Outline. What is transfer pricing?Examples of how it worksNigerian Law provisionsChallengesLegal work in transfer pricing. The transfer pricing problem. Most Countries enforce tax laws based on the arms length principle, limiting how transfer prices can be set and ensuring that their country gets to tax its fair share.
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1. Transfer Pricing – an introduction Kayode Sofola & Associates
2. Outline What is transfer pricing?
Examples of how it works
Nigerian Law provisions
Legal work in transfer pricing
3. The transfer pricing problem
4. How can it work
5. Other Examples Springs from the assumption that a multinational group of companiess will manipulate income and deduction across borders to get most tax effecitve ans and tax trates Springs from the assumption that a multinational group of companiess will manipulate income and deduction across borders to get most tax effecitve ans and tax trates
6. reality The size and nature of the market, the quality of the goods, the extent of the competition, cost and desired profit margin are all factors which bear on the selling price. Send goods ast low prices to countries with high import duties – ship goods at high taxes to countrs with low import duties The size and nature of the market, the quality of the goods, the extent of the competition, cost and desired profit margin are all factors which bear on the selling price. Send goods ast low prices to countries with high import duties – ship goods at high taxes to countrs with low import duties
7. Not just sale of goods Sale of goods transactions are easiest to understand but this concept also applies to –
research and development services,
licensing of intellectual property,
provision of security to third parties.
8. Principle is applied to a controlled transaction by
9. Internationally accepted methods Comparable uncontrolled price method(CUP)
By reference to the prices agreed between unconnected parties for comparable goods or services in the external market.
Cost plus method
The cost to the supplying company of obtaining or providing the relevant goods or services and adding an appropriate mark up.
Resale price method
The final selling price of the goods or services outside the group, minus an appropriate gross margin.
Profit split method
First, a functional analysis is carried out to establish the functions performed by each member of the group, the assets used by each member and the respective risks assumed. Following this analysis, each party is allocated a share of the group’s overall profit or loss (profit split) that it would have expected to receive on that basis (typically assessing the issue at the time when the relevant arrangements were set up).
Transactional net margin method (TNMM)
The net margin achieved by unconnected entities on similar transactions, based on criteria such as turnover, cost or capital employed. That margin is then applied to the company’s income or expenses to identify the pricing for its intra-group arrangements.
10. Nigerian context What are the provisions of Nigerian law on transfer pricing?
What circumstances will trigger the recognition of a transfer pricing model as a potential scheme for tax avoidance?
11. Nigerian Law Section 13 (2)(d) Companies Income Tax Act (CITA) Cap 21 LFN 2004 empowers the Federal Inland Revenue Service to –
Make adjustments in order to reflect arms length transactions
Where “in its opinion” it deems trade or business or activities between related parties to be artificial or fictitious
”The profits of a company other than a Nigerian company from any trade or business shall be deemed to be derived from Nigeria – Where the trade or business or activities
is between the company and another person controlled by it or which has a controlling interest in it and conditions are made or imposed between the company and such person in their commercial or financial relations
which in the opinion of the Board is deemed to be artificial or fictitious, so much of the profit is adjusted by the Board to reflect arms length transaction” 13(2)(d) CITA
Where the board thinks a disposition or transaction is artificial/ fictitious, it may
Disregard such disposition
Counteract the reduction of liability to tax
Section 22 CITA 2004
Issues of determining transfer pricing in the Nigerian context is an exercise of subjective judgement by the tax authority!
13. SOME Factors that may cause the exercise of the “opinion” of the tax authority What transactions are at variance with the arms length principle?
Presence of intercompany intangible transactions – consistent losses of the tax payer
Significant changes in the profitability of the tax payer and its associated enterprises
Unjustifiably large payment of management charges not passing the benefit test
Losses incurred by routine distributers
Low mark up for services
Transactions with companies situated in tax havens
Subsidiary of a foreign parent
In India, should the value of a transaction exceed $3.75M, it must be audited
14. challenges Among the biggest losers of tax revenue from this capital flight between 2005 and 2007 were Nigeria, Pakistan, Vietnam and Bangladesh.
Developed countries have stringent TP rules to ensure profit stays within
Lack of comparable data in Nigeria
Few players in a given sector
Where available its costly and incomplete
Lack of knowledge and skill set to implement
Terms such as arms length are not defined
No rules concerning documentation
Burden of proof on assessing officer
No rules for determining arms length prices
15. Legal ADVICE Required to draft and review documentation that may have an impact on the tax structuring of an intra-group transaction - documentation to reflect arm’s-length arrangements
Review and monitoring of arrangements, particularly in respect of the pricing, the allocation of risk and the conduct of the parties
Drafting/negotiating advance pricing agreements
Understand how documentation may be scrutinised by tax authorities
Understand penalty regimes – if they apply
Transfer pricing planning – with economists, tax, IP and ADR specialists
16. CONTACT US For any advice on transfer pricing or any tax matters contact us at:
KAYODE SOFOLA & ASSOCIATES
9, ONDO STREET,
OSBORNE FORESHORE ESTATE,