Managing transfer pricing risks in Nigeria: The importance of proactivity

by Victor Adegite

December 20, 2017 | 12:08 am
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In recent years, central governments and tax authorities around the world have paid more attention to transfer pricing. Different countries are introducing legislation, rules or regulations with detailed requirements for taxpayers (mostly companies) to document and support the application of the arm´s-length principle to their intercompany transactions. Globalisation has also had a great impact on the importance of transfer pricing, as a large part of global trade takes place within multinational enterprises (MNEs).

From the tax authorities’ perspective, transfer pricing is important in that setting of prices for the provision of services or sale of tangible or intangible property has significant impact on the profitability of companies, which may in turn affect tax payable. The tax authorities would usually strive to defend its tax base and ensure it collects adequate tax that reflects the level of economic activity taking place within its jurisdiction.

On the other hand, the taxpayer often sees transfer pricing as a way of optimising its group profit. This is achieved by evaluating the performance of each entity within the group, anticipating possible double taxation issues and areas for supply chain management.

The opposing perspective and objective of the tax authorities and taxpayer often lead to controversies. It is therefore important for taxpayers to know the existing transfer pricing risks so they can proactively address them without compromising the law.

Transfer price is the price at which services, tangible and intangible properties are traded among related entities. Nigeria introduced transfer pricing regulations (Regulations) in 2012. With effect from August 2 2012, every company with related party or intra-group transactions is required to conduct such transactions at arm’s-length. The Regulations require a taxpayer to conduct and document an adequate transfer pricing study to demonstrate arm’s-length by conducting and documenting. While it is clear that transfer pricing is relatively new in Nigeria, it is vital that taxpayers start on a good note by managing their transfer pricing risk proactively.

Identification of risk areas

The first step in addressing any risk is to identify its source. Taxpayers unfamiliar with the concept of transfer pricing run the risk of rushing into compliance mode without proactively identifying and dimensioning the issue. This may trigger unexpected additional tax liability in future. This was the issue in a case involving the French tax authority and eBay France.

eBay France (the taxpayer), a French company incorporated in 2000 and wholly owned by eBay International AG (Swiss Company), provides marketing and sales support services for the benefit of its parent company, the Swiss entity. It is also the registered owner of the internet domain name “”.  eBay International AG conducts business in France and leverages on the marketing and sales support services from eBay France. On auditing the company, the French tax authority held the view that the right to use the internet domain name “” was an intangible asset that eBay France had failed to recognise upon registration under its name. The French tax authority then made a transfer pricing adjustment equal to 2% of the turnover realised by eBay International AG through “” to reflect what the French tax administration considered to be arm’s-length compensation for the registered owner of the domain name.

The tax authorities’ assessment was challenged but the court confirmed the assessment. The court held that the exclusive right to use an internet domain name entails the recognition of an intangible fixed asset, for which arm’s-length compensation must be paid if used by a related party. 

The starting point in identifying transfer pricing risk is the analysis of a taxpayer’s business model. This should be done both at the company and group level involving transaction and payment flow within the group. Particular attention should be paid to the following kinds of transactions as these may attract greater scrutiny from the tax authorities:

•Transactions with related entities in countries with lower effective/marginal tax rates;

•Transactions with centralised supply chain/procurement entities in tax jurisdictions with low tax rates;

•Transactions with related parties in jurisdictions with aggressive/strict transfer pricing rules (where the tax authority is likely to take the view that a group would set the transfer price in a way that ensures compliance with the stricter jurisdiction to the detriment of the more relaxed jurisdiction);

•Transactions with companies located in the home jurisdiction of the MNE or where the holding company is listed; or

•Transactions with companies in jurisdictions with safe harbour provisions that do not always align to the arm’s-length principle.


Having identified potential transfer pricing risk areas, the taxpayer needs to put in place a robust transfer pricing system that will ensure proper implementation of the company’s transfer pricing policy. While transfer pricing is a matter of taxation, it requires input from key resource personnel within the business organisation. Cooperation and collaboration with key personnel in the transfer pricing, legal, internal audit, information technology (IT), commercial, finance and tax departments is crucial to the success of transfer pricing risk management. Communication among all the relevant departments is important. A situation where the transfer pricing personnel finds out too late about significant business changes that could negatively impact compliance with transfer pricing will not augur well for the company’s transfer pricing risk management efforts.

The participating departments must also have a basic understanding of transfer pricing. They must be well informed about the local compliance requirements as well as understand their roles in managing identified transfer pricing risks.

Documentation and compliance

According to the OECD Transfer Pricing Guidelines for Multinational Enterprises and Tax Administrations, “each taxpayer should endeavour to determine transfer pricing for tax purposes in accordance with the arm’s-length principle, based upon information reasonably available at the time of the determination.”

Simply put, contemporaneous documentation is that which is up to date and available at any time. The OECD advocates contemporaneous documentation, as do the tax administrators of countries like Nigeria, India, South Africa and Canada, among others. The Nigerian transfer pricing regulation stipulates that a taxpayer should have transfer pricing documentation in place before the due date of the income tax returns for the year in which the transactions occurred. Upon request by the tax authority, the taxpayer is obliged to provide this documentation within 21 days.

Transfer pricing risks can be effectively managed through contemporaneous documentation. It offers protection against additional tax liabilities in the form of transfer pricing adjustment. Contemporaneous documentation also helps in transfer pricing audit defence, intra-group coordination and institutional knowledge management.

Transfer pricing audit and first line defence

Though Nigeria just introduced its Regulations, transfer pricing audit will be commonplace as soon as taxpayers start filing transfer pricing statutory forms. Effective transfer pricing risk management begins long before the tax authority decides to audit a taxpayer. Contemporaneous documentation is the first line of defence in case of a transfer pricing audit. Proper documentation establishes the basis to support and defend tax positions. This will help the taxpayer to shift the burden of proof to the tax authorities.

Another strong reason why managing transfer pricing risk is important is the possibility of simultaneous transfer pricing audits across tax jurisdictions in Africa. The African Tax Administration Forum (ATAF), an umbrella body for tax authorities across the continent, recently signed a Mutual Assistance Agreement for information exchange on tax matters. This agreement will allow for mutual information exchange of taxpayer information, joint assessment and audits as well as inter-jurisdictional support on complex tax matters.

Pro-activity key to preventing unpleasant surprises

Transfer pricing is a top priority for tax administrators across the world. Every tax administrator will aggressively seek to defend its tax base and collect what it thinks is its fair share of tax revenue. The taxpayer will be required to defend its tax position from time to time. By proactively managing transfer pricing risks, taxpayers can align business objectives with a viable tax strategy and prevent unpleasant surprises in the form of transfer pricing adjustments and penalties.

Victor Adegite

Victor Adegite is Senior Manager, Tax, Regulatory & People Services at KPMG Advisory Services, Lagos.

by Victor Adegite

December 20, 2017 | 12:08 am
  |     |     |   Start Conversation

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