The study evaluated the effect of taxation and compliance on the international transfer pricing regulations in Nigeria after the enactment of transfer pricing regulations in Nigeria in 2012.Secondary data were gathered from published reports on transfer pricing guides for the period of 2008 to 2015. Qualitative characteristic measurement (in form of 20 indexes) was developed and the data obtained were analysed using Statistical Package for Social Sciences (SPSS) in order to find the level of significance of the variables: taxation and compliance by FIRS on the international transfer pricing regulations in Nigeria
The result revealed that both taxation and compliance have significant effects on international transfer pricing regulations in Nigeria after the enactment of TP regulations in 2012 at 5% level of significance. The study showed that compliance has a higher tendency to improve international transfer pricing regulations in Nigeria. It is therefore concluded that FIRS should invest in capacity building in respect of skills and staff in order to ensure that the regulations is applied consistently. However, there should be adequate and effective communication with the companies.
1.0. Introduction
Transfer pricing has been a major contentious issue blurring the thin line between tax planning and tax evasion. It is a tug of war with the Multinational companies on one side and tax authorities in various jurisdictions on the other side. Transfer pricing is the pricing of goods, intangibles, services and financial instruments when transferred between affiliates or subsidiaries in various countries within an organisation. It is also the price charged by related parties for goods, services, intellectual property or other resources supplied by and between connected persons. Ernst and Young (2013) opined that the highly complex nature of transfer pricing lends itself to being misunderstood as a scheme by Multinational companies to shift profit to affiliates or subsidiaries companies in low tax jurisdictions, in reality, arm’s-length transfer pricing in its current form, when effectively managed, is a powerful mechanism for both tax authorities and companies to reduce transfer pricing controversy while proving to apportion income fairly among multiples taxing jurisdictions worldwide. In other way round, if inadequately administered, transfer pricing can be costly for all stakeholders, leading to lengthy audit, litigations, transfer pricing adjustments, potential non deductible penalties and double taxation (Ernst and Young, 2013).
Without transfer pricing regulations, tax authorities are concerned that the Multinational Enterprises will have incentive to misprice their related party transactions to take advantage of corporate rate differentials across countries, resulting in profit shifting from entities in high tax jurisdictions to related entities in low tax jurisdictions. Nigeria, like most countries across the world has adopted the arm’s length principle in line with the Organisation for Economic Cooperation and Development’s (OECD)’s transfer pricing guidelines to ensure that related party transactions are reasonably and fairly priced. The arm’s length principle basically refers to the requirement that related party transactions should be priced as if the transactions were conducted with unrelated or independent parties. The situation in Nigeria is not different from the experiences of other countries, before 2012; there have been no special enactments of transfer pricing regulations in Nigeria.
This study focused on the effect of taxation and compliance on the international transfer pricing regulations in Nigeria between the periods of 2008 to 2015. At the end of 2015, Nigeria companies have been under Transfer Pricing rules for three years, the nation have gone full circle in Transfer Pricing roadmap at the end of third year of introduction (KPMG, 2016). The question now is to find out the effect of taxation laws and compliance by FIRS over the international transfer pricing regulations in Nigeria. The study covered the periods of 2008 to 2015. The Income Tax (Transfer pricing) Regulation was enacted on 21 September, 2012. The commencement date was August 2, 2012 while the TP regulations became effective for accounting periods beginning after the commencement date.
2.0 Review of Literature
2.1 History of Transfer pricing Regulations
Transfer pricing adjustment have been a feature of many tax systems since 1930s.United States of America (US) and Organisation for Economic Co-operation and Development (OECD) had some guidelines as at 1979.The United States led the development of detailed, comprehensive transfer pricing guidelines with white paper in 1988 and proposals in 1990 and 1992 ,which ultimately became regulations in 1994.OECD issued the first draft of its current transfer pricing guidelines referred to as OECD guidelines in 1995, but distinct from its better known general guidelines for Multinational Companies (MNCs),which it expanded in 1996 and 2010(Wikipedia,2016). According to Wikipedia (2016), the OECD guidelines have been formally adopted by many countries in the world with little or no modification.
The OECD and US systems provide that the prices may be set by the component member of an enterprise in any manner, but be adjusted to conform to an arm’s length standard. Each System provides for several approved methods of testing prices, and allows the government to adjust prices charged between related parties. The systems provide for standards for comparing third party transactions or other measures to test prices, based on comparability and reliability criteria.
