Published by The Tax Club, University of Lagos. on

By Abdulwahab Habeeb


Transfer Pricing is a big negative phenomenon in international taxation. It has continued to cause problems to both taxpayers and tax authorities. Though it is a legal business practice, it nevertheless serves as a tool of tax avoidance. In Nigeria, the issue was far worse before 2012 when the Transfer Pricing Regulation was published by FIRS. Before that, only general anti-avoidance rules were applicable to matters of transfer pricing in Nigeria.



Transfer pricing occurs when a conglomerate of the same corporation trade between each other. It refers to the value ascribed to the exchange of goods and services between the conglomerate of the same corporation. It is the price at which related parties transact with each other.
Generally, transfer pricing is not illegal. What is illegal and discouraged is what we can call Transfer Mispricing, which is a situation whereby corporations exploit transfer pricing to evade or avoid taxes. Thus, where there is a trade between related parties at prices ridiculously below or above the normal market value of which the trade is meant to manipulate the market value or reduce tax liabilities, then there is transfer mispricing.
The most popular means tax authorities in different jurisdictions have tried to curb the issue of transfer mispricing is through the adoption of the Arm’s Length Principle for trade between related parties. This principle is also set out by Article 9 of the OECD Model Tax Convention. The purport of the Arm’s Length principle is that the related parties shall trade or do business as if they were independent. The result is that the arm’s length price would be agreed upon if the same transaction had occurred between independent and unrelated parties. Generally, for goods and commodities, it is easy to determine an arm’s length price. However, when dealing with services or intangibles, determining arm’s length can be more complicated.


In Nigeria, prior to the 2012, there was no clear transfer pricing regulations. This created difficulties in taxing companies with subsidiaries, especially foreign companies involved in trans-border transactions with their corporate head or other subsidiaries. The only similar provision that was obtainable in our laws was against Artificial Transaction. Section 22 of the Company’s Income Tax empowered the Federal Income Revenue Services to make adjustments in order to reflect arm’s length transaction where in its opinion it deems the trade or business or activities between related parties to be artificial or fictitious. Thus, the tax authority is by implication conferred with the responsibility to make adjustments where the transfer pricing does not reflect the normal market prices.
The Transfer Pricing Regulations 2012 was published by FIRS pursuant to the powers conferred on it by Section 61 FIRS Establishment Act. Under the regulation, any transaction between related parties shall be treated as a controlled transaction liable to applications of the regulation. The regulation provides for compliance with Arm’s Length Principle, Documentation of Transfer Pricing, Advance Pricing Agreements etc. Article 4 provides that related parties are to ensure that all taxable profits that result from transactions between them are in compliance with the arm’s length principle and where they fail to abide by it, the FIRS is empowered to make necessary adjustments.
The regulation further provides for the documentation and disclosure of transfer pricing. Related parties are required to, in advance, record and provide substantial information and data which verifies that the pricing of the transaction is consistent with arm’s length principle. FIRS is however authorised to request for additional information where it deems it necessary to effectively carry out its duties under the regulation. Additionally, for each year of assessment, related parties are expected to make Transfer Pricing Disclosure in the form prescribed by the regulation.
Regulation 7 provides for Advance Pricing Agreements. A connected taxable person may request the FIRS to enter into an Advance Pricing Agreements that will establish an appropriate set of criteria for determining whether the person or company has complied with the arm’s length principle for future transactions undertaken by the person or company over a fixed period of time. Only tax payers with an annual cumulative transaction of not less than N250,000,000 can enter into the agreement with FIRS and the agreement must not exceed a three-year duration.
In 2018, FIRS released a revised Income Tax {Transfer Pricing} Regulations. The regulation was published to align with the developments in international tax practice vis a vis the project of Base Erosion and Profit Shifting carried out by the OECD. One major improvement of the new regulation is that it did not set out a limit for Advance Pricing Agreements. It however included a section to clarify that the provision on APA will be effective the moment FIRS publishes relevant notices and guidelines.
Thus, the publishing of the transfer pricing regulations is commendable. It could have far reaching effects and significant impacts on the operation of TP in Nigeria. The FIRS is encouraged to take adequate measures in ensuring the enforcement of the act while the companies on the other hand should take necessary steps to take advantage of the benefits that comes with compliance and also to avoid imposition of penalties on them.


Habeeb is a 500Level law student interested in Taxation, Investment banking and emerging markets. He isalso passionate about the Sustainable Development Goals. You can reach him on LinkedIn via and on twitter @Abdulwahab_jnr

Categories: Tax Matters

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