Question Tag: Transfer Pricing

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  • 5 Marks

SCS – Nov 2024 – L3 – Q4b – International Tax Considerations

Key tax issues for BOGML’s planned international expansion to minimize total group tax payable.

The company is planning to expand its operations to Tanzania and South Africa in 2026. As a result, transactions between the head office in Ghana and the prospective foreign subsidiaries will likely take place, leading to potential international tax implications.

Required:

Briefly identify and explain TWO key issues to consider for the company to minimise total tax payable on the group profits.

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  • 10 Marks

AT – Nov 2024 – L3 – Q5a – Transfer Pricing Documentation and Compliance

Explain the required transfer pricing documentation and exemptions under Ghana’s Transfer Pricing Regulations, 2020 (L.I. 2412).

You are a Senior Transfer Pricing Associate of Fameye and Associates. You have received the following email from a former client, Asew LTD, who has received a Transfer Pricing audit assessment from the Ghana Revenue Authority (GRA) for the 2021, 2022, and 2023 years of assessment.

Subject: Transfer Pricing Compliance Assistance

Hello Team,

I came to the office today and received a letter from the GRA regarding a tax assessment on transfer pricing issues. According to the letter, our company owes the GRA some penalties for non-compliance with the transfer pricing regulations. I am confused as to what our compliance obligations are. I would need your assistance on how we can comply with the transfer pricing laws of Ghana.

I hope to hear from you soon.

Kind regards,

Nii Armaah
Managing Director, Asew LTD

Required:

In line with the provisions of the Transfer Pricing Regulations, 2020 (L.I. 2412), draft a response for the review of your Tax Partner, covering the following:

(i) The required transfer pricing documentation that must be maintained by companies in Ghana under the three-tier transfer pricing documentation requirements, including the time by which these must be filed with the GRA, where applicable.                      (ii) TWO conditions or circumstances under which a company may be exempted from compliance with any of the above documentation requirements.

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  • 10 Marks

MA – Nov 2024 – L2 – Q1a – Transfer Pricing

Explanation of three reasons why Kako PLC determines transfer pricing centrally.

Kako PLC is a multinational company with production divisions trading in many countries across the globe. Trade takes place between a number of the divisions in different countries, with intermediate products being transferred between them. Where a transfer takes place between divisions trading in different countries, it is the policy of the board of the company to determine centrally the right transfer price without reference to the managers in the division.

Required:

i) Explain THREE possible reasons for Kako PLC to determine transfer prices of goods from the head office.

ii) Explain TWO criticisms of the central determination of transfer pricing.

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  • 15 Marks

ATAX – May 2017 – L3 – Q5 – Transfer Pricing

Explain the significance of transfer pricing, its regulation, and methods.

The dwindling oil revenue in recent times has constrained the earning capacity of the Nigerian government. This situation accelerated the slide in the nation’s economy into recession in 2016. There has been a lot of arguments as to which regime’s actions or inactions brought about this economic malaise. Some experts argue that Nigeria has good tax laws, but successive governments displayed a lack of political will to implement them. They posit that the lack of implementation has caused the nation’s Internally Generated Revenue (IGR) to nosedive.

As part of various recommendations by these experts, coupled with the compelling need to shore up the Internally Generated Revenue, the Federal Inland Revenue Service (FIRS) has created the Transfer Pricing Division located in the FIRS Building at Ikoyi, Lagos. To give teeth to its mandate, the Division has been writing multinationals and groups of companies to file returns with it, in respect of their transfer pricing activities.

MGBORIE GROUP LIMITED recently received one of such letters from the FIRS, which startled the Chairman/Chief Executive who is already sensing rough times with the FIRS.

As the company’s tax consultant, the letter was forwarded to you for further explanations.

