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Study Level: BTech, BSc, BEng, BA, HND, ND or NCE

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Transfer pricing regulation and tax competition | CEPR



1.1       Background of the Study

Transfer pricing constitute the price determined for the sale of goods and services between a related and controlled organization. An illustration is when a subsidiary firm sells goods to a parent organization. When the parent organization pays for the goods the cost paid by the parent firm constitutes the transfer price.  Legal entities which operate under the control of a single corporation consist of those firms and their branches which are wholly or majorly owned ultimately by the parent corporation. Also firms are considered to be under common control if they share family members on their boards of directors. Transfer pricing can be used as a profit allocation method to allocate a multinational firms net profit (or loss) before tax to the countries where it does business. Consequently transfer pricing results in the setting of prices among firms of divisions within an enterprise. The use of transfer pricing multinationally   has a Tax advantage, but this is against the regulatory requirementof tax collectors as they are against the use of transfer pricing for tax avoidance. This implies that if a company uses transfer pricing, they can book profits of goods and services in another country that may have a lower tax rate. But in some cases, they can avoid tariff on goods and services exchanged internationally in the transfer of goods and services from one country to another within an interrelated company transaction. The Organization for Economic Cooperation and Development (OECD), and auditing firms within each international location are responsible for international tax laws and audit financial statements according to the Arm’s length principle. Article 9 of the OECD Model Tax Convention is dedicated to the Arm’s Length Principle (ALP). The principle stipulates that the transfer prices set between the corporate entities should be in manner as If they were two independent entities. OCED has provided a framework   in the Transfer Pricing Guidelines which stipulate the details regarding the arm’s length price. The benefit of transfer price show that the ALP is based on real markets and gives the governments and MNE a single international standard for the contracts that provide an allowance for various different government entities to collect their share of tax at the same time creating enough room for the MNE’s to avoid the double taxation. Transfer pricing helps in reducing the duty costs by shipping goods into high tariff countries at minimal transfer prices so that duty base associated with these transactions are low. Reducing income taxes in high tax countries by overpricing goods that are transferred to units in those countries where the tax rate is comparatively lower thereby giving them a higher profit margin.

Despite the fact that the branches of MNC are managed separately, they have common corporate objectives to achieve. One of such objectives is “good profit”. To achieve this, MNCs engage in international trade among the various units of the MNCs, such as between the parent company and its foreign subsidiaries or between its subsidiaries in different countries. This “trade” among the various units of MNCs is normally carried out at a price referred to as ‘transfer price”. Kayode (2003:252), describe transfer Price as “a price attached to goods and services being exchanged among divisions operating under the canopy of a central management”. One could make a distinction between intra-corporate transfer price and inter-corporate transfer price by using the former to refer to transactions among divisions of a single corporate entity and the latter to refer to transactions among different corporate entities of one large company. In this paper, inter-corporate refers to any transfer made within a global corporate family. Inter-corporate pricing is also used synonymously with transfer pricing. The objectives of this paper therefore are: to create awareness on the issues associated with multinational corporate transfer pricing policy, identify the various conditions that facilitate transfer pricing, identify the methods adopted in transfer pricing, show the effect of international transfer pricing on the economy and recommend a general guideline for determining a minimum transfer price in transfer pricing situations. The term “transfer price” has been defined variously by different authors. Okoye (1997:462), in his own view, defines transfer price as “a price used to measure the value of goods or services furnished by one division to another division within a company”. Adeniji (2005:211) defines it as “the monetary value attached to goods manufactured by a particular decision making unit and then transferred to another division for the purpose of being utilized for the divisional final product”. While Dean, Feucht and Smith (2008:12), are of the view that it is “pricing of goods and services that are transferred between members of a corporate family including parent to subsidiary, subsidiary to parent and between subsidiaries”. From the above definitions, multinational transfer price could be referred to as the price used to measure the value of goods and services being exchanged among the different units of the MNCs. Inter-corporate transfers are important to most MNCs not just because of the profit motive but for the going concern of the MNCs. This of course may be the reason why most MNCs are engaging in intercorporate transfers despite stringent measures put in place by governments of host countries of their subsidiaries to checkmate them. Adediran (2006:12) cites some reasons why MNCs will continue in inter- corporate transfers. However, the study will examine the transfer pricing and business profit taxation of multinational companies in Nigeria.

