- 20 Marks
Question
Transfer pricing has become a topical issue in the world of taxation in recent years. This trend is partly driven by the need to prevent fiscal evasion and avoid economic double taxation. Various governments, both in developed and emerging countries, have continued to issue regulations to guide the operations of transfer pricing systems within their jurisdictions.
In Nigeria, the first step toward establishing a legal framework for regulating transfer pricing took place in August 2012, with the enactment of Income Tax (Transfer Pricing) Regulations Number 1, 2012. Due to shortcomings in the implementation of this regulation, it was revoked, and the Income Tax (Transfer Pricing) Regulations 2018 was subsequently enacted.
One critical principle, enshrined in various transfer pricing regulations, that every taxpayer must comply with when dealing with transactions between related entities is the arm’s length principle. This principle has gained significant attention among academics, regulatory institutions, and professionals, with ongoing debate surrounding its application.
Required:
a. Explain the significance of transfer pricing to both the taxpayers and tax authorities. (2 Marks)
b. In complying with the arm’s length principle, discuss two guiding actions which enterprises and multinationals must follow in their intercompany dealings. (3 Marks)
c. Identify and explain four methods multinational companies might use in financial dealings with associated or subsidiary entities that deviate from the arm’s length principle. (6 Marks)
d. In the administration of the Transfer Pricing Regulations 2018, highlight and discuss three fundamental compliance areas for taxpayers and tax practitioners. (6 Marks)
e. Explain the resolution process for disputes that arise between a taxpayer and tax authorities under the Transfer Pricing Regulations 2018. (3 Marks)
(Total: 20 Marks)
Answer
a. The significance of transfer pricing to both the taxpayers and tax authorities
Transfer pricing is crucial because it affects both the income and expenses of related companies across different tax jurisdictions, impacting their taxable profits. It also serves as a mechanism to align pricing for transactions within multinationals to ensure fairness, which benefits both taxpayers and tax authorities by reducing fiscal evasion.
b. Guiding actions for arm’s length compliance
To adhere to the arm’s length principle, enterprises and multinationals must:
- Ensure that taxable profits from transactions align with the arm’s length principle.
- Structure transactions so that their terms mirror those that would apply between independent entities under similar circumstances.
c. Methods inconsistent with the arm’s length principle
Multinational companies may deviate from the arm’s length principle in these ways:
- Pricing discrepancies: Companies may set transfer prices differently from market prices to influence profits.
- Tax avoidance: Overpricing or underpricing transactions to shift profits to jurisdictions with favorable tax rates.
- Tariff manipulation: Adjusting prices to minimize import/export duties.
- Dividend manipulation: Overpricing goods or services to circumvent dividend restrictions and shift funds.
- Excessive charges: Imposing high charges for royalties or intangible assets to reduce taxable income in certain jurisdictions.
d. Compliance areas under Transfer Pricing Regulations 2018
Key compliance areas include:
- Annual Transfer Pricing Returns: Connected taxable persons must file transfer pricing documents with FIRS within six months of the end of each accounting year.
- Administrative procedures: FIRS reviews submitted transfer pricing documents to confirm consistency with the arm’s length principle.
- Burden of Proof: Taxpayers must provide comprehensive documentation demonstrating adherence to the arm’s length principle in their transactions.
e. Dispute Resolution
Disputes under the Transfer Pricing Regulations 2018 are resolved by:
- Lodging complaints with the Head of the FIRS Transfer Pricing Unit within 30 days of assessment receipt.
- The Head of Transfer Pricing has discretion over referring objections to the Decision Review Panel for further action.
- Topic: Regulatory Environment for Corporate Reporting
- Series: NOV 2020
- Uploader: Dotse