You are required to state:
a. The significance of Transfer Pricing. (2 Marks)
b. TWO objectives of the Income Tax (Transfer Pricing) Regulation Act of 2012. (2 Marks)
c. Contents of the Transfer Pricing Disclosure and Submission Forms to the FIRS. (5 Marks)
d. THREE Transfer Pricing Methods. (6 Marks)

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  • 15 Marks

ATAX – May 2019 – L3 – Q6 – Transfer Pricing

Outline key aspects of transfer pricing regulations in Nigeria, including objectives, key concepts, and methods.

The need for monitoring and controlling the operations of multi-national enterprises (MNEs) and their local subsidiaries or associate companies around the world has necessitated special interest in various governments putting in place mechanisms for the treatment of transfer pricing. Although transfer pricing is not new in Nigeria, the law regulating it, the Income Tax (Transfer Pricing) Regulation Act, was enacted in August 2012. It specifies that “every taxpayer” is expected to develop a transfer pricing policy in regard to transfer pricing and control transactions, as well as treatment of transactions of permanent establishments (PE) and dispute resolutions.

You have been invited by the Nigerian Association of Chambers of Commerce, Industry, Mines and Agriculture (NACCIMA) to present a paper at a workshop on transfer pricing regulations in Nigeria. The primary objective of the workshop is to provide the participants, both local and foreign stakeholders in the Nigerian business environment, necessary information on transfer pricing issues in Nigeria.

You are required to outline relevant points to address the following issues:

a. Objectives of application of transfer pricing regulation in Nigeria (3 Marks)
b. The concepts of:
i. Connected taxable persons (3 Marks)
ii. Arm’s length principle (3 Marks)
c. Description of three transfer pricing methods (6 Marks)

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  • 10 Marks

FM – Nov 2014 – L3 – SC – Q6a – Treasury Management

Discuss transfer pricing and its implications for multinational companies with subsidiaries in foreign countries.

Nimega Plc is a Nigeria-based multinational company that has subsidiaries in two foreign countries. Both subsidiaries trade with other group members and with four third-party companies.

You are required to present SIX arguments for and FOUR arguments against centralized treasury management in a multinational organization.

(10 Marks)

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  • 15 Marks

AT – Nov 2014 – L3 – SC – Q5 – Transfer Pricing

Explain transfer pricing objectives, treatment of permanent establishments, and disclosure requirements under FIRS.

You are the Tax Manager of Forum Tax Associates and recently represented your firm at a Workshop organised by the Federal Inland Revenue Service (FIRS), Western Zone, on Transfer Pricing Regulations in Nigeria.

The Workshop was to create awareness on the filing requirements and compliance with the provisions of “The Income Tax (Transfer Pricing) Regulations 2012.”

The Workshop, which was held on the 20th Floor of the Nigeria Stock Exchange building, was fully attended by Company Auditors, Tax Practitioners, Stock Brokers, Bankers, and other Stakeholders.

From the notes you took at the Workshop, you presented a report to the Managing Partner, Forum Tax Associates, on Wednesday, 3 September 2014. The Managing Partner thanked you for a good job and highlighted some key areas of the regulations that will serve as a guide to the staff of the firm.

Required:
Prepare a technical briefing for the staff explaining the following key areas noted by the Managing Partner:
a) Objectives of the application of Transfer Pricing Regulations. (6 Marks)
b) Treatment of Permanent Establishment. (2 Marks)
c) Contents of a Transfer Pricing Disclosure to be submitted by Companies to the FIRS. (7 Marks)

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  • 15 Marks

AAA – May 2022 – L3 – Q7 – Risk Management in Audits

Evaluate key risk areas for auditors in consolidating Nigerian and UK company accounts, considering transfer pricing and related party transactions.

BARCHI International Limited is a company with corporate registrations in both the United Kingdom (U.K.) and Nigeria. The Chairman of the company is based in Nigeria and from time to time travels to the U.K. to oversee the office there and order for the purchase of some of the articles for sale. To ensure steady supply of the products, some of the products are also ordered from China. The purchases from the U.K. are charged to the Nigerian entity in pound sterling, while the purchases from China are charged to the Nigerian company in American dollars.