1.2       Statement of the Problem

Transfer pricing also possess some challenges. Disagreement among the organizational division managers often does ensue as to what should be the nature of   transfer policies. Also additional costs are encountered regarding the with the required time and manpower required to executetransfer pricing and designing the accounting system. Difficulties also arise as to estimating the right amount of pricing policy for intangibles such as services, since these departments do not provide measurable benefits. Dysfunctional behavior could also arise among managers of organizational units. Another matter of concern is the process of transfer pricing is highly complicated and time-consuming in large multi-nationals. Buyer and seller perform different functions from each other that undertakes different types of risks. For instance, the seller may or may not provide the warranty for the product. But the price a buyer would pay would be affected by the difference. The risks that impact prices are as follows. Financial & currency risk, Collection risk, Market and entrepreneurial risk, Product obsolescence risk, Credit risk.

1.3       Objectives of the Study

The main objective of this study is to examine the transfer pricing and business profit taxation of multinational companies in Nigeria.

Specific objectives include;

  1. To determine transfer pricing and business profit taxation of multinational companies in Nigeria.
  2. To ascertain the relationship between transfer pricing and business profit taxation of multinational companies in Nigeria
  3. To find the challenges of transfer pricing in multinational companies in Nigeria
    1. Research Questions
  4. What are the transfer pricing and business profit taxation of multinational companies in Nigeria?
  5. What is the relationship between transfer pricing and business profit taxation of multinational companies in Nigeria?
  6. What are the challenges of transfer pricing in multinational companies in Nigeria?
    1. Research Hypotheses

Hypothesis 1

H0:     There is no significant benefit of transfer pricing and business profit taxation of multinational companies in Nigeria

H1:     There is significant benefit of transfer pricing and business profit taxation of multinational companies in Nigeria

Hypothesis II

H0:     There is no relationship between transfer pricing and business profit taxation of multinational companies in Nigeria

H1:     There is significant relationship between transfer pricing and business profit taxation of multinational companies in Nigeria

1.6       Significance of the Study

This study will be of immense benefit to other researchers who intend to know more on this study and can also be used by non-researchers to build more on their research work.

This study contributes to knowledge and could serve as a guide for other study.The recommendations will enhance academic performance.

1.7       Scope of the Study

This study is on the transfer pricing and business profit taxation of multinational companies.

The study is carried out in the Lagos state only. The study will make use of both primary and secondary data. Questionnaires will be distributed and used to find out the correlation between transfer pricing and business profit.

1.8       Limitations of the study

The demanding schedule of respondents at work made it very difficult getting the respondents to participate in the survey. As a result, retrieving copies of questionnaire in timely fashion is very challenging. Also, the researcher is a student and therefore has limited time as well as resources in covering extensive literature available in conducting this research. Information provided by the researcher may not hold true for all institutions but is restricted to the selected organization used as a study in this research especially in the locality where this study is being conducted.

Financial constraint: Insufficient fund tends to impede the efficiency of the researcher in sourcing for the relevant materials, literature or information and in the process of data collection (internet, questionnaire and interview).

Time constraint: The researcher will simultaneously engage in this study with other academic work. This consequently will cut down on the time devoted for the research work.

Finally, the researcher is restricted only to the evidence provided by the participants in the research and therefore cannot determine the reliability and accuracy of the information provided.

1.9       Definition of Terms

Competent authority; is a person identified as such in a Double Taxation Convention and who by that Convention is given the authority to carry out certain functions under that Convention.

Controlled transaction: means a commercial or financial transaction between connected taxable persons;

Connected taxable personnel in the context of these Regulations is as defined in regulation 10 of these Regulations;

OECD: means the Organization For Economic Cooperation and Development;

Other regulatory approvals include approvals issued by the National Office For Technology Acquisition and Promotion; Department of Petroleum Resources, the Nigeria National Petroleum Corporation and any other such regulatory authorities or bodies.

“Person” means a natural or legal person;

“Resale Price Method” means a method in which the resale margin that a purchaser of property in a controlled transaction earns from reselling the property in an uncontrolled transaction is compared with the resale margin that is earned in a comparable uncontrolled purchase and resale transaction;

Serviceǁ means Federal Inland Revenue Service or the FIRS‘;

TP; This typically means Transfer Pricing; (z).

TP Disclosure Form means the form on which a tax payer is required to disclose information on all related transactions.