Understanding Transfer Pricing: A Comprehensive Guide.

Transfer Pricing (TP) stands as the method employed by connected organizations or related parties to determine the pricing of goods, services, assets, intellectual properties, loans, and other transactions amongst themselves. This strategic financial practice is not just an economic tool but also a legal mechanism utilized by businesses to optimize their tax liabilities. When implemented within legal frameworks, Transfer Pricing can offer substantial tax benefits to businesses.

Relevance of Transfer Pricing:

a. Facilitating Global Transactions: Ensures the smooth movement of people, capital, goods, and services across national borders.

b. Revenue Generation: Recognizes each country’s right to generate tax revenues from economic activities within its borders.

c. Promoting Economic Growth: Fosters macroeconomic growth on unilateral, bilateral, and multilateral levels.

Transfer Pricing Documentation, Declaration, and Disclosure:

Connected organizations are mandated to prepare a comprehensive Master File and Local File as part of their TP documentation. This includes a detailed list of information and analysis as outlined in the schedule to the Regulations.

1. Documentation must be in place before the due date for filing income tax returns and submitted to the Federal Inland Revenue Service (FIRS) within 21 days upon request.
2. Organizations are required to declare all connected entities, whether resident in Nigeria or elsewhere, within 18 months after incorporation or within 6 months after the end of the accounting year, whichever occurs earlier. Updated declarations are necessary in case of mergers, acquisitions, or other structural changes.
3. Annual disclosures of related party transactions should be made within 6 months after the end of the accounting year or no later than 18 months after incorporation, excluding new businesses.

Advantages of Transfer Pricing:

1. Tariff Optimization: Allows low-tariff goods to be shipped to high-tariff countries at minimal charges, reducing duty bases and fees.
2. Tax Reductions: Enables tax reductions in high-tax countries by overpricing goods and transferring profits to low-tax jurisdictions.
3. Facilitates Dividend Repatriation: Inflating the prices of transferred goods facilitates dividend repatriation when curtailed by government policies.
4. Structural Flexibility: Companies can maintain business structures effectively, optimizing income allocation within related groups through strategic planning.

Transfer Pricing Penalties in Nigeria:

The importance of complying with Transfer Pricing rules in Nigeria is underscored by the potential penalties:

1. Failure to file TP declaration – N10 million initially and N10,000 for each day of continued failure.
2. Failure to file updated TP declaration or provide notification about directors – N25,000 for each day of default.
3. Failure to file TP disclosure — the higher of N10 million or 1% of the value of related party transactions not disclosed; N10,000 for each day of default.
4. Incorrect disclosure of transactions — the higher of N10 million or 1% of the value of incorrectly disclosed transactions.
5. Failure to file TP documentation upon request — the higher of N10 million or 1% of the value of undisclosed transactions; N10,000 for each day of default.
6. Failure to furnish information/documentation upon request — 1% of the value of each related party transaction (RPT) for which information/document relates; N10,000 for each day of default.

Seeking Professional Assistance:

The Chartered Institute of Taxation of Nigeria boasts over 1,000 licensed tax practitioners who can assist with TP compliance. Sunmola David and Co. with its licensed tax practitioners, provides a range of TP management and advisory services, including:

1. Advisory and preparation of necessary TP documentations.
2. Preparation, assembling, and filing of relevant TP returns.
3. Management of TP audits and investigations.
4. Representation at the FIRS concerning TP issues.

In summary, understanding and adhering to Transfer Pricing rules are crucial for businesses operating in Nigeria to avoid penalties and ensure tax compliance. Professional assistance can significantly aid in navigating the complexities of TP requirements.

For professional advice on Accountancy, Transfer Pricing, Tax, Assurance, Outsourcing, online accounting support, Company Registration, and CAC matters, please contact Sunmola David & CO (Chartered Accountants & Tax Practitioners) at Lagos, Ogun state Nigeria offices, www.sunmoladavid.com. You can also reach us via WhatsApp at +2348038460036.