faith. If it finds the taxpayer’s narrative incomplete or inconsistent with economic reality, it can move from debating the price to reconstructing the taxable base. At that point, the practical burden shifts to the taxpayer to show that the related party relationship did not drive the pricing, but that independent economic logic did.
Who bears the burden of proof in Egypt transfer pricing?
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In practice, the burden of proof in Egypt quickly moves to the taxpayer. This happens when the functional profile claimed in the transfer pricing file does not match operational reality or the financial statements, or when responses to audit questions are late, generic, or weakly supported. Once the tax authority doubts the completeness of the story, the taxpayer must affirmatively prove that its prices reflect real market logic, supported by documentation consistent with operations and accounts.
Why do transfer pricing files fail in Egypt audits?
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Many transfer pricing files fail in Egypt despite being professionally drafted because they are built as ex post defenses rather than as prior proof. Auditors test the consistency between the written narrative and the operational and accounting reality. If a company claims it does not bear market risk while its profits clearly move with the local market, or describes itself as low risk while setting prices and managing customers, the file loses credibility and is more likely to be rejected or recharacterized.
How are intra group services reviewed in Egypt tax?
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Intra group services are a common focal point of dispute in Egyptian transfer pricing because they require composite proof. It is not enough to have a contract or invoice. The taxpayer must show actual benefit to the local entity, absence of duplication with local functions, reasonableness of the cost, and a defensible allocation method. If these elements are missing, the tax authority may treat the charges as artificial profit shifting rather than genuine economic activity, increasing the risk of adjustments and disputes.
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