In September 2020, the Chairman embarked on a trip to Dubai for two weeks where he spent part of his annual holiday. During this period, he hosted a couple of friends with the costs that were paid for by the company as the costs were above his approved annual holiday expenses. He subsequently traveled to the U.K. and was quarantined for two weeks due to COVID-19 before moving to the usual business lodge that he uses. Despite using that period to oversee the U.K. company, all the costs incurred were borne by the Nigerian company.

The products bought in the U.K. and sent to Nigeria were charged at cost plus 25%, while the Nigerian company was responsible for insurance and freight. The goods purchased from China were forwarded to Nigeria at the cost of landing in Nigeria plus 30%. The China-made products are less expensive and therefore give better profits despite the cost of the long-distance freight.

Money was transferred to the Chairman’s account for the company’s purchases in the U.K., the purchases made in China, and the Chairman’s personal expenses. An agent in China bought the goods which were paid for by the Chairman.

The U.K. company staff handled the documentation of all the transactions of the Chairman while there and transferred them to Nigeria subject to the approval of the Chairman.

Separate records were not maintained for the Chairman’s expenses in the U.K. However, his comparison of the results of the two units showed that for the immediate past financial year, the Nigerian company had performed sub-optimally and way below the targeted profit in relation to the U.K. company. The Chairman is very unhappy about this as he expects that his personal visit to the U.K. would reduce the purchasing and associated costs.

It is usual for the Chairman to account for the cost of purchases based on his personal expenses attributable to each purchase together with the actual cost of purchases. The U.K. component is elated about this costing method which favors it and would wish that this arrangement continues.

The two units prepare separate financial statements which are audited by separate accounting firms before the two financial statements are consolidated in Nigeria for the Chairman’s evaluation.

Required:

Evaluate, with appropriate justifications, from the scenario above, the areas of risk which the auditor needs to consider. (15 Marks)

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  • 20 Marks

ATAX – May 2023 – L3 – Q3 – Transfer Pricing

Explain transfer pricing compliance, declaration, and disclosure requirements along with arm's length comparability factors.

Transfer pricing has become a topical fiscal policy issue globally due to the need for governments to prevent tax evasion and economic double taxation. Developing countries are encouraged to establish regulations to protect their tax bases while maintaining investor confidence.

NADA Incorporated, a multinational company headquartered in Quebec, Canada, plans to establish a textile company in northern Nigeria. While reviewing the Nigerian Income Tax (Transfer Pricing) Regulations 2018, the board of directors identified uncertainties around transfer pricing documentation and arm’s length comparability factors.

You are engaged as the company’s Tax Consultant to clarify these issues.

Required:

Send a report to the Managing Director of PROMOT Link, explaining:

(a) Transfer pricing compliance report (3 Marks)
(b) Transfer pricing declaration form to be submitted to the Federal Inland Revenue Service (FIRS) (6 Marks)
(c) Transfer pricing disclosure form to be submitted to the FIRS (6 Marks)
(d) Arm’s length comparability factors in transfer pricing (5 Marks)

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  • 8 Marks

ATAX – Nov 2018 – L3 – Q4c – Transfer Pricing

Advisory on maintaining the arm's length principle in inter-company transactions for Abbey Limited.

(c) You are the tax controller of Abbey Limited, the holding company of a group of companies involved in various businesses including: trading, manufacturing, distribution, and packaging. The companies from time to time supply goods and services to each other at pre-determined prices.

You are required to:
Advise the board of Abbey Limited on the factors to be considered when the entities transact business amongst themselves to ensure that the arm’s length principle is upheld.
(8 Marks)

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  • 8 Marks

AT – April 2022 – L3 – Q2a – Anti-avoidance measures

Discuss four factors the Commissioner-General will consider in comparability analysis for transfer pricing arrangements.

In response to some taxpayers’ behaviour, transfer pricing regulation has been passed to ensure that all arrangements are conducted at arm’s length. The Commissioner-General in his dealings with taxpayers must ensure that market price drives business transactions. The Commissioner-General reserves the right to allege abuse of transfer pricing if certain factors point to the fact that there is an arrangement not in accord with the dictate of market forces.

