Transfer pricing, commonly referred to as TP, is a term used to describe all aspects of intercompany pricing arrangements between related business entities, including transfers of tangible goods, services, intellectual property and financing transactions.

Tax authorities reckon that with increasing scale of international businesses and complexity of cross border trade, paying closer attention to transactions between related parties is now necessary in ensuring tax revenues are not improperly allocated to other tax jurisdictions. TP could also be an issue even for related parties that are resident within the same tax jurisdiction.

Recent developments in Nigeria

Specific TP regulations are were released in October 2012 based on the general antiavoidance provisions in the various tax laws which require related party transactions to be conducted at arm's length. The regulations are applicable to basis (accounting) periods commencing after August 2012. For example, a company with an accounting year end date of 31st December 2012 will be required to have its TP documentation in place for the accounting year commencing 1st January 2013 for returns to be filed by June 2014. However, the time to act is now to ensure that the appropriate transfer prices are reflected from the first day of the new accounting year. It is important to start to collate the correct supporting documentation now rather than making year-end adjustments which may be difficult to defend.

Who will be impacted?

Simply put: any entity involved in a related party transaction! You will be impacted by the new TP regulations if you are a member of a group - local or multinational involved in any transactions with a related party whether a price is charged or not including:

  • purchase of materials or finished products;
  • sale of goods or procurement of services e.g. rep office, management and technical services etc;
  • any agreement for the use of intellectual property e.g. trademark, royalty agreements etc;
  • a tripartite contract or a subcontracting arrangement;
  • intercompany loans, receivables or payables;
  • guarantees, indemnities, commitments or other obligations;
  • recharges or reimbursements including secondment arrangements; or
  • transfer, acquisition or lease of assets.

What must you do now?

  • Proactively identify related party transactions;
  • Consider the current transfer pricing policies in place (if any);
  • Review the results of the application of these policies;
  • Efficiently maintain and update documentation supporting the transactions;
  • Where global policies exist, assess the relevance of those policies to local transactions and whether the policies are being applied appropriately;
  • Consider tax planning opportunities that may exist; and
  • Seek professional assistance.

There will be a few challenges

  • The arm's length principle may appear simple but applying it could be a herculean task. How do you find information on similar transactions between related parties in an environment where local databases are not available? Even where information on other industry players is available, there is no guarantee that the conditions and circumstances of the transactions will be sufficiently similar.
  • In addition the existence of a global TP policy may not necessarily eliminate the requirement for additional work as there may be Nigeria specific issues that have to be addressed and which create a need to localise the global policy.

The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.