Transfer Pricing Rules for Nigerian Companies: A Practical Guide

Transfer pricing is one of the most significant tax compliance areas for companies with related party transactions. Nigeria has robust transfer pricing regulations that require transactions between connected parties to be conducted at arm's length prices. This guide explains what you need to know.

What is Transfer Pricing?

Definition

Transfer pricing refers to the pricing of transactions between related parties:

• Sales of goods between group companies
• Provision of services
• Loans and financial arrangements
• Licensing of intellectual property
• Cost-sharing arrangements

Why It Matters

Transfer pricing can shift profits between jurisdictions:

• Sell goods to low-tax affiliate at low price → Reduces Nigerian profit
• Pay excessive management fees to parent → Reduces Nigerian profit
• Receive loans at excessive interest → Reduces Nigerian profit

Nigerian transfer pricing rules prevent artificial profit shifting.

The Arm's Length Principle

Core Concept

Related party transactions must be priced as if the parties were independent:

Arm's Length Price = What unrelated parties would agree

The Question to Ask

"Would this price be agreed between two unrelated parties in similar circumstances?"

If yes → Compliant If no → Adjustment required

Example

Transaction	Related Party Price	Arm's Length Price	Issue?
Product sale to subsidiary	₦100	₦150 (market)	Yes, underpriced
Management fee to parent	₦50M	₦20M (benchmark)	Yes, overpriced
Loan interest	15%	15% (market rate)	No

Who is Affected?

Connected Persons

Transfer pricing applies to transactions with "connected persons":

Direct Ownership:

• Parent company
• Subsidiary company
• Fellow subsidiary (same parent)

Indirect Relationships:

• Companies with common directors
• Companies with common shareholders (significant)
• Entities under common control

Threshold for Documentation

Detailed transfer pricing documentation is required if:

• Related party transactions exceed ₦300 million per year
• Smaller companies must still apply arm's length principle

Exemptions

Some transactions may be exempt:

• Pure domestic transactions (both parties Nigerian)
• Transactions below materiality thresholds
• Specific exemptions in regulations

Transfer Pricing Methods

1. Comparable Uncontrolled Price (CUP)

Compare directly to similar transactions between unrelated parties.

Example:

• Your company sells Product A to related party at ₦100
• You sell the same Product A to unrelated customers at ₦120
• Arm's length price = ₦120

Best for: Commodity-type products with observable market prices

2. Resale Price Method (RPM)

Start with resale price and deduct appropriate margin.

Example:

• Related distributor resells at ₦150
• Comparable distributors earn 20% margin
• Arm's length purchase price = ₦150 × (1 - 20%) = ₦120

Best for: Distribution arrangements

3. Cost Plus Method (CPM)

Start with costs and add appropriate markup.

Example:

• Manufacturing costs = ₦80
• Comparable manufacturers earn 25% markup
• Arm's length price = ₦80 × (1 + 25%) = ₦100

Best for: Manufacturing, contract services

4. Transactional Net Margin Method (TNMM)

Compare net profit margins from transaction.

Example:

• Related party earns 8% operating margin
• Comparable companies earn 10-15%
• If within range, acceptable; if below, adjust

Best for: Complex transactions, services

5. Profit Split Method

Split combined profits based on contribution.

Example:

• Combined profit from collaboration = ₦100M
• Party A contributes 60% of value
• Party A's share = ₦60M

Best for: Highly integrated operations, unique contributions

Documentation Requirements

Transfer Pricing Documentation

If above threshold, maintain:

1. Master File

• Group structure
• Business overview
• Group TP policies
• Intangibles ownership
• Financial arrangements

2. Local File

• Nigerian entity operations
• Related party transactions
• Functional analysis
• Comparability analysis
• Method selection rationale

3. Country-by-Country Report (CbCR)

• For large multinationals (€750M+ group revenue)
• Revenue, profit, tax by country
• Filed with NRS (Formerly FIRS)

Documentation Deadlines

Document	Deadline
Local file	With CIT return (6 months after year-end)
Master file	With CIT return
CbCR	12 months after group year-end

Contemporaneous Documentation

Documentation must be:

• Prepared at time of transaction (or shortly after)
• Ready for submission on request
• Updated annually

Common Transaction Types

1. Sale of Goods

Risk areas:

• Underpriced exports to related parties
• Overpriced imports from related parties

Documentation:

• Comparable prices from third parties
• Functional analysis of both parties
• Adjustments for differences

2. Management Fees

Risk areas:

• Excessive fees for vague services
• Fees for shareholder activities

Documentation:

• Nature of services provided
• Benefit to Nigerian entity
• Benchmark for similar services

3. Intercompany Loans

Risk areas:

• Excessive interest rates
• Excessive loan amounts (thin capitalization)

Documentation:

• Credit rating analysis
• Market interest rate comparison
• Loan terms justification

4. Royalties and IP

Risk areas:

• Excessive payments for IP use
• Payments for non-existent or minimal value IP

Documentation:

• Value of IP to Nigerian operations
• Comparable royalty rates
• Ownership and development analysis

5. Technical/IT Services

Risk areas:

• Charges for services not received
• Excessive charges for basic services

Documentation:

• Service agreements
• Evidence of services rendered
• Benefit analysis

Compliance Process

Step 1: Identify Related Parties

Map all entities that are "connected persons":

• Group structure chart
• Ownership percentages
• Control relationships

Step 2: Identify Transactions

List all related party transactions:

• Goods sold/purchased
• Services provided/received
• Loans given/received
• IP licenses
• Cost allocations

Step 3: Quantify Transactions

Transaction Type	Related Party	Amount (₦M)
Product sales	Parent Co	500
Management fees	Parent Co	50
IT services	Sister Co	20
Loan interest	Parent Co	30
Total	600

Step 4: Functional Analysis

For each transaction, analyze:

• Functions performed by each party
• Assets used by each party
• Risks assumed by each party

Step 5: Select Method

Choose most appropriate method:

• Consider transaction type
• Data availability
• Reliability factors

Step 6: Conduct Analysis

Perform comparability analysis:

• Identify comparable transactions/companies
• Make adjustments for differences
• Determine arm's length range

Step 7: Document

Prepare comprehensive documentation:

• Facts and circumstances
• Method selection rationale
• Comparability analysis
• Conclusions

Step 8: Adjust if Necessary

If prices not arm's length:

• Adjust in tax return
• Or restructure future transactions

Penalties for Non-Compliance

Documentation Penalties

Offense	Penalty
Failure to maintain documentation	₦10M or 1% of transaction value
Failure to submit on request	Additional penalties
Incomplete documentation	May be treated as failure

Adjustment Penalties

If NRS makes transfer pricing adjustment:

• Additional tax on adjusted profit
• Interest from original due date
• Potential penalties for under-declaration

Avoiding Penalties

• Maintain contemporaneous documentation
• Apply arm's length principle genuinely
• Be prepared for NRS queries
• Consider Advance Pricing Agreements

Advance Pricing Agreements (APA)

What is an APA?

Agreement with NRS on appropriate transfer pricing methodology:

• Provides certainty
• Reduces audit risk
• Usually covers 3-5 years

Types of APA

Type	Parties
Unilateral	Company + NRS only
Bilateral	Company + NRS + foreign tax authority
Multilateral	Company + NRS + multiple foreign authorities

When to Consider APA

• Large ongoing related party transactions
• Complex arrangements
• High penalty risk
• Desire for certainty

Common Mistakes

Mistake 1: No Documentation

"We'll prepare it if NRS asks."

Reality: Documentation must be contemporaneous. After-the-fact preparation is obvious and may not be accepted.

Mistake 2: Using Group Policies Blindly

"Group says charge 5%, so we charge 5%."

Reality: Nigerian arm's length standard must be met. Group policy doesn't override local law.

Mistake 3: Ignoring Domestic Transactions

"Both parties are Nigerian, so TP doesn't apply."

Reality: Pure domestic transactions between connected parties may still be subject to anti-avoidance rules.

Mistake 4: Inadequate Functional Analysis

"We just used a database search."

Reality: Proper functional analysis is essential. Database comparables must be adjusted for differences.

How Finora Supports Transfer Pricing

Transaction Tracking

Finora identifies related party transactions:

• Tag transactions by counterparty
• Flag connected party transactions
• Summarize for TP analysis

Documentation Support

Organize information for TP documentation:

• Transaction details
• Pricing information
• Supporting contracts
• Payment evidence

Reporting

Generate related party reports:

• Transaction listing by party
• Annual summaries
• CIT return support schedules

Alerts

Notifications for:

• New related party transactions
• Threshold approach (₦300M)
• Documentation due dates

Frequently Asked Questions

Do purely domestic transactions require TP documentation?

Full TP documentation typically focuses on cross-border transactions. However, domestic related party transactions should still be arm's length and may require documentation under anti-avoidance provisions.

What if there are no comparable transactions?

Use alternative methods (TNMM, Profit Split) or economic analysis. Document why CUP or other methods aren't available.

Can NRS adjust prices retroactively?

Yes. NRS can adjust prices going back several years. This is why contemporaneous documentation is crucial.

What about shared services centers?

Shared services are subject to TP rules. The cost allocation methodology must be arm's length and documented.

How often should documentation be updated?

Annually. Even if transactions are similar, economic circumstances change and documentation must reflect current conditions.

Conclusion

Transfer pricing is a significant compliance area for companies with related party transactions. Key points:

• Arm's length principle governs all connected party transactions
• Documentation is mandatory above the ₦300M threshold
• Multiple methods available—choose the most appropriate
• Penalties are significant for non-compliance
• Contemporaneous documentation is essential

Proper transfer pricing compliance requires understanding your transactions, applying appropriate methods, and maintaining robust documentation.

Finora helps track related party transactions and organize information for transfer pricing documentation requirements.

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