Transfer Pricing (TP) is the process of setting the mechanism for the transfer of goods and services[1] between related entities[2] in a manner that ensures fair pricing and arms length dealing

[3]. Simply put, related party transactions are compared with other third party transactions to determine the fairness or otherwise of the pricing.

The adoption of transfer pricing mechanisms into the tax systems of Nations, date as far back as the early 1930s. As of today many countries across the globe have adopted transfer pricing laws because of its significance to revenue generation. Many related entities are able to leverage their commercial and financial relationships to achieve undue tax advantages and ultimately revenue base erosion to the Host Nation.  The principle behind transfer pricing is to statutorily empower tax authorities to adjust the pricing of related entity transactions for tax purposes where same was not conducted in line with the principles of arms length dealing.

The Organization for Economic Co-operation and Development (OECD) has for several decades been in the fore front of the development of transfer pricing policies and regulations. It issued its first guideline in 1979 from which the United States and several other European Countries have developed their transfer pricing regulations.



In 2012, the Federal Inland Revenue Service (FIRS) came up with the Income Tax (transfer pricing)  Regulation No1, 2012 in an attempt to plug holes in the tax leakages suffered as a result of related entity transactions. The regulation came into effective on the 2nd of August, 2012 and applies to all related entity businesses transacted after that date.

The main objectives of the regulation includes amongst others:

  1. To provide opportunity for the country the benefit of sharing in profits generated from the transactions and dealings of connected taxable persons.
  1. To eliminate artificial transactions and prevent profit flight out of Nigeria by connected taxable persons.
  1. To eliminate double taxation.
  1. To prevent unfair advantage in the dealings of related entities and provide a level playing field for independent business enterprises in Nigeria.
  1. To guarantee certainty of transfer pricing treatment for taxable entities in Nigeria.




The regulation applies to transactions between connected persons including sale and purchase of goods; sale, transfer, purchase or lease of tangible or intangible assets[4]; provision of services; manufacturing arrangements and any other transaction capable of impacting on the profitability or otherwise of the transacting parties.


The FIRS by including this omnibus provision “any other transaction capable of impacting on the profitability or otherwise of the transacting parties”, has deliberately broadened the scope of the regulation such that it would apply to all connected party transactions without exception.


The litmus test for the applicability of the regulation is whether transactions are between “Connected Persons”.  The principal tax legislations in Nigeria

[6] collectively define connected persons to include “individuals and entities (including trusts, associations, partnerships, companies etc.) that share common control or participate directly or indirectly in management, control or profit of one another”.

It presupposes therefore that all transactions between connected persons are subject to the provisions of the TP Regulation, to the extent that either or both of the parties are taxable persons under Nigerian Law.  This extends to Group/Holding Companies, Subsidiary Companies, Head Offices and Branches, Franchise Outlets, Foreign Companies with Local subsidiaries, unrelated companies sharing similar Directors and/or Shareholders.


All transactions between or amongst related entities “controlled transactions” are by the regulation required to be conducted  and  priced in a manner consistent with arm’s length principles.

[7] Where they fail to comply, the FIRS has statutory powers to make necessary adjustments before determining the taxable entity’s tax liability in each accounting year.

The regulation prescribes the acceptable transfer pricing methods, which are consistent with the arms length principles. Taxable entities are required to apply the TP method that is most suitable in the circumstance giving consideration to the Comparability Factors[8]. They include the following; Comparable Uncontrolled Pricing (CUP) method[9], Resale Price method[10], Cost Plus method[11], Transaction Net Margin method[12] and Transaction Profit Split method

[13]. The regulation also gives the FIRS the power to prescribe other methods as it may deem fit.

Connected Taxable Persons are required to keep records (information and documents) of all controlled transaction prior to filing of tax returns in the year the transaction occurred and make such records available upon demand by the FIRS in the course of its audit procedures. The regulation failed however to provide procedure or guidelines for the records required to be kept, however since regulation 11 states that the regulation shall be applied in a manner consistent with the OECD TP Guidelines, it is advisable that Connected Taxable Persons strive to comply with the provisions of the guideline as it relates to records and documentation.

