- 15 Marks
Question
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)
Answer
a. The significance of Transfer Pricing:
Transfer pricing is significant because it ensures that transactions between related entities in different tax jurisdictions are conducted at arm’s length prices. This helps prevent tax avoidance through profit shifting and ensures fair taxation for both domestic and international companies, safeguarding the tax base of the country.
b. TWO objectives of the Income Tax (Transfer Pricing) Regulation Act of 2012:
- To ensure arm’s length pricing in intercompany transactions:
The regulation ensures that related companies transact at market rates, preventing the shifting of profits to lower-tax jurisdictions. - To increase Nigeria’s tax revenue:
The regulation aims to improve the Nigerian government’s tax revenue by ensuring that multinationals report accurate and fair profits in Nigeria, avoiding under-reporting due to transfer pricing manipulation.
c. Contents of the Transfer Pricing Disclosure and Submission Forms to the FIRS:
The Transfer Pricing Disclosure and Submission Forms to the FIRS generally include:
- Details of the company’s structure (parent company, subsidiaries, affiliates).
- Financial statements for the company and its related entities.
- Description of intercompany transactions, including amounts and nature of the transactions.
- Transfer pricing documentation that supports the arm’s length nature of the transactions.
- Summary of the methods used to determine the pricing of intercompany transactions.
d. THREE Transfer Pricing Methods:
- Comparable Uncontrolled Price (CUP) Method:
This method compares the price charged in a related party transaction with the price charged in similar transactions between independent entities under comparable circumstances. - Cost Plus Method:
This method determines the transfer price by adding an appropriate markup to the cost incurred by the supplier in providing goods or services to a related party. - Transactional Net Margin Method (TNMM):
This method compares the net margin realized by a related party in a transaction to the net margin earned by independent entities in similar transactions, adjusting for differences in functions, risks, and assets.
- Tags: FIRS, Income Tax Regulations, multinational companies, Transfer Pricing
- Level: Level 3
- Topic: Transfer Pricing
- Uploader: Kofi