What is transfer pricing?
We can split the term “transfer pricing” into two parts; “transfer” and “pricing”. Transfer means to move an item from one place to another. Pricing is the total money estimated or agreed in exchange for an item. Hence, transfer pricing is the amount which a company requires in payment for goods, services or intangible property to a subsidiary or related company. For instance, Company A would be related to Company B if:
Company A has control or significant influence over the later or
Company A is a member of Company B’s key management personnel.
Related companies could be located within or outside Nigeria.
Transfer Pricing in Nigeria
The income tax (Transfer Pricing) Regulations emerged in 2012. Prior to this, the Nigerian Tax Authority exercised its powers to adjust artificial or fictitious transactions that reduce tax liability. Artificial transactions are dealing or arrangement between two or more associated enterprises that is incorrect or where an allocation of profits fails to conform to the arm’s length principle. This principle suggests that, where conditions between related enterprises differ from conditions between independent enterprises, the probable profits may be added to the profits of that enterprise and taxed accordingly.
The TP Regulations apply to transactions between connected persons and comprises;
- Transactions between a Permanent Establishment (PE) and its headquarters or other related branches.
- Trading of goods and services
- Trading or lease of tangible assets
- Transfer, acquisition or usage of intangible assets
- Rendering services
- Lending or borrowing of money
- Manufacturing arrangement
- Any transaction which may distort profit and loss or any other similar arrangement
Global reach of transfer pricing
International trade has grown rapidly over the last two decades. Also, global trade by multinational enterprises (MNEs) contributed a reasonable percent of this growth. This aroused the significance of transfer pricing. For instance, tax authorities in many OECD countries such as Australia, the US, Japan, and Europe, have TP regulations that requires MNEs to report the relevant profit and associated taxes in their jurisdiction. In 2018, the Federal Inland Revenue Service Nigeria released the Country-by-Country Reporting Regulations (CbCR). The CbCR aims at increasing international tax disclosure and lower tax avoidance risks. In addition, African tax authorities have increased collaboration amongst itself aimed at curbing base erosion and profit shifting.
The way forward........
MNEs operate in multiple countries and consequently encounter several tax laws. The tax authority may pass adjustments if inter-company prices are not fixed at arm’s-length. Therefore, it becomes important for MNEs to structure its operations between countries in a manner which reduces the likelihood of double taxation. Nevertheless, MNEs still need to waddle through numerous TP compliance requirements as penalties for non-compliance are gradually getting stiffer.