(a) The significance of transfer pricing to both the taxpayers and tax authorities include:

(i) They impact on the income and expenses as well as taxable profits of related companies in different tax jurisdictions in which the enterprises and multinationals operate; and

(ii) Transfer pricing mechanism is usually adopted by many companies to

boost their head office profits which may be at the disadvantage of

subsidiaries or associated companies which operate in other countries

with different tax jurisdictions.

(b) In complying with arm’s length principle, the guiding actions which enterprise and multinationals must follow in dealings between them include:

(i) Where a connected person has entered into a transaction or series of transactions to which these regulations apply, the person shall ensure that the taxable profits resulting from the transactions are ascertained in a manner that is consistent with the arm’s length principle.

(ii) A controlled transaction is at arm’s length if the conditions of the

transaction do not differ from the conditions that would have applied

between independent persons in comparable transactions carried out

under comparable circumstances; and

(iii) Where a connected person fails to comply with the provisions of transfer pricing regulations, the Service shall make adjustments, where necessary, in order to bring the taxable profits resulting from the transactions in conformity with the arm’s length principle.

(c) Ways which multinational companies adopt in financial dealings with their associated or subsidiary entities that are not consistent with the arm’s length principle include:

(i) Different pricing of goods/services at purchase cost: In any multinational group, a member of the group in one country may supply goods or services to another member in another country. By implications, the prices charged often create revenue for the company selling the goods or services, whilst its cost of purchase for the company buying the goods or services.

(ii) Tax avoidance: When companies operating under different jurisdictions belong to the same group, they may decide depending on what they want to achieve, underprice or over price inter group transactions. The tax implication of the foregoing is that multinational transfer pricing can provide an avenue for tax avoidance; (iii) Custom duties and tariff manipulation: Custom duties paid on imports and exports are usually based on transfer prices. For instance, if the transfer prices on imports into a country are low-priced, the import duties and other tariffs on the imports will equally be reduced.

(iv) Dividends manipulation: An instance of dividends manipulation is when a country A restricts an amount that can be paid as dividends to another company in country B, the company in country B may decide to overprice goods and services transferred to its subsidiary in country A.

The implication of the foregoing is that more funds will be remittable to the other company in country B without any violation on restriction of dividend; and

(v) Imposition of excessive charges: The parent company can also impose excessive charges (e.g. royalties) on its foreign subsidiaries, associates, etc. in respect of the provision of intangibles, such as patents, licenses, trademarks, etc. and use these avenues to extract profits to a tax haven or jurisdiction with favorable tax requirement. Where the head office of the multinational or a member of the group incurs expenses which are for the benefits of all or many members of the group, the allocation of the joint costs to members of the group will certainly affect their profits and taxes.

(d) Fundamental areas to be noted and complied with by the taxpayers and tax practitioners as enshrined in Transfer Pricing Regulations 2018 are:

(i) Annual transfer pricing returns: A connected taxable person must submit transfer pricing document annually to FIRS not later than 6 months after the end of each accounting year or 18 months after the date of incorporation, whichever is earlier. Transfer pricing disclosure and declaration forms are to be attached to the annual tax returns.

(ii) Extension of filing annual transfer pricing returns: A connected person may apply in writing to the Service for an extension of the time within which to file returns and where the Service is satisfied with the reasons stated in the application made, it may grant the extension. Where the taxable person fails to meet the extended submission date granted by the Service, the administrative penalty shall apply as if no extension of period was granted; (iii) Administrative procedures: Transfer Pricing Department of FIRS shall review transfer pricing documents submitted and carry out a review of transactions verifying the appropriateness of transfer pricing methods adopted; and

(iv) Burden of proof: Transfer pricing document must demonstrate sufficient information and analysis to verify consistency of the taxable profits derived from its controlled transactions with the arm’s length principle.

(e) Disputes that arise between the taxpayer and tax authorities under the Transfer Pricing Regulations 2018 are resolved through the following ways:

(i) A taxpayer who has any objection on assessment cannot approach the Decision Review Panel for a review of the assessment received from FIRS.

(ii) Taxpayers are now expected to lodge their complaints with the Head; FIRS Transfer Pricing Unit within 30 days after the date of receipt of the assessment notice; and

(iii) Effective March 12, 2018, the Head of Transfer Pricing Unit has the prerogative to decide whether or not to refer the taxpayer’s objection to the Decision Review Panel.