Transfer pricing hits Nigeria

New government tax regulations regarding transfer pricing are to be introduced in 2012, with implications for many companies – both multinationals and others.

Ken Igbokwe, Country Head

Ken Igbokwe,
Country Head

As the Nigerian economy diversifies away from its traditional oil & gas mainstay, tax authorities are awakening to the need for proper transfer pricing (TP) regulations. The increasing scale of international businesses and complexity of cross border trade requires closer attention to transactions between related parties, and ensuring that tax revenues are not improperly allocated to other tax jurisdictions.

“Specific TP regulations are being developed for Nigeria by the Federal Inland Revenue Service (FIRS),” explains Ken Aitken, Head of Tax at PwC, “based on the general anti-avoidance provisions in the various tax laws which require related-party transactions to be conducted at arm’s length. The regulations are expected to be issued and become effective in 2012.”

“These new TP policies will have an impact on any related-party transaction”, pursues Taiwo Oyedele, Partner and Tax Director at PwC, “whether you are a member of a group (local or multinational) involved in any transactions with a related party, and whether a price is charged or not.”

The fields of application are manifold, and include purchases of materials, finished products, procurement of services, inter-company loans or receivables, agreement for use of intellectual property, and more.

“We advise our clients to prepare for these new TP regulations with half a dozen recommendations, which include identification of any related-party transactions, reviewing current TP practices, analyzing the application of these policies, and more,” concludes Ken Aitken.

Although the PwC shortlist of recommendations may simplify a CFO’s life, any finance director handling Nigerian books should be aware of challenges down the road. “The arm’s length principle may appear simple,” says Oyedele, “but applying it could be a Herculean task.” How do you find information on similar transactions between related parties in an environment where local databases are not available? Even where information on other industry players is available, there is no guarantee that the conditions and circumstances of the transactions will be sufficiently similar.

To illustrate some of the pitfalls, PwC uses two examples. The first has to do with disparities between customs import values and TP documentation. “There has been a lingering and prevalent issue, particularly in frontier markets, where custom duties are handled by separate tax authorities,” explains Aitken. “However, there are instances where reliance has been placed by the courts on customs valuations. In our experience customs do not give refunds due to a TP adjustment done by the income tax authorities.” The second example concerns upstream oil companies needing to document their TP policies beforehand. In the case of discrepancies with respect to benchmarking by government regulators, such written policies will be required.

Furthermore, the existence of a global TP policy may not necessarily eliminate the requirement for additional work as there may be Nigeria-specific issues that have to be addressed and which create a need to localize the global policy.

For further information:
Taiwo Oyedele, Partner Tax Director,, +234 1 271 1700

Engineering know-how transfer

For a large German engineering company with extensive operations in Nigeria and other ECOWAS countries, PwC analyzed cross-border transactions regarding the proper cost allocation of an important research & development project involving double-digit million dollar investments.

At the core of the analysis was how to allocate costs incurred in Europe across four African countries that were using the software and hardware developed over several years of efforts.

In the end, PwC recommended a pluri-national solution that helped optimize the company’s tax burden, whilst remaining equitable and upholding the client’s strict governance standards.