Required:
Explain FOUR (4) factors the Commissioner-General will rely on in his comparability analysis in Transfer Pricing arrangements.

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  • 3 Marks

AT – May 2021 – L3 – Q3b – Anti-avoidance measures

Explain how contractual terms protect revenue in transfer pricing arrangements.

Contractual terms between two persons, both dependent and independent, must be examined regarding goods, property, and services. The associate’s transactions must be scrutinised to ensure that revenue is not lost relative to non-associate.

Required:
How do contractual terms protect revenue in transfer pricing arrangements?

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  • 4 Marks

AT – NOV 2021 – L3 – Q2b – International taxation

Explain the underlying principle of transfer pricing in international taxation.

What is the principle underlying the concept of Transfer Pricing? (4 marks)

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  • 10 Marks

AT – May 2020 – L3 – Q2a – Tax administration in Ghana

Explanation of five transfer pricing methods approved by LI 2188 and OECD guidelines.

In July 2012, Ghana introduced new transfer pricing rules and guidelines through Transfer Pricing Regulations, 2012 (LI 2188). The transfer pricing rules require the use of the “most appropriate” method to price related party transactions. Similar to the Organisation for Economic Co-operation and Development (OECD) guidelines, the transfer pricing methods approved by the LI 2188, among others, are:

i) The Comparable Uncontrolled Price method; ii) The Resale Price method; iii) The Cost-Plus method; iv) The Transactional Profit Split method; and the v) Transactional Net Margin Method.

Required: Explain the transfer pricing methods stated above.

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  • 10 Marks

AT – Nov 2020 – L3 – Q5b – Business income – Corporate income tax

Tax computation for Percy-Perry Construction Ghana Ltd and Percy-Perry Engineering Company USA Ltd, addressing related party transactions and withholding tax implications.

Percy-Perry Engineering Company (USA) Ltd is incorporated in the USA and has Percy-Perry Construction (Ghana) Ltd as its subsidiary in Ghana. The foreign company was awarded a road construction contract by the Government of Ghana at a total sum of GH¢9 million on 1 January 2019. The company subcontracted the job to Percy-Perry Construction Ghana Ltd at GH¢7 million. Both companies entered into a technical service agreement under which the parent company would provide equipment and technical personnel for the execution of the contract.

The contract was successfully executed by Percy-Perry Construction Ghana Ltd during the year ended 31 December 2019, and the statement of comprehensive income of the company showed the following:

Description Amount (GH¢)
Contract Fees 7,000,000
Less:
– Cost of Materials (910,000)
– Hiring of Equipment (795,000)
– Technical Personnel Cost (555,000)
– Other Administration Expenses (223,000)
– Depreciation (110,000)
Net Profit 4,407,000

The following additional information is provided:

  • The equipment hired from the parent company at GH¢795,000 could have been hired from another company at GH¢600,000.
  • If the parent company did not provide the technical personnel, Percy-Perry Construction Ghana Ltd could have employed the same personnel at GH¢450,000.
  • Capital allowances for the year have been agreed at GH¢65,000.
  • The contract fees were subject to withholding tax.

Required: i) Compute the Companies Income Tax payable by Percy-Perry Construction Ghana Ltd for the relevant year of assessment and comment on the treatment of any two of the transactions.
(5 marks)

ii) Compute the Companies Income Tax payable by Percy-Perry Engineering Company (USA) Ltd to the Ghana Revenue Authority for the relevant year of assessment.
(2 marks)

iii) Explain THREE (3) objectives of the Ghana Investment Promotion Centre (GIPC).
(3 marks)

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  • 6 Marks

AT – Nov 2020 – L3 – Q3c – International taxation

A paper to the Commissioner-General outlining factors to consider in a related party transaction for SuccessVehicles Ltd.

Two vehicles of the same model and brand were sold by SuccessVehicles Ltd to two buyers at different prices. The first buyer bought one of the vehicles at the equivalent of US$84,500 and the second buyer bought the other vehicle at US$91,000. This arrangement, the Tax Authority finds difficult to accept and plans to confront SuccessVehicles Ltd on the matter.

