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Issue 8 - Transfer Pricing Rules in Nigeria - An Overview


The Federal Inland Revenue Service (FIRS) recently invited stakeholders to a one day sensitization programme on transfer pricing rules in Nigeria. The objective of the programme was to inform stakeholders of the progress made so far by the tax authority subsequent to the introduction of the Income Tax (Transfer Pricing) Regulations. No 1, 2012, which has an effective date of 2 August 2012. In view of the foregoing, over the course of the coming weeks,  beginning from today, we will be discussing the possible impacts of the newly introduced transfer pricing regulations in Nigeria.

According to a research conducted in 2013 by Global Financial Integrity (GFI) and the African Development Bank, it was reported that between 1980 and 2009, Africa economies lost between US$597 billion and US$1.4 trillion in net resources transferred away from the continent. This illicit transfer of funds was primarily achieved through transfer mispricing. This highlights the serious need to plug the massive leakages of economic resources from the continent.

Transfer pricing refers to the pricing of goods, services, intangible assets, or financial transactions between related entities or those transactions deemed controlled. Related entities are the parties under common control. Thus, in related party transactions, the assumption is usually that normal market rules between third parties may not apply. Accordingly, prices are considered to be controlled by the affiliated entities involved in such transactions.

Generally, the overall objective of every business organisation is maximization of profits. However, where companies, within a group, annually incur huge corporate tax expenses, the group may be tempted to seek ways of reducing its overall tax burden. This may entail manipulating prices of intra-group transactions to shift profits to affiliated entities  located in low tax jurisdictions. As the profits in the low tax jurisdiction increase, the total aggregate tax paid by the group is significantly reduced. These intra-group transactions in many cases do not reflect arms length prices (prices that are consistent with what would be agreed by independent /unrelated parties under similar circumstances) and as such, the transactions are said to be mispriced.

One of the most challenging issues that arise from international tax perspective is the establishment of arm's length transfer prices for controlled transactions. The global community has made concerted efforts at tackling these challenges by issuing guidelines on how related party transactions are to be priced. The most widely acclaimed guidelines and suggested methods for determining appropriate prices for related party transactions are contained in the Organization for Economic Co-operation and Development (OECD) Transfer Pricing Guidelines for Multi-National Enterprises and Tax Administrations, and the United Nations (UN) Practical Manual on Transfer Pricing for Developing Countries. Many countries around the world also have domestic transfer pricing rules which are modeled after the OECD Guidelines and UN Practice Manual.

Transfer mispricing is a form of tax avoidance, and this has been recognised as an area of concern and several countries including Nigeria have expressed concern over this issue. In the Nigerian context, the anti-avoidance provisions in the Principal Tax Laws (Companies Income Tax Act, Petroleum Profit Tax Act, Personal Income Tax Act, Capital Gains Tax Act) empower the relevant tax authorities (RTAs) to make adjustments to any transactions they consider artificial or fictitious. This is achieved through adjustment of transfer prices to ensure fairness and equity in pricing. However, the laws do not stipulate proper documentation of related-party transactions or recommend transfer pricing methods to be used in determining appropriate arm's-length prices for these transactions. This was a situation which left room for arbitrariness and uncertainty in the manner of determining adjustments in connection with related party RTAs

Further, applicability of transfer pricing in Nigeria goes beyond just monitoring transaction prices among multinational related entities. It includes tracking possible harmful tax planning among affiliated companies where some of the entities are enjoying significant tax incentives or holidays. For example, Company X, a pioneer company (exempt from income taxes) engages in controlled transactions with its affiliate, Company Y. The group may choose to shift profits from Company Y to Company X and thus, lower Company Y's tax burden, while increasing the non-taxable profits of Company X. It is generally accepted that the aims and objectives of multinational companies are different from those of the host countries. Therefore, effective transfer pricing rules would be crucial to developing economies like Nigeria.

We can only commend FIRS for joining other African countries such as South Africa, Kenya, Ghana, Cameroon, etc. in coming up with local transfer pricing rules. These rules are expected to address the shortcomings of the anti-avoidance provisions in the Principal Tax Laws on related party transactions (Artificial Transactions). The expectation is that the operation of these rules would enhance revenue generation for government through taxes whilst limiting leakage of economic resources through related party transactions.

The Nigeria transfer pricing regulations inevitably impose additional compliance obligations on the taxpayers. These include preparing contemporaneous transfer pricing  documentation and filing transfer pricing declaration forms, amongst others. This means that taxpayers having related party transactions would need to initiate proactive measures to ensure full compliance with the regulations.

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