FELIX AYANROUH

The PIB couldn’t have been clearer about the issue of transfer pricing.  Section 353(4) of the PIB proposes an amendment to section 22 of the Company Income Tax Act (CITA), which addresses transfer pricing while providing for payment of additional tax based on selling prices of crude oil and condensate exported by a company based, on fair market value.

Given that a sizeable proportion of investment in the minerals and petroleum sectors is transnational, all players in these sectors (government or commercial) must be aware of the key issues of transfer pricing in international taxation.

Transfer pricing is one of the most crucial issues facing International Oil Companies (IOCs) today due to its direct effects on both their profits and host and home countries’ tax revenues. Transfer pricing pertains to defining the size of the tax base in each country, and how corporations can ‘move’ their tax base around the world through internal pricing mechanisms in order to minimize their tax liability.

IOC’s, especially those which are vertically integrated, make transfers of assets, equipment and services between different component parts of the corporation in different countries. It is generally accepted practice that transactions between related parties occur at prices consistent with those between unrelated parties. This is based on the arm’s length principles which are based on both the Article 9 of The Organization for Economic Co-operation and Development (OECD) and Section 1.482 of the United States treasury regulations.

Both the US treasury regulations and the OECD guidelines set out methods for establishing arm’s length transfer prices for tangible goods, services, technical assistance, trademarks or other assets that are transferred or licensed between related or controlled parties.

The PIB alarmist do not seem to realize that aside from acknowledging a fair and reasonable relationship to the established official selling price of Nigerian oil and gas of comparable quality and gravity, the PIB and other related laws and regulations would allow government to take advantage of small variations in prices as they arise.

The Income Tax (Transfer pricing) Regulations, 2012  made pursuant to Section 61 of the Federal Inland Revenue Service (Establishment) Act. No.13 of 2007 has as its seminal objective the eradication of tax evasion, which is usually promoted through over or under–pricing of transactions between associated enterprises or corporations not adhering to the arm’s length tax principle.

Section 17 of the Personal Income Tax Act (as amended), Section 22 of the Companies’ Income Tax Act (as amended) and Section 15 of the Petroleum Profit Tax Act authorizes the Federal Income Revenue Services FIRS to disregard and substitute a proper tax assessment for a prior tax assessment where any transaction is intended to artificially or fictitiously reduce the amount of the tax that will otherwise be assessed and paid by a tax payer in Nigeria.

The Arm’s Length Principle requires that the conditions of a transaction, between connected taxable persons, should not differ from the conditions that would have applied if the connected persons were independent contracting parties engaged in comparable similar transactions carried on under comparable similar circumstances.

Some of the Transfer Pricing Methods that can be applied in determining whether a transaction is transacted within the parameters of the Arm’s Length Principle include (i) the Comparable Uncontrolled Price (“CUP”) method, or (ii) the Resale Price Method, or (iii) the Cost Plus Method, or (iv) the Transactional Net Margin Method, or (v) the Transactional Profit Split Method, or (vi) any other method as may be prescribed by FIRS, from time to time.

To be continued.