Transfer Pricing (TP) is described as the method by which connected organizations or related parties price goods, assets, services, intellectual properties, loans, and other commercial transactions between them. Transfer Pricing can be reasonably considered as an economic and legal tool used by business entities for the optimization of their tax burden. If the framework in which TP is implemented is legal, it provides significant tax benefits to businesses.
Transfer Pricing Relevance
a. It ensures the free movement of people, capital, goods, and services across national boundaries.
b. Each country has a right to generate its tax revenues from the economic activities carried out within its borders.
c. Transfer Pricing promotes macroeconomic growth unilaterally, bilaterally, and multilaterally.
Transfer Pricing Documentation, Declaration, And Disclosure
- Connected organizations are to prepare a Master File and Local File as part of their TP documentation in addition to a detailed list of information and analysis contained in the schedule to the Regulations.
- Documentation is expected to be in place before the due date for filing income tax returns and is to be submitted to the FIRS upon request within 21 days.
- An organization is expected to make a declaration of all its connected organizations resident in Nigeria or elsewhere not later than 18 months after incorporation or within 6 months after the end of the accounting year whichever is earlier. An updated declaration will be required where there is a merger or acquisition of up to 20% of an entity or its parent; or any other change in the structure or arrangement of the entity.
- Except for a new business, the rules remain unchanged. A connected organization is expected to make annual disclosures of related party transactions within 6 months after the end of the accounting year or no later than 18 months after incorporation, whichever is earlier.
Advantages of Transfer Pricing
- Low-tariff goods can be shipped to high-tariff countries at minimal charges, thereby lowering duty bases and fees.
- Tax reductions in high-tax countries through overpricing goods are transferred to units in these countries; profits are eliminated and transferred to low-tax countries.
- The inflating of the prices of transferred goods facilitates dividend repatriation when dividend repatriation is curtailed by government policy.
Companies can flexibly maintain their business structure with Transfer Pricing rules. By employing an effective planning strategy, taxpayers can optimize their income allocation within their related groups. The Transfer Pricing rules must be obeyed as well so that there are no consequences of double taxation for the companies later on. Also, companies cannot afford to ignore the Transfer Pricing rules. In some cases, it may even result in disputes with tax authorities that end up triggering penalties. In Nigeria, TP Penalties are as follows;
i. Failure to file TP declaration – NIO million in the first instance and NIO,OOO for everyday failure continues;
ii. Failure to file updated TP declaration/provide notification about directors –
N25,000 for every day in which default continues;
iii. Failure to file TP disclosure — the higher of NIO million or 1% of the value of related party transactions not disclosed; and N 10,000 for every day in which the default continues;
iv. Incorrect disclosure of transactions — the higher of NIO million or 1% of the value of RPT incorrectly disclosed
v. Failure to file TP documentation upon request — the higher of NIO million or 1% of the value of RPT not disclosed; and N 10,000 for every day in which the default continues
vi. Failure to furnish information/documentation upon request — 1% of the value of each RPT for which information/document relates; and NIO,OOO for every day in which the default continues.
The Chartered Institute of Taxation of Nigeria currently has more than 1,000 chartered or licensed tax practitioners who can assist with TP compliance requirements. Taxaide’s professional personnel are among such licensed tax practitioners. Taxaide provides a wide range of TP management and advisory services which includes:
- Advisory and preparation on the necessary TP documentations
- Preparation, assembling, and filing of relevant TP returns
- Management of any TP audits and investigations
- Representation at the FIRS with regards to TP issues
For more information on TP and all tax-related issues, please do not hesitate to contact us on 0700TAXAIDE or contact@taxaide.com.ng