2.1.1 Taxation and Transfer Pricing Regulations in Nigeria
Nigeria is a country blessed with huge population and many natural resources such as oil, gas, iron ore, coal, gold, and limestone which had made the multinationals companies to have investments in several sectors of the economy in the country. Also, there are increasing numbers of local companies that are expanding across the border into other countries in particular, the manufacturing, and banking and telecommunication industries.
Prior the passing of specific transfer pricing regulations in Nigeria in 2012, there have always been general anti-avoidance rules (GAARS) in tax legislations in Nigeria for several years such as Section 17 of the Personal Income Act 2004, Section 22 of Company Income Tax Act (CITA, 2004) as amended by CITA 2007 and Section 15 of Petroleum Profit Tax Act (PPTA, 2004) as amended by PPTA 2007 (Income Tax (Transfer pricing) Regulations,2012). The tax authority in Nigeria, Federal Inland Revenue Service (FIRS) was empowered to adjust the tax liability of a company if it considers any transaction of a company which reduces or would reduce the amount of any tax payable to be artificial or fictitious. FIRS was conferred with the responsibility to make any adjustment where the internal pricing mechanisms of the related parties tend not to reflect the open market prices. There were no clear-cut guidelines on how to determine the transfer pricing so the determination of transfer pricing was an exercise of subjective judgement on the part of FIRS. The enactment of The Income Tax (Transfer pricing), Regulation in 2012 was to give effects to the above stated provisions. The objectives of the TP regulations are the followings: to defend the nation’s tax base that is the country’s tax base is not eroded and also it gets its fair share of tax, tool to prohibit tax evasion, reduction of the risks of economic double taxation and provision of level playing ground field between Multinational and independent companies.
2.1.2 Implementation
The Income Tax (Transfer pricing), Regulation, 2012 based on OECD model provided clear-cut guidelines of assessing transactions and combating related parties transactions. The commencement date was August 2, 2012 while the TP regulations became effective for accounting periods beginning after the commencement date. The Federal Inland Revenue Service however commenced the implementation of the TP regime with the first set of TP returns for 2013 financial year’s transactions filed in 2014. The provisions of the regulations cover both domestic and cross border transactions. The rules defined connected taxable persons to include individuals, permanent establishments created by head offices, subsidiaries, associates, partnerships, joint ventures etc to the extent that they participate directly or indirectly in the management, control or capital of another or both of which have common control, management or shareholders. The Transfer pricing regulations is applicable to the sales and purchase of goods and services, sales and Purchase of tangible assets, Transfer, purchase or use of intangible assets, provision of services, lending and borrowing of money ,manufacturing arrangement and any transaction incidental, connected or pertaining to the above transactions. The rules provide that taxpayer may negotiate for Advance pricing agreement (APA) which may be unilateral, bilateral or multilateral with FIRS.
The Nigeria’s transfer pricing regulations permit the use of any five common methods: Comparable Uncontrolled price(CUP), Cost Plus, Resale price ,Transactional Net Margin method(TNMM) and Transactional Profit split and any other method that can be justified by the tax payer provide the method used must be the most appropriate to the particular transaction bearing in mind the relative strength and weakness of each method ,the nature of the transaction, availability of reliable information and degree of comparability. The taxpayer is obliged to keep records of transactions with related or connected parties and make them available on request and to ensure consistency with arm-length principles with related or connected parties making the burden of the proof to be on the taxpayer. The language of documentation is English; it should be in place prior to the due date of filling income tax returns and must be provided to FIRS within 21 days of request subject to the discretion of the service on extension. TP regulation form and TP disclosure must be appended to annual income tax returns.
The aim of this study was to assess the effect of taxation and compliance on the international transfer pricing regulations in Nigeria between the periods of 2008 to 2015 using qualitative characteristic measurement (in form of 20 indexes) developed for the purpose of this study.
2.2 Empirical Review
There are various empirical studies that call for the need for the enactment of transfer pricings regulations worldwide.
