A transfer price is the price charged between related parties (e.g., a parent company and its controlled foreign corporation) in an intercompany transaction. For example, if a subsidiary company sells goods to a parent company, the cost of those goods paid by the parent to the subsidiary is the transfer price. Transfer pricing (TP) could apply to the transfer of tangible goods. In addition, it could also apply to intercompany services performed. Provision of intra-group services, intra-group financing and the use of intellectual property legally owned by a particular group are all examples of transactions subject to scrutiny.
Determining Transfer Prices
Determining a company’s transfer prices requires identifying where value is created in an organisation and transferred across group members. Typically, value can be characterised and the comparability of a transaction between unrelated parties can be determined by factors such as assets used, risks assumed and functions performed by each group member. The law also empowers a tax authority to adjust the taxable income to more accurately reflect the income earned by each party to determine what the true taxable income of a controlled taxpayer is.
TP is not in itself illegal or necessarily abusive. What is illegal or abusive is transfer mispricing, also known as TP manipulation or abusive TP. Transfer mispricing is also a form of a more general phenomenon known as trade mispricing. TP becomes a concern for the Nigerian tax authorities when it is used to lower profits in a division of an enterprise located in a country that levies high income taxes, and raises profits in a country that is a tax haven that levies no (or low) income taxes. It is a topical issue in Nigeria and the Federal Inland Revenue Service (FIRS) has informed the public of its intention to implement TP rules in Nigeria. This has also been underscored by the FIRS’s directive that non-resident companies are required file their tax returns on an actual results’ basis.
New Rules
TP regulations were released in October 2012 and are applicable to basic (accounting) periods commencing after August 2012. For example, a company with an accounting year end date of December 31, 2012 will be required to have its TP documentation in place for the accounting year commencing January 1, 2013 for returns to be filed by June 2014. The FIRS has established a TP division equipped with technically proficient professionals who have been given the mandate to drive TP compliance. The FIRS hosted a TP workshop where it made the following clarifications on its position for TP compliance:
- Income tax returns without TP returns do not constitute complete compliance with the filing provisions of Section 54 of Companies Income Tax Act;
- Permanent establishments (PE) and non-resident companies are expected to file complete tax returns as indicated above for their Nigerian operations, and the existing practice whereby PE entities file tax returns based only on schedules of income earned from Nigerian operations is a legal breach;
- The FIRS will soon issue demand letters to all companies that fail to file their TP returns with the 2014 year of assessment income tax returns;
- The National Office for Technology Acquisition and Promotion and any other regulatory approvals obtained by taxpayers for pricing of related party transactions may not operate as an automatic safe harbour;
- The individual taxpayer’s responses to requests for TP policies sent out earlier in the year by the FIRS will be very crucial criteria in risk-profiling of taxpayers for TP audit purposes; and
- TP requirements have come to stay in Nigeria, and the FIRS will create more awareness on TP issues through more frequent awareness programmes.
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