Transfer pricing (TP) describes the form of inter-company pricing methods between two or more related economic entities with respect to intra-group supply of goods, services, finance, intellectual property, etc.
TP arrangement can be carried out between two or more related organizations located in different countries (international transfer pricing) or between 2 or more organizations carrying on business within a country.
TP is regulated by the Income Tax (Transfer Pricing) Regulations, 20182 (TP Regulations) made pursuant to the Federal Inland Revenue Service (Establishment) Act, 2007.3 The objective of the TP Regulations, amongst others, is to ensure that associated/related enterprises and companies pay tax on an appropriate taxable basis corresponding to the economic activities deployed by taxable persons in Nigeria. It aims to ensure that the prices at which related entities exchange goods and services is in conformity with the functions performed, the asset used and the risk assumed in generating the income to be taxed.
The transactions to which TP adjustments apply are as follows:
- Sale and purchase of goods and services;
- Sale, purchase or lease of intangible assets;
- Transfer, purchase, licence or use of intangible asset (intellectual property);
- Provision of services;
- Lending or borrowing of money;
- Manufacturing agreement; and
- Any transaction which may affect profit and loss or any other matter incidental to, connected with or pertaining to the above listed transactions.4
In evaluating a taxpayer's controlled transaction or series of transactions, the FIRS5 normally adopts one of the following methods in line with Section 5 (1) of the Regulation:
- The Comparable Uncontrolled Price (CUP): The price charged for a good, property or service transferred in a controlled transaction or in transaction between related entities relative to the price charged for property or services transferred in a comparable uncontrolled transaction in analogous circumstances;
- The Resale Price Method (RPM): The RPM analyses the price of a product that a related company or an associated enterprise charges an unrelated customer i.e., the resale price, to determine whether the profit realized is based on the function it performs and the risks assumed;
- The Cost Plus Method (CPM): This method evaluates the arm's length nature of an inter-company charge by comparing the gross profit mark-up earned by a party to an uncontrolled transaction to the gross profit earned by associated companies carrying on a similar transaction;
- The Transactional Net Margin Method (TNMM): TNMM compares the net profit margin that a particular controlled entity earns to the same net profit margins earned by an entity in comparable uncontrolled transaction or by independent comparable companies;
- The Transactional Profit Split Method (TPSM): The TPSM is applied when 2 related entities in a controlled transaction contribute significant intangible property. This method seeks to eliminate the effects of special conditions imposed in a controlled transaction by determining the division of profits which independent unrelated enterprises would have expected to realize from engaging in a similar transaction or transactions6 ; and
- Any other method which may be prescribed by regulations made by the Service from time to time.7
As contained in the TP Regulations, a company is required to declare its relationship with all connected or related entities not later than 18 (eighteen) months from the date of incorporation or within 6 (six) months after the end of the accounting year.8 The Regulation further stipulates that a company is to make disclosure of all controlled transactions that are subject to the Regulations without notice or demand. Failure to comply with the disclosure requirements within the prescribed period attracts payment of penalty by the defaulting company to the FIRS.9
Taxpayers can seek a review of transfer pricing adjustments from the Decision Review Panel (whose decision on any assessment or adjustment is final). Still, a taxpayer can seek judicial review of a decision of the panel based on a "point of law."10
1. Olalekan Sowande, Senior Associate Real Estate & Succession Department, SPA Ajibade & Co., Lagos, NIGERIA.
2. This Regulation repealed the Income Tax (Transfer Pricing) Regulations, 2012 which took effect on 2nd August, 2012.
3. Federal Inland Revenue Service (Establishment) Act No. 13 of 2007.
4. Section 3 of the TP Regulations
5. Federal Inland Revenue Service [FIRS]. This is the authority responsible for taxation of companies in Nigeria pursuant to the Federal Inland Revenue Service (Establishment) Act No. 13 of 2007 and Companies Income Tax Act Cap C21 Laws of the Federation of Nigeria 2004 (as amended).
7. Section 5 of the TP Regulations.
8. Section 13 of the TP Regulations
9. Sections 14, 15 and 16 of the TP Regulations.
10. Section 21 of the TP Regulations.
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.