The Commissioner-General has invited you as a final level student of ICAG to advise him on the factors to consider before approaching SuccessVehicles Ltd on the matter, as the Commissioner-General suspects related party issues.

Required:
Write a paper to the Commissioner-General on the issues to consider before approaching SuccessVehicles Ltd on the matter.

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  • 20 Marks

AT – Dec 2023 – L3 – Q1 – International taxation

Calculating tax adjustments for related party transactions between Abirem Ltd and Gomoa Ltd, including pricing and dividend issues.

Gomoa Ltd, a resident of the United States of America, established two companies, Komenda Ltd (resident in South Africa) and Abirem Ltd (resident in Ghana). The Ghana Revenue Authority (GRA) requested information about Abirem Ltd for tax purposes.

The details for the 2021 year of assessment are as follows:

Additional information:
i) Gomoa Ltd invoiced goods to Abirem Ltd at a price of GH¢1,900,000, which is 10% higher than the market price.
ii) Dividend of GH¢700,000 paid by Abirem Ltd to Gomoa Ltd has been incorporated into Abirem Ltd’s cost.
iii) Management and technical services fee of GH¢1,290,000 paid to the group by Abirem Ltd has been added to operating expenses.
iv) Goods invoiced to Komenda Ltd by Gomoa Ltd amounted to GH¢1,000,000, priced 15% below the arm’s length price.
v) Dividend of GH¢200,000 received by Abirem Ltd from a resident company is included in its revenue. Abirem Ltd holds 25% of the resident company’s voting power.
vi) The Managing Director of Abirem Ltd took goods for personal use, valued at GH¢200,000 (cost), with a margin of 20%.
vii) The Managing Director of Abirem Ltd took additional goods worth GH¢130,000 at cost for home consumption, which was not added to the cost of goods above. The goods were sold at a 10% markup.
viii) Abirem Ltd paid GH¢20,000 in tax in South Africa at a rate of 27% on goods sold, which was included in its revenue.
ix) Abirem Ltd received a loan from Komenda Ltd for operations. Loan details are as follows:

  • Loan amount: GH¢10 million
  • Interest on loan payable: GH¢1,000,000
  • Foreign exchange loss on the loan: GH¢200,000
    x) Equity at the start of the year: GH¢2,000,000, and at the end of the year: GH¢2,800,000
    xi) GH¢400,000 was transferred from retained earnings to share capital.
    xii) Financial gain from derivative: GH¢2.5 million, and financial cost from derivative: GH¢6 million, included in operating expenses.

Required:
Calculate the tax payable by Abirem Ltd for the 2021 year of assessment.

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  • 2 Marks

AT – July 2023 – L3 – Q2c – Anti-avoidance measures

Explaining the effectiveness of the Transactional Net Margin Method in combating pricing abuse.

Transactional Net Margin Method under transfer pricing has proven useful in combating abuse and manipulation in the invoicing regime in the commercial world.

Required:
What makes the Transactional Net Margin Method very effective?

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  • 10 Marks

AT – July 2023 – L3 – Q2b – Anti-avoidance measures

Discussing the key factors the Commissioner-General considers when evaluating price manipulation among connected persons.

The Commissioner-General would review certain essential factors in an attempt to consider price differentials for possible adjustment in price to protect revenue when there is clear evidence to suggest price manipulation between and among connected persons.

Required:
Discuss FOUR (4) considerations the Commissioner-General may place reliance on as part of measures to be convinced that there is no price manipulation.

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  • 4 Marks

AT – Nov 2016 – L3 – Q3c – Business income – Corporate income tax

Explain the arm’s length principle and its application in tax transactions between related parties.

c) The Commissioner-General of the Ghana Revenue Authority expects persons conducting business with related parties to ensure that the transaction is at arm’s length.

Required:
Explain the arm’s length principle in tax transactions. (4 marks)

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