TAX COMPLIANCE: TRANSFER PRICING REGULATION AND ENFORCEMENT.
Transfer price can be defined as the price at which services, tangible property and intangible property are traded between connected taxable persons. Transfer pricing relies on the application of the arm’s length principle.
In broad terms, Arm’s length means the terms and conditions applied in transactions between connected taxable persons are the same as those applied in transactions between independent parties.
Where the terms and conditions applied in transactions between connected taxable persons differ from those in transactions between independent parties, the FIRS shall make adjustments to such terms and conditions and impose appropriate taxes thereon.
Transfer pricing as defined by CIMA is a price related to goods or other services transferred from one process or department to another or from one member of a group to another Transfer pricing is necessary in order to appraise the individual performance of the divisions or departments it is used to evaluate the revenue accruing to the selling division and the cost or expenses incurred by the buying division.
Transfer pricing is a performance management tool for most businesses.
Transfer prices may have an effect on a group’s taxable income in the different countries in which it operates. Transfer pricing is a very important international tax issue facing multinational enterprises. Tax authorities are becoming more interested in transactions with related parties as it affects their tax revenue.
INTERNATIONAL / MULTINATIONAL DIMENSIONS OF TRANSFER PRICING
With the advent of multinational corporations and their continued growth, they have added another more complicated dimension to transfer pricing in setting an international transfer price a company will usually concentrate on satisfying a single objective ie minimize income taxation The other broad objectives of transfer pricing are considered secondary by reducing income tax through the use of transfer pricing, the company’s after-tax pricing after tax pricing will increase.
It is interesting to note that the subject of transfer pricing has adverse applications. Apart from the accounting aspect, transfer pricing has socio-economic-political and even security implications as applied by multi-national companies. It could be said that transfer pricing policies have been effectively used to defend the economic and political interests of some countries to the advantage of others through the activities of multinational companies Transfer Pricing as seen in the United States, has become an important area of enforcement for states to protect their tax revenue. The states are not always content with proposing adjustments to state taxable income only. Rather in some instances, states have sought to adjust federal taxable income for state purposes, thereby increasing the amount of income that can be taxed by the state.
Personal Income Tax Act (PITA), Companies Income Tax (CITA) and Petroleum Profit Tax Act (PPTA): General Anti-avoidance Provisions
- Section 17 of the Personal Income Tax Act, CAP P8, Laws of the Federation of Nigeria, 2004 (as amended by the Personal Income Tax (Amendment) Act, 2011).
- Section 22 of the Companies Income Tax Act, Cap C21, Laws of the Federation of Nigeria (LFN), 2004 as amended by the CIT (Amendment) Act, 2007.
- Section 15 of the Petroleum Profit Tax Act, CAP P13, Laws of the Federation of Nigeria, 2004. The above provisions empower the tax authority to make adjustments to transactions between related entities that are considered not consistent with the arm’s length principle.
TRANSFER PRICING REGULATIONS
- Income Tax (Transfer Pricing) Regulations, 2018 (as amended)
The Regulations were first published in the Federal Government Gazette in October 2012 and became effective on 2 August 2012. Revision to the Regulations was published in 2018. Companies are required to comply with the Regulations from the new accounting year starting after 2 August 2012 and provide guidelines as to how to apply the arm’s length principle.
The Regulation empowers the tax authority to make adjustments to transactions between related entities that are considered not consistent with the arm’s length principle.
INTERNATIONAL CONVENTIONS
The Transfer Pricing Regulation is required to be applied consistently with the following international conventions:
I. Article 9 of the United Nations (UN) and Organisation of Economic Cooperation and Development (OECD) Model Tax Conventions on Income and Capital.
ii. OECD Transfer Pricing Guidelines for Multinational Enterprises and Tax Administrations
iii. UN Practical Manual on Transfer Pricing
However, where any inconsistency exists between the provisions of the above listed with the Nigerian TP regulations, the provisions of the relevant tax laws in Nigeria shall prevail.
