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Pricing of interpersonal transactions and their relationship to international taxes

Overview of the Base Erosion and Profit Shifting Project

Issues related to international taxation have become at the top of the political agenda worldwide, due to the remarkable increase in the integration of economies and markets, which is putting pressure on the currently applied international tax rules. The loopholes and weaknesses in international tax rules create opportunities for base erosion and profit shifting, which required decisive steps on the part of policy makers to restore confidence in the international tax system and to ensure that these measures are initiated so that profits can be taxed where economic activities are conducted.

In response to this matter, the Organization for Economic Cooperation and Development approved in September 2013 an action plan comprising 15 measures to address the problem of base erosion and profit shifting, and this plan is based on three main principles: inclusion in domestic rules related to cross-border activities the principle of logical association, emphasizing the principle of substance and enhancing the principle of transparency.

Definition of Procedure 13

Action 13 of the Action Plan entitled:
“Preparation of Transaction Pricing Documents, Including Preparation of a Country Report” aims to follow updated guidance on the conditions to be met in transaction pricing documents that were previously approved by the Organization's Transaction Pricing Guidance Instructions to reinforce the main principles The three for the tax base erosion and profit transfer project. Therefore, updated guidance has been issued on transaction pricing documents, including "preparing a country-by-country report to enhance transparency while taking into account the costs of compliance."

Articles of the Law and the Executive Regulations on the Pricing of Related Interpersonal Transactions

Articles of the law

Regulation Material

Article 30 of the law

“If related persons set conditions in their commercial or financial transactions that differ from the conditions that take place between unrelated persons that would reduce the tax base or transfer its burden from a taxable person to another who is exempt from it or not subject to it, the authority shall determine the taxable profit on the basis of Neutral price.

The head of the authority may conclude agreements with related persons to follow one or more methods to determine the neutral price in their dealings.

The executive regulations of this law shall specify the methods for determining the neutral price”.

Article 38 of the regulation

The Authority may verify that the” related persons apply the neutral price in the commercial or financial transactions that take place between them, and in particular the exchange of goods and services, the distribution of joint expenses, royalties, royalties, and other commercial or financial transactions that take place between them.”

Article 39 of the executive regulations

The neutral price stipulated in Article (30) of the law shall be determined according to any of the following methods:

1- Comparative free price method.

2- The total cost method plus a profit margin.

3- Resale price method.

4- How to divide profits.

5- Transaction net profit margin method.

Articles of the Law and the Executive Regulations on the Pricing of Related Interpersonal Transactions

Articles of the law

Regulation Material

 

Article 40 of the executive regulations

In determining the neutral price, the financier may apply any of the methods stipulated in the previous article, according to the nature of the financial or commercial transaction, and the conditions of the transaction.

In the event that none of these methods can be applied, the taxpayer may follow any other appropriate method, provided that books and documents that support the suitability of this method are kept.

It is also permissible to agree in advance between the authority and the financier on the method to be followed by the financier in determining the neutral price when dealing with related persons.

The Minister shall issue an implementation guide for Article (30) of the law, including how to apply the methods for determining the neutral price, what must be taken into account when applying each method, and the books and documents to be kept. This guide is the main reference when the interest is realized to apply the neutral price, and it is not permissible to deviate from it except in the cases that require that at the request of the taxpayer and after the approval of the head of the tax authority.

our team - Mostafa Hosni

International Tax Partner

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