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Inside Tax : Issue 10 - Transfer Pricing Regulations

Reviewing the policy thrust


Since its coming into force on 2 August 2012, the Income Tax (Transfer Pricing) Regulations (“the Regulations”) has opened up a new chapter in transfer pricing in Nigeria.

The provisions of the Regulations have potential game-changing implications for how related-party transactions covering sale and purchase of goods, lease or sale of tangible assets, transfer or use of intangible assets, provision of services, lending or borrowing of money or other financial assistance or arrangements, manufacturing arrangements and any transaction which may affect profit and loss or any other incidental matter, will apparently now be carried out between multinational corporations/enterprises (MNCs/MNEs) and their Nigerian affiliates. There appears to be a resounding message that it would no longer be “business as usual”.

While organisations would want to exercise their legitimate right to plan their affairs in a bid to maximize profit; each country tries to protect its territory to prevent tax base erosion. A need to protect a country's tax base, discourage multiplicity of taxes, define prescriptive measures for dealing with related party transactions amongst others,  necessitates the formulation of transfer pricing legislation, regulations and guidelines.

The Regulations stipulate the following objectives:

  • ensure that Nigeria is able to tax on an appropriate taxable basis corresponding to the economic activities deployed by taxable persons in Nigeria, including their transactions and dealings with associated enterprises
  • provide the Nigerian authorities the tools to fight tax evasion through over or under-pricing of controlled transactions between associated enterprises
  • reduce the risk of economic double taxation
  • provide level playing field between multinational enterprises and independent enterprises doing business within Nigeria and provide taxable persons with certainty of transfer pricing treatment in Nigeria

Underlying the above objectives is the desire to protect the nation's tax base. This shows a clear linkage with one of the major propositions of the National Tax Policy (launched on 5 April 2012) to force a shift in the country's over dependence on oil revenue to taxes. Generation of tax revenue and its utilization to provide basic infrastructure, increase investment in specific sectors to stimulate growth and develop effective regulatory structures could:

  • yield increased private sector investment
  • deepen flow of foreign direct investment
  • create employment opportunities,
  • boost volume of trade and economic activities with the concomitant result of enhancing tax revenue

Over the years taxation has played a minimal role in contributing to  Nigeria's GDP due to inadequate tax policies, inefficient tax administration, tax avoidance and evasion. These drawbacks have played a major role in reducing the rate of contribution of taxation to economic growth of Nigeria. It has been alleged that more than 60% of registered companies or firms do not pay taxes in Nigeria. This has resulted in the low percentage contribution of 7% from tax revenue to Nigeria's GDP as at April 2013 as against 21% contribution to GDP in other African countries such as Ghana. 

If the revenue leakages arising from related-party transactions could be addressed by an effective implementation of the Regulations, the expectation is a resultant positive multiplier effect on Nigeria's tax revenue.

Inherent in the Regulations is its possibility to foster fair and healthy competition between Small and Medium Scale Enterprises (SMEs) and Multi-National Enterprises (MNEs) in the market. It is anticipated that an effective implementation of the Regulations would restrict the ability of MNEs to capitalise on differing  effective tax rates to strengthen their capital base and stifle competition in the industries in which they operate. This hopefully will enable SMEs to operate and contribute significantly to the economic growth of Nigeria as a developing country.

However, there is need for cautious optimism. The Regulations should not be perceived only as a tool for enhanced tax revenue generation. If at all, emphasis should be more on ensuring that the “right amount” of tax is being paid and not necessarily the “maximum amount”. Emphasis should also be on harmonizing the tax system within the country and in collaboration with the tax authorities in other countries, efficient taxpayer information management and development of comparable data.

As the implementation of the Regulations is evolving, exaggerated assumptions cannot be made on its potential effects on the nation's economic growth.

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