Understanding the TP audit cycle in Egypt – part one

Transfer pricing (TP) audits have become an integral aspect of tax audit procedures in Egypt over the past few years, with many companies recently going through a specialised TP audit for the first time.

An Egyptian TP audit requires taxpayers to submit extensive information and documents to allow the Egyptian Tax Authority (ETA) to thoroughly investigate a company’s TP practices. Although taxpayers with related-party transactions are required to submit their TP documentation package in accordance with the deadlines stipulated by the Unified Tax Procedures Law, Law No. 206 of 2020, the details requested in an audit often go beyond TP local files and master files to include documents such as copies of related- and third-party contracts, segmented financials, and invoices.

In recent years, the ETA has undergone a comprehensive business process re-engineering project, a key outcome of which was the full automation of the tax audit process for years commencing 2020 onwards. In light of this development, automated TP audits are intended to take a faster track, whereby the interaction between taxpayers and the ETA is anticipated to be much less than under current audits as the entire process will be administered through the ETA’s portal.

This article tackles the TP audit cycle in Egypt, with a focus on the audit phases and appeal procedures, while part two addresses the anticipated changes post implementation of the newly established automated TP audit process.

The TP audit cycle generally follows the same path as a corporate income tax (CIT) audit, with the exception that TP audits are mostly administered through the ETA’s TP unit, based on the outcome of a risk assessment.

There is a limited period for the tax department to complete an inspection cycle; namely, a statute of limitation of five years from the end of a taxable period, except for tax evasion cases, for which the period is extended to six years. If no inspection/assessment is carried out within five years, the company’s tax declaration is considered final.

The audit cycle progresses according to the following phases.

The audit process commences with a general CIT inspection that is performed based on documents and records to assess the compliance of a company’s tax practices, potential adjustments, and additional tax due accordingly. Based on the CIT inspection, the ETA will determine the difference in tax due as per the company’s declarations and the ETA’s assessment.

The decision to commence a specialised TP audit as part of a CIT inspection is always the outcome of a risk assessment. In this regard, the ETA has introduced TP risk assessment criteria aimed at evaluating crucial factors pivotal in the assessment of risk levels associated with tax filings. These criteria facilitate the categorisation of files into high, medium, or low TP risk levels, thereby streamlining the audit process. Files identified as high risk are seamlessly directed to the TP unit for immediate inspection. Conversely, those classified as medium or low risk are entrusted to the central TP risk assessment committee stationed within the Large Taxpayer Centre, for further handling through the CIT inspectors.

For more information pertaining to risk assessment criteria, please refer to Grant Thornton’s article titled “Stay ahead of the curve: assessing and managing transfer pricing risk – part one”.

Subsequently, an assessment order is issued – including TP adjustments, if any – and the resulting tax due from the taxpayer. If the taxpayer is not in agreement with the tax due assessed by the ETA, the case should be appealed within 30 days from the date of receiving the assessment form.

If the company objects to the results arrived at after the general CIT inspection, the dispute is transferred to an internal committee to discuss the dispute points and basis for objection. The ETA then notifies the company of the committee’s date to review their objection within 30 days from submitting the appeal form.

The case may be resolved within the internal committee and a modified assessment will be issued with the committee’s opinion in that case. Generally, the internal committee or the taxpayer may refer the case to the ETA’s TP unit for a technical TP assessment.

If the taxpayer objects to the tax due assessed by the internal committee, the case should be appealed within 30 days from the date of receiving the assessment form.

If the company objects to the results arrived at by the internal committee, the dispute is transferred to an appeal committee, which may also refer the case to the TP unit.

The appeal committee’s decision is final and binding on the company and the ETA, unless the case is appealed by either party at court within 60 days from the date of receiving the decision.

The Unified Tax Procedures Law enables taxpayers to settle their tax disputes by filing a settlement request to the ETA with respect to the disputed items, provided that the file is still under discussion, and not yet held for the issuance of a decision by the High Appeal Committee.

The final phase in the audit process is transferring the case to court if either party does not agree with the appeal committee’s decision. Typically, the court would then appoint an expert witness to investigate the case and prepare a report, which is usually a long process.

Read part two here.