Understanding Transfer Pricing Regulation

19 Dec 2012

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Obinna Chima writes on how transfer pricing rules that were introduced recently can boost the country’s revenue generation
Concerned with the need to curb revenue leakages in their economies, some countries in Africa have adopted rules on transfer pricing (TP).
To policy makers and accounting firms in these African countries which includes Nigeria, transfer pricing would help position the country into a path of sustainable economic growth and rapid development.

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.

This regulation can be further described as the price at which goods, services or intellectual property are transferred between company divisions and departments within one country or between related companies of a multinational organisation across international borders.
The policy is also expected to serve as a tool to help stimulate revenue growth by blocking fiscal leakages through offshore tax havens.

KPMG Nigeria- part of the global financial advisory and consultancy firm, in a report, pointed out that in an increasingly global business environment, many multinationals see national borders as less and less of an impediment to conducting business, adding that cross-border activity has been on the rise. These, were part of the reasons for the adoption of transfer pricing in Nigeria.

The world, the firm noted, has become a global village with extraordinary implications for businesses and their customers in diverse geographies.

To this end, KPMG argued: “Fiscal authorities have faced significant challenge tracking economic activities within their territories and harnessing the benefits thereof to stimulate growth of local economies.

“One consequence of such challenge is growing trend to defend the national tax base vigorously by means of rules including, in the case of Nigeria, efforts such as ‘Local Content’ legislation and guidelines, cabotage rules and more recently, focus on transfer pricing between related parties, particularly multinational operations.”

In Africa, just like Nigeria, Uganda had 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, Kenya, Ghana, Egypt, Benin, Zambia and Cameroon that had previously adopted legislation on this subject.
Transfer Pricing in Nigeria
Transfer pricing regulations were released this year based on the general anti-avoidance provisions in the various tax laws. The regulations are applicable to 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 transfer pricing documentation in place for the accounting year commencing 1st January 2013 for returns to be filed by June 2014.

Tax and Corporate Advisory Leader, PwC Nigeria, Mr. Taiwo Oyedele, explained that the rules on transfer pricing that were issued in the country recently, were designed to create opportunity for the country to have a fair share of the profit of connected taxable persons’ transactions carried out within the country and to fight artificial transactions which often result in the shifting of profits out of Nigeria.

It also cover all transactions between connected persons within or outside Nigeria and those between a Permanent Establishment (PE) and its head office or other related branches (branches are treated as separate taxable entities for TP purposes). Specifically, the rules will apply to sale and purchase of goods, lease or sale of tangible assets, transfer or use of intangible assets, provision of services, lending or borrowing of money, manufacturing arrangements and any transaction which may affect profit and loss or any other incidental matter.

To the Director, Large Taxpayers Department, Federal Inland Revenue Service (FIRS), Mr. Ajayi Julius Bamidele, the rules on transfer pricing were introduced to support the federal government’s Vision 20:2020 targets.

“Out of $100 that goes out of Nigeria, what can be attributed to corruption is less than 30 per cent, transfer accounts for close to 50 per cent, which means Nigeria has a lot to do as regards to transfer pricing. For FIRS to ensure that there is a level playing field there is a need to make the law very clear,” he explained.
Benefits and Opportunities

Oyedele also explained that if the right amount of tax is levied on businesses, especially multinationals, it would enhance business operations in Nigeria and add value to the economy, even as the proceeds would be channelled to basic socio- economic needs.

“However, the time to act is now to ensure that the appropriate transfer pricing 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.”

He further explained that the regulations are applicable only to transactions between connected taxable persons which include individuals and entities who share common control, management or shareholders, or individual and entities who participate directly or indirectly in the management, control or capital of one another.

This, according to him, also required that annual declarations on related party transactions must be made at the time of filing the annual tax returns including specific statements on whether or not documentation exists.

Such documentation, he said, must be made available to the FIRS within 21 days after filing the annual tax returns.
“A tax payer may be exempted from the documentation requirement on an application to FIRS where the controlled transactions are priced in line with the requirements of the Nigerian Statutory provisions or where the prices of controlled transactions have been approved by the regulatory authorities and the FIRS.”

On her part, Partner and Transfer Pricing Leaders, KPMG, Ms. Teresa Quinones, insisted that in most emerging markets, tax authorities have been giving attention to transfer pricing regulations since last decade.

“This is not surprising if we consider the astronomical growth in the amount of cross-border transactions in the continent. Business expansion into Africa can be seen in the volume of exports out of Africa, surpassed only by those from Asia,” she added.

Also, Mr. Akinbiyi Abudu and Mr. Abass Adeniji of Ernst & Young Nigeria, in a joint report also explained that the rule became very important 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.

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

The Chairman, Tax Justice Network, Africa, Mr. Dereje Alemayehu, welcomed the initiative saying: “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.”
Issues and Challenges
However, the KPMG Nigeria report identified lack of knowledge and requisite skills on the subject, difficulty in identifying all transactions (goods, services, intangibles) subject to the arm’s length rule, lack of data on comparables in local environment amongst others, as some of the challenges that may affect the effective implementation of the policy.

Tags: Business, Nigeria, Featured, KPMG, Tax, Pricing Regulation

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