According to Clausing (2015), ‘the revenue cost to the U.S. government from profit shifting has been increasing steadily over the previous decades, reaching $77 to $111 billion by 2012’. Buettner and Wamser (2013) in their study on German multinationals companies confirmed the use of internal debt to shift taxable profits to low tax countries though the tax effect are small partly due to German controlled foreign corporation (CFC) rules. Lohse, Riedel and Spengel (2012) in their study emphasized the increasing importance of transfer pricing regulations. Osei (2010) in his study (Transfer Pricing in comparative perspective and the need for Reform in Ghana) stated that a study conducted in Ghana indicated that Multinational Companies do take advantage of overpricing to manipulate transfer prices. Kebwaro (2014) concluded that transfer pricing affect the tax planning of Multinational companies in Kenya, it enabled interrelated parties to shift revenues from high tax jurisdictions to low tax jurisdictions. While, Jansky and Prats (2015) in their study of 44 countries concluded that in India, Multinational companies with links to tax havens reported and paid less tax than Multinational companies with no such links.
Akhidime (2011) stated that developing countries like Nigeria in order to avoid tax-revenue losses must take cue from developed countries like US to develop its tax rules to reduce to minimum, the avoidable tax by Multinational corporations through creative international transfer pricing practices. As noted by Awodiran (2014), the Multinational Companies took advantage of different tax rates charged in different jurisdictions to minimize the groups’ tax liabilities. According to Obasi (2015), transfer pricing has a negative effect on economic growth in Nigeria. Smith (2015) in his study on the Impact of transfer pricing on financial reporting: Nigeria Study, concluded that the government and multinational companies in Nigeria and those of other developing countries world over are constrained by the required resources to be able to effectively implement transfer pricing.
3.0 Research Method
3.1 Conceptual Framework
In this study, we stated that the effectiveness of international transfer pricing regulations in Nigeria depends on taxation laws and the effective enforcement of compliance with the TP regulations by FIRS. The model is schematically shown below:
Source:Author ( 2016).
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3.1.1 Methodology
The source of data used in this into study was secondary data that is reports on transfer pricing guides published by KPMG, Pricewaterhousecoopers (PWC), Ernst and Young (EY),UHY and Deloitte in Nigeria , Doing business report (2016), and Nigeria’s Transfer Pricing Regulations’gazette to determine the effects of taxation and compliance on the international transfer pricing regulations in Nigeria before and after the enactment of TP regulations in Nigeria in 22012. Federal Inland Revenue Service (FIRS) constituted the population of the study. The effects of taxation and compliance on the international transfer pricing regulations in Nigeria between the periods of 2008 to 2015 was evaluated using qualitative characteristic measurement (in form of 20 indexes) developed for the purpose of this study. The data obtained were analysed using Statistical Package for Social Sciences (SPSS) in order to find the level of significance of the variables: taxation and compliance by FIRS on the international transfer pricing regulations in Nigeria
4.0 Data Presentation and Analysis of Result
4.1 Results
Table 1: Result of OLS regression
Variable Coefficient Std. Error t-statistic prob
Constant 0.541 0.271 1.996 0.062
Taxation 0.226 0.103 2.199 0.042
Compliance 0.291 0.113 2.569 0.02
R-squared 0.465
Adjusted R-squared 0.402
F-statistic 7.385
Prob (F-statistic) 0.005
Source: Author (2016).
4.2 Findings and Discussion
The results of regression analysis are presented in Table 1. A unit increase in Taxation will result in 0.23 increases in international transfer pricing regulations while a unit increase in compliance will lead to 0.29 increases in international TP regulations. Both Taxation and Compliance have significant effects on International Transfer pricing regulations in Nigeria after the enactment of TP regulations in 2012. However, both Taxation and Compliance could only explain about 40% of the systemic variation in international transfer pricing regulations in Nigeria while about 60% of the systemic variation could not be accounted for by the regression model. Also the model passes the test of good fit given the value of F-statistics of 7.385 with its associated probability of 0.005 which is lower than 0.05.
From the above, it is seen that Compliance has a higher effect than Taxation on international transfer pricing in Nigeria.
5.0 Summary and Conclusions
This study evaluated the effects of taxation and compliance on the international transfer pricing regulations in Nigeria using qualitative characteristic measurement (in form of 20 indexes) developed for the purpose of this study. The result revealed that compliance has a higher tendency to improve international transfer pricing regulations in Nigeria. It is therefore concluded that FIRS should invest in capacity building in respect of skills and staff in order to ensure that the regulations is applied consistently. However, there should be adequate and effective communication with the companies.
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References
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