Where sufficient record is not kept, the Connected Taxable Person would have failed to satisfy the burden of proof that its transaction complied
with arm’s length principles. In this regard the FIRS may apply adjustments as its deems necessary.

Advanced Pricing Agreements

The regulation makes provision for Connected Taxable Persons to enter into forward agreements with the FIRS. Here, both parties agree to a TP methodology to be applied by the entity in pricing all its controlled transactions within the materiality threshold of N250,000,000.00 (Two Hundred and Fifty Million) for an agreed period

[14]. This agreement may be made subject to such conditions as the FIRS may deem fit and may also be terminated where there is a breach, mistake/misrepresentation or a change in law.

Corresponding Adjustments

Where an adjustment is made to the tax liability of a connected taxable person, in a jurisdiction with which Nigeria has a double taxation treaty, upon application, the FIRS may permit a corresponding adjustment to the income tax liability of such person in Nigeria so as to avoid double taxation.



The Regulation is made pursuant to the FIRS’ powers under the Federal Inland Revenue Services (Establishment) Act, 2007. Its provisions are binding on all persons taxable under PITA, CITA and PPTA.

The penalty for contravention of the regulation may range from FIRS’ out right disregard of the transaction or an adjustment of the tax liability of the related taxable entity to reflect arm’s length dealing.

The regulation equally makes room for its own internal dispute resolution mechanism. Where taxable entities are dissatisfied with an assessment or an adjustment, they may notify the FIRS which will in turn constitute a decision review panel. The complainant is required to provide sufficient documentary evidence to substantiate its claim and the Board’s decision is final and binding subject only to the complainant’s right to seek redress in a court of law.



Taxable entities can no longer use related entity transactions as a vehicle for tax avoidance or planning. Before contracting any business it is important for a taxable entity to determine whether or not the transaction falls within the related parties’ threshold because the FIRS’ powers to adjust the price at which parties contracted may lead to a cost overrun after the transaction is concluded. Transaction advisors must also ensure that transfer pricing elements are given consideration during the preliminary due diligence exercises and that parties are advised on its implication.

It is advised that all companies in Nigeria adopt a transfer pricing compliance policy, Companies within multinational groups that have adopted their global TP policies must also ensure that those policies are in line with local regulations and that all transactions be subjected to a related parties’ litmus test. Where such relationships are established, parties must ensure that transactions are priced based on any of the acceptable transfer pricing mechanisms or in line with an advanced pricing agreement entered into with the FIRS.

Taxable entities may still for commercial and other compelling reasons desire to contract related transaction other than on an arm’s length basis; in such cases they could mitigate their risks by drafting sufficient indemnities from the other party into the transaction agreement such that that where the transaction resorts in additional tax liability, it could be borne solely by the other party or allocated between the parties in a pre agreed ratio.


For queries or further information regarding the contents of this newsletter please contact:

Oluwatosin Ajose (Associate) at:


[1] This would include intangible assets (e.g. intellectual property) and related party loans.

[2]  Entities that share common ownership or control, also called ‘Connected Persons’

[3] This is the basis on which transactions are contracted where parties are independent and unrelated and neither is acting   under compulsion or undue influence

[4] Such as use of technology and intellectual property rights.

[5] Some tax advisory firms have affirmed that the regulation will also extend to guarantees, indemnities and similar obligations, tripartite or subcontracting arrangements, Intercompany receivables and payables obligations.

[6] Personal Income Tax Act,  Companies Income Tax Act and the Petroleum Profit Tax Act.

[7]This is based on the price at which two independent parties will be willing to transact a business, under similar circumstances without compulsion or undue influence.

[8] These are the bases for determining whether a transaction is comparable with another independent transaction conducted under similar circumstances.

[9]  Comparism with prices of similar trascaction between unrelated parties.

[10]  Price at which a product purchased from a related party is sold to an independent party.

[11]  Determining appropriate mark up of production cost to arrive at an arm’s length price.

[12] Determining appropriate margin of profit which will be added to the base cost of the good or service to arrive at an arm’s length price.

[13] A split of the total profit derived from the transaction between the related parties as would have been expected where parties are independent and unrelated.

[14]  Not exceeding 3 years.