Transfer Pricing (TP) is anchored on the arm's length principle. Companies with Related Party Transactions (RPTs) are required to conduct them in a manner comparable to what would have been obtainable between independent parties carrying out similar transactions under similar circumstances. More importantly, taxpayers have to demonstrate that their transactions have been conducted at arm's length by carrying out various analyses and documenting such analyses in a report. This is also applicable in Nigeria.
The Nigeria TP Regulations require that taxpayers prepare a contemporaneous documentation, which should contain relevant and sufficient information to verify that the pricing of RPTs is consistent with the arm's length principle. This contemporaneous document, which is to be prepared annually and should be in place prior to the due date of filing of the income tax return for the financial year of interest, is not supposed to be submitted to the Federal Inland Revenue Authority (FIRS) until it is requested for, typically during an audit.
Over the years, taxpayers have faced various challenges with respect to the preparation of the TP documentation, which include the high cost of compliance, difficulties in conducting the analyses required to support the arm's length nature of RPTs, and timely preparation of the documentation. The FIRS has recognized these challenges and have provided in the revised TP Regulations, situations in which a taxpayer will be exempted from preparing contemporaneous TP documentation.
This article examines such circumstances and explains some salient issues that taxpayers need to be aware of when taking advantage of such provisions.
Companies with total value of RPTs less than ₦300 million in a financial year
The Nigeria TP Regulations state that where a taxpayer's total value of RPTs is less than ₦300 million, the taxpayer can choose not to prepare the contemporaneous TP documentation.
This exemption is a welcome development for taxpayers because it will ease their compliance burden, especially for Small and Medium Scale Enterprises (SMEs) who carry out limited RPTs and are seeking to reduce their costs.
It is however important to note that this exemption does not preclude a taxpayer from the requirement to comply with the arm's length
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.