Transfer Pricing Challenges and Solutions in Egypt

Transfer pricing challenges have become one of the most significant and pressing issues in modern tax administration. It is no longer perceived as a purely technical accounting matter but rather as an issue that touches the very core of state sovereignty over public revenues and the equitable distribution of the tax burden among taxpayers. The growing role of multinational enterprises and the expansion of cross-border intra-group transactions have made transfer pricing a central focus of tax policy.

Any deviation in the pricing of related-party transactions is now seen as a potential avenue for profit shifting and base erosion. International Framework At the international level, the OECD Transfer Pricing Guidelines have established the most widely accepted reference framework, centered on the Arm’s Length Principle. This principle, enshrined in Article 9 of the OECD Model Tax Convention, requires that transactions between related parties be priced under the same conditions as would prevail between independent parties in an open market. Its philosophy is that intra-group transactions must reflect genuine market conditions rather than serve as artificial tools for reallocating profits across jurisdictions.

The OECD Guidelines provide a number of methodologies for applying the Arm’s Length Principle, including the Comparable Uncontrolled Price method, the Resale Minus method, the Cost-Plus method, the Transactional Net Margin Method, and in more complex cases, the Profit Split method. The choice of method is left to the taxpayer, depending on the nature of the transaction and the availability of reliable market data.

National Framework In Egypt, the legislator has explicitly adopted the arm’s length principle through Income Tax Law No. 91 of 2005 and its Executive Regulations, as well as through the Unified Tax Procedures Law No. 206 of 2020, which imposed clear obligations on related parties to prepare and submit a Local File, a Master File, and, where applicable, a Country-by-Country Report. These reforms marked a major step in aligning Egyptian practice with international standards. Nevertheless, the practical implementation continues to face challenges.

Local benchmark data remain scarce, which forces taxpayers to rely on international databases that may not accurately reflect the Egyptian market. Discrepancies between financial accounting and tax accounting often complicate the analysis. Moreover, the continuing reliance on paper-based systems in many tax offices creates evidentiary and procedural difficulties.

Finally, the capacity of different tax inspectorates is uneven, leading to inconsistent interpretations and frequent disputes.

Practical Challenges In practice, many transfer pricing files fail not because of substantive errors but due to formal inconsistencies. Typical pitfalls include confusion between performance indicators such as EBIT margin versus Return on Sales, insufficient documentation supporting the transactions, or the use of generic justifications without numerical or legal evidence.

These seemingly minor flaws often undermine the credibility of the file and open the door for tax adjustments and penalties. It is therefore important to distinguish between the responsibilities of the taxpayer and those of the report preparer.

The company, as the legal taxpayer before the tax administration, remains responsible for providing accurate financial data, supporting documentation, and complete records that reflect the reality of its intra-group dealings. The preparer of the report—whether an external consultant or an internal team—bears professional responsibility for reviewing the consistency of that data, ensuring coherent presentation, and highlighting any contradictions or deficiencies that might weaken the report before the tax authority.

A failure to deliver a complete file may thus be attributed either to shortcomings in the company’s internal systems or to professional negligence in the preparation of the report. In all cases, the company remains the legally accountable party, while the preparer carries ethical and professional responsibility for the work signed and presented. Best Practices These challenges underscore the need for a more rigorous professional practice. Companies should establish internal mechanisms to monitor and document all related-party transactions on a continuous basis, update benchmarking studies annually using reliable databases, and adopt written transfer pricing policies formally approved by their boards of directors, so that they serve as authoritative references before the tax authority.

On the other side, the tax administration should work towards building reliable local databases that capture the specificities of the Egyptian market, enhance the capacity of its inspectors through specialized training in economic and financial analysis, and adopt a risk-based approach that directs scrutiny towards the transactions with the greatest impact on the tax base. Disputes and Preventive Mechanisms Transfer pricing controversies often escalate into complex administrative and judicial disputes. A taxpayer that rejects additional assessments issued by the tax authority may find itself before internal committees and ultimately before the economic or administrative courts. For this reason, preventive mechanisms such as Advance Pricing Agreements (APAs) are gaining prominence in many jurisdictions. These agreements allow the taxpayer and the tax authority to agree in advance on the appropriate transfer pricing methodology, thereby minimizing the likelihood of future disputes.

Conclusion

Transfer pricing lies at the intersection of law, economics, and tax administration. It is far more than a technical compliance exercise; it is a strategic matter that directly affects investment stability and state sovereignty over fiscal resources. Balancing the protection of public revenues with the creation of a transparent and stable investment environment remains the ultimate goal that should guide both national legislation and administrative practice. Achieving this balance requires strengthening domestic legislation with greater detail on pricing methodologies, enhancing transparency by obliging companies to disclose general transfer pricing policies, and encouraging academic research to develop solutions tailored to the specific realities of the Egyptian and regional economy, rather than relying solely on the wholesale adoption of international models.

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