a. Objectives of the Application of Transfer Pricing Regulation in Nigeria

The objectives of applying transfer pricing regulation in Nigeria include:

1. Prevention of Tax Evasion and Avoidance: Ensuring that multinational enterprises (MNEs) do not manipulate their pricing policies to shift profits from Nigeria to lower-tax jurisdictions, thereby avoiding taxes.
2. Promotion of Fair Taxation: Ensuring that profits earned by foreign subsidiaries and permanent establishments (PEs) are appropriately taxed in Nigeria, based on the actual economic activity conducted in the country.
3. Alignment with International Standards: Adopting a transfer pricing framework that aligns with global practices, particularly the OECD Transfer Pricing Guidelines, to improve Nigeria’s tax compliance and ensure consistency in international business operations.

b. The Concepts of:

i. Connected Taxable Persons
Connected taxable persons refer to parties that are related or have close ties, such as parent and subsidiary companies, or two entities that are under common control. These entities engage in transactions between themselves that could influence the pricing of goods, services, or other assets, often to reduce taxable income in one or more jurisdictions. In Nigeria, the transfer pricing rules apply specifically to transactions between such connected persons.

ii. Arm’s Length Principle
The arm’s length principle is the cornerstone of transfer pricing regulations. It requires that transactions between connected persons be conducted as if they were between unrelated entities, i.e., the terms and conditions must be comparable to those agreed upon by independent parties in similar transactions under similar circumstances. This ensures that tax liabilities are fairly distributed, and no preferential tax treatment is given to one entity over another in the same corporate group.

c. Description of Three Transfer Pricing Methods

There are several methods to determine the appropriate pricing of transactions between connected persons. Three of the most widely recognized methods are:

1. Comparable Uncontrolled Price (CUP) Method
   This method compares the price charged in a controlled transaction between connected parties to the price charged in a comparable uncontrolled transaction between unrelated parties. The CUP method is considered the most reliable and is typically used when similar goods or services are sold by unrelated parties.
2. Cost Plus Method
   The cost-plus method involves determining the cost of producing goods or services and adding an appropriate markup for profit. The markup is based on the profit margins that would be expected for similar independent transactions. This method is commonly used when transactions involve the provision of goods or services that are not sold on a regular market basis.
3. Profit Split Method
   The profit split method allocates the combined profits of the MNE group based on the relative value of the contributions made by each party to the controlled transaction. It is particularly useful when there are no comparable transactions and is often applied to transactions involving intangible assets or highly integrated operations between connected persons.

Each of these methods helps to ensure that the transaction prices between connected parties reflect market conditions and are in line with the arm’s length standard, thus ensuring that the appropriate amount of tax is paid in each jurisdiction involved.