Minister of Finance, Ngozi Okonjo Iweala
More countries in Africa are set to adopt rules on transfer pricing by companies, with a view to curbing revenue leakages in their economies.
Transfer pricing is an international taxation technique, which refers to the setting, analysis, documenting and adjustment of charges made between related parties for goods, services, or use of property (including intangible property). It is a valid business practice for associated companies in the pricing of inter-related sales within a group.
The policy is expected to serve as a tool to help stimulate revenue growth by blocking fiscal leakages through offshore tax havens.
In Africa, just like Nigeria, Uganda has also revealed plans to introduce the tax legislation, in order to regulate the prices companies set for transactions between subsidiaries. Both countries would be joining South Africa, Ghana and Cameroon that had previously strengthened their legislation in this area.
Financial Analyst at Profund Securities Limited, Lagos, Mr. Chijioke Obiagwu, said: “While transfer pricing is a valid business practice, it (sometimes) creates a suspicion for the tax authorities who may think it is a form of profit shifting with the result of providing avenues for tax avoidance.”
However, transfer pricing policy has continued to confuse tax administrators in a lot of developing countries, a situation linked to the shortage of expertise on the policy in developing countries.
For Nigeria, the Federal Inland Revenue Service (FIRS) had said that regulations on transfer pricing takes effect by the last quarter of this year.
Obiagwu said the policy would significantly contribute to economic growth, while Mr. Akinbiyi Abudu and Mr. Abass Adeniji of Ernst & Young Nigeria, in a joint response to enquiries from THISDAY, explained that the rule was important.
This, to them, was because African countries had historically faced significant challenges in respect of the effectiveness of their tax systems, especially as it pertained to the taxation of international transactions, in particular transfer pricing. They, however, charged revenue generating bodies in the continent to create awareness on this policy.
“In this regard, specific emphasis should be placed on educating and informing local companies as well as local tax practitioners who may not be well versed in this area of taxation. In this vein, it is quite encouraging to see that the Nigerian Federal Inland Revenue Service, recently, as a first step to the implementation of the transfer pricing policy, issued draft regulations.
“This should give the public sufficient time to familiarise themselves with the anticipated transfer pricing provisions and allow companies to make the necessary policy changes prior to the final implementation of the provisions,” they added.
The Chair, Tax Justice Network, Africa, Mr. Dereje Alemayehu, welcomed the initiative. “Tax dodging is the worst form of corruption. For any similar economic activity, the amount of tax to be paid should be the same so that profit shifting can be stopped,” he said.
KPMG Nigeria - part of the global financial advisory and consultancy firm, had in a report, stated that the key principle of transfer pricing was based on the arm’s length rule.
“The essence of this requirement is that the quantum of profit which ordinarily should be subjected to domestic tax does not become a gain to another country to which profit is shifted,” KPMG had said.