Transfer Pricing (TP) refers to how related parties, such as multinational companies or connected businesses, price goods, services, intangible assets, loans, and other transactions between them. Transfer pricing rules and regulations are established in various countries, including Nigeria, to ensure that these related-party prices are reasonable and fair.
As cross-border transactions continue to grow, particularly with Nigeria’s expanding economy and increasing participation in global trade, understanding and complying with TP regulations has become critical for businesses to remain compliant and avoid costly penalties. These Regulations apply only to transactions between connected taxable persons.
Taxable persons include individuals or entities that share common control, management, or shareholders, or those that participate directly or indirectly in each other’s management, control, or capital. This article explains transfer pricing in Nigeria, its regulations, key methods, and the obligations of connected persons in simple, practical terms.
Is Transfer Pricing a Form of Tax in Nigeria?
No, Transfer Pricing is not a separate tax. Instead, it is a framework for determining the appropriate prices for transactions between related parties. However, TP can significantly affect the amount of Income Tax, Capital Gains Tax, or Value Added Tax (VAT) payable if the prices set for these transactions are not in line with market value.
When transactions are mispriced, either too high or too low, it can reduce the taxable profits of a company, prompting closer scrutiny from tax authorities. In Nigeria, the Federal Inland Revenue Service (FIRS) is responsible for monitoring compliance with TP regulations. If the FIRS determines that a transaction between related parties does not reflect an arm’s length price, it has the legal authority to make a Transfer Pricing Adjustment. This means the FIRS can revise the reported price to match an arm’s length standard.
Such TP adjustments often result in additional tax liabilities, including higher income tax or other related taxes, which are assessed in addition to any tax that was previously declared. In some cases, penalties and interest may also apply for non-compliance or underpayment, making proper TP documentation and reporting essential for businesses.
What Are the Regulations that Govern Transfer Pricing in Nigeria?
Transfer Pricing (TP) in Nigeria is governed by several tax laws and specific regulations that empower the tax authorities to monitor and adjust related-party transactions. The key legislation includes:
1. Companies Income Tax Act (CITA), Cap C21 LFN 2004 (as amended)
CITA regulates the taxation of company profits in Nigeria (excluding petroleum operations). Under TP rules, companies must ensure that transactions with related parties, such as sales, services, or loans, are priced at arm’s length to prevent profit shifting and guarantee that the correct company income tax is paid.
2. Income Tax (Transfer Pricing) Regulations, 2018
This is the core legislation that specifically sets out Nigeria’s modern TP framework. It provides detailed rules on documentation requirements, filing obligations, acceptable pricing methods, penalties for non-compliance, and the authority of the Federal Inland Revenue Service (FIRS) to make TP adjustments where related-party transactions do not meet the arm’s length standard.
3. Petroleum Profits Tax Act (PPTA), Cap P13 LFN 2004 (as amended)
This Act applies to companies engaged in petroleum exploration and production. TP rules under the PPTA ensure that transfer prices for crude oil sales, technical service fees, or intercompany charges reflect fair market value, so petroleum profits tax is properly assessed and collected.
4. Capital Gains Tax Act (CGTA), Cap C1 LFN 2004
The CGTA imposes tax on gains from the disposal of assets. TP regulations require that related-party transfers of assets—such as shares, properties, or intangible rights are priced at market value to avoid artificial underpricing or overpricing aimed at reducing capital gains tax.
5. Personal Income Tax Act (PITA), Cap P8 LFN 2004
PITA governs the taxation of individuals, partnerships, and certain trusts. Transactions between connected persons, such as family-owned businesses or individuals with shared control, must reflect arm’s length pricing to ensure that taxable income is correctly reported and taxed.
6. Value Added Tax Act
VATA imposes VAT on the supply of goods and services in Nigeria. TP principles ensure that related-party transactions are valued fairly so that the correct amount of VAT is charged and remitted to the tax authority.
Transactions Covered by Transfer Pricing Rules
Transactions covered under the Transfer Pricing (TP) Regulations include a wide range of dealings between related parties. These include:
- The sale or purchase of goods and services;
- The sale, purchase, or lease of tangible assets such as equipment, property, or machinery;
- The transfer, licensing, or use of intangible assets, including intellectual property, trademarks, or patents;
- The provision of services, whether technical, managerial, or administrative;
- The lending or borrowing of money, including intercompany loans or financial support arrangements;
- Manufacturing or production arrangements, such as contract manufacturing or tolling agreements;
- Transactions between a head office and its permanent establishments (PEs); and
- Any other transaction, including domestic or cross-border, that directly or indirectly affects a company’s profit or loss.
Transfer Pricing Methods in Nigeria
To determine whether related-party prices reflect the arm’s length principle, the Federal Inland Revenue Service (FIRS) applies internationally recognized methods. These methods ensure that prices are comparable to those charged between independent parties in similar circumstances. They include the following:
1. Comparable Uncontrolled Price (CUP) Method
This method compares the price charged in a controlled transaction with the price charged in a similar transaction between unrelated parties under comparable conditions. It is considered the most direct and reliable method where identical or highly similar market data is available.
2. Resale Price Method
Used when a product purchased from a related party is resold to an independent buyer. It determines the arm’s length price by subtracting an appropriate gross profit margin (covering costs and profit) from the resale price. This method is common in distribution arrangements where the reseller adds limited value to the product.
3. Cost Plus Method
Focuses on the supplier’s production or service costs and adds an appropriate profit mark-up to arrive at an arm’s length price. It is often applied in manufacturing, service, or contract arrangements where reliable cost data is available.
4. Transactional Net Margin Method (TNMM)
Examines the net profit margin a taxpayer earns from a related-party transaction relative to an appropriate base, such as sales, costs, or assets. TNMM is widely used when direct price comparisons are difficult, but reliable profit margin data from independent companies is available.
5. Transactional Profit Split Method
Allocates the combined profit (or loss) from a related-party transaction based on the relative contributions of each party. This method is suitable for highly integrated operations, unique intangibles, or situations where parties share significant risks and cannot be evaluated separately.
6. Other Prescribed Methods
Where none of the standard methods can reliably determine an arm’s length price, the FIRS may approve an alternative method that better reflects market conditions, provided it aligns with the principles of fairness and comparability. FIRS selects the most appropriate transfer pricing method by carefully evaluating the specific circumstances of each case.
In doing so, it considers the strengths and limitations of the available methods, the nature of the transaction, and the functions, assets, and risks borne by each party. The decision also depends on the availability of reliable data for comparison and how closely the related-party transaction mirrors a similar transaction between independent parties.
Conclusion
In conclusion, transfer pricing is far more than a regulatory formality; it directly impacts a company’s tax obligations, financial health, and overall risk exposure. Because transfer prices determine the taxable profits of Nigerian companies and their foreign affiliates, the FIRS closely scrutinizes these transactions to ensure they reflect market realities.
Failure to comply can result in double taxation, significant penalties, and reputational harm. For businesses operating in Nigeria, particularly multinationals, a strong understanding of TP rules and strict adherence to them is important to maintain tax efficiency, avoid disputes, and safeguard long-term operations.
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