CAIRO: The Egyptian Tax Authority (ETA) launched guidelines last week on how to account for transfer pricing from a fiscal perspective, which will help cast a net around a bulk of tax revenue that has been slipping through the authorities' hands for several decades. Abdallah El Adly, partner at PricewaterhouseCoopers (PWC) in Egypt, explained to Daily News Egypt in an interview that for many years, companies were benefiting from a loophole in the tax system, which allowed them to redirect profits of a local sister company to their mother company, often located abroad. Illustrating with an example, if a tire firm sold raw materials for tires at $15 per ton on the Egyptian market, but then sold the same material to a sister firm based in Europe, for instance, at $12 per ton, they would be under-reporting revenue, which is a form of tax avoidance, El Adly said. To prevent firms from shrewdly manipulating the tax system, El Adly explained, the ETA will soon have the proper toolbox, through the establishment of guidelines for transfer pricing, to intervene and prevent companies from shifting profits and tax exemptions to sister firms. Through this new set of tools, the government, he said, will be able to double its tax revenue, from the current LE 140 billion it collects on an annual basis. He stressed that companies, especially multinational firms, which have been benefiting handsomely from the loophole, would be wise to adhere to the guidelines as quickly as possible given the hefty fines that will be incurred for violating them — 80 percent of the tax difference. If a firm owes, for instance, $7 million to the tax authorities and it is in violation of the guidelines, it can expect a bill of upwards of $30-40 million from the ETA. Thus, he stated, “Companies should be prepared and not let the tax authorities” pursue them for violating the new guidelines. Although the guidelines were established in 2005 under Law 91/2005, the government has delayed their implementation, believing that a five-year grace period would allow the market — as well as the tax collection agents, which need training to adapt and change their cultural mindset — to adjust to the new system, he said. Under the 2005 tax law, the tax rate was reduced from 42 to 20 percent, a move which is thought to have helped bring the substantial informal segment of the economy into the formal fold. Asked whether major international firms would modify their local business strategies following this latest decision, El Adly stated that this would not be the case, as on the one hand, these regulations parallel an international benchmark — which essentially mirrors those propounded by the OECD. On the other hand, this new change does not signify that the tax authority has the power to intervene in a company's price policy with a sister company, but when auditing the tax amount, it will be amended by the difference. El Adly believes that the new changes are positive, because, besides closing a glaring loophole, they enhance transparency in the tax system, which instills trust amongst taxpayers, and allows for an increased level of self-assessment. Moreover, drawing on South Africa's experience of having instituted an identical system, Egypt can expect similar benefits: tax authorities are now able to collect taxes through transfer pricing that equal the amount generated by all other activities. El Adly underscored that this represents a “huge volume” of revenue, which can thereafter be used for much needed state expenditures. Similar tax regulations have been adopted in neighboring countries as well, such as Lybia and Tunisia. El Adly concluded by stressing that if firms prepare themselves by adhering to the new set of guidelines, “they will be winners and not losers” by eschewing large claims from the ETA.
