Introduction
Transfer pricing sits at the top of the Federal Inland Revenue Service’s (FIRS) enforcement agenda — yet many Nigerian SMEs with cross-border related-party transactions are either unaware of the rules or believe they apply only to large multinationals. That belief is expensive.
Whether you import goods from a parent company abroad, pay management fees to an overseas affiliate, or provide services to a related entity in another country, Nigeria’s transfer pricing regulations almost certainly apply to you.
What Is Transfer Pricing?
Transfer pricing refers to the prices set for transactions between related parties — companies or individuals who are connected through ownership, control, or family relationships. The fundamental rule under both international standards and Nigerian law is the arm’s length principle: the price charged between related parties must be equivalent to what two independent, unconnected parties would have agreed in similar circumstances.
Without this rule, companies could shift profits to lower-tax jurisdictions by artificially manipulating prices — for example, by overcharging a Nigerian subsidiary for imported goods to reduce the subsidiary’s taxable profit in Nigeria.
The Nigerian Legal Framework
Nigeria’s Income Tax (Transfer Pricing) Regulations were first issued in 2012 and have since been updated — most recently to align more closely with the OECD’s Base Erosion and Profit Shifting (BEPS) guidelines. The FIRS has explicit powers to adjust taxable profits where related-party transactions are not priced on an arm’s length basis.
The regulations apply to transactions between connected persons that affect a company’s assess-able profit in Nigeria. This includes the sale of goods, provision of services, loans, royalties, and use of intellectual property.
Who Is a ‘Related Party’ Under Nigerian Law?
The definition is broader than most business owners realise. Related parties include:
- A company and its parent, subsidiary, or fellow subsidiary
- Two companies controlled by the same individual or family
- A company and any individual who directly or indirectly owns 25% or more of its shares
- A company and its director, manager, or any person who exercises significant control
If any of these relationships exist and you have cross-border transactions with the related party, transfer pricing rules apply to you.
Documentation Requirements — The Most Common Compliance Gap
FIRS requires that companies maintain contemporaneous documentation — meaning documentation prepared at or around the time the transactions take place, not after FIRS comes knocking. Required documentation includes:
- A master file describing the group’s global business, value chain, and transfer pricing policies
- A local file with details of the Nigerian entity’s related-party transactions, comparability analysis, and the transfer pricing method used
- A Country-by-Country Report (CbCR) for groups with consolidated annual turnover above NGN 160 billion
The master and local files must be submitted to FIRS annually along with the company’s income tax return. Many SMEs fall foul simply because they have no documentation at all.
Acceptable Transfer Pricing Methods
FIRS accepts the following methods for establishing an arm’s length price — you should use the most appropriate one for your specific transaction:
- Comparable Uncontrolled Price (CUP): compares the controlled transaction price to a similar transaction between unrelated parties
- Resale Price Method (RPM): starts with the price at which a product is resold to an independent party and works back
- Cost Plus Method: adds an appropriate markup to the supplier’s costs
- Transactional Net Margin Method (TNMM): compares the net profit margin of the controlled transaction to that of comparable transactions
- Profit Split Method: used where transactions are too intertwined to evaluate separately
The CUP method is FIRS’s preferred approach where comparable data exists.
Penalties for Non-Compliance
The penalties for failing to comply with transfer pricing obligations in Nigeria are significant. Failure to file transfer pricing returns attracts a penalty of NGN 10 million for the first year of default, and NGN 10,000 for every additional day of default thereafter. Inaccurate returns attract a penalty of 1% of the value of the understated or omitted transaction. FIRS also has the power to make upward adjustments to taxable profits where pricing is not at arm’s length — potentially triggering back taxes, interest, and further penalties.
Practical Steps for SMEs
- Map your related-party transactions: make a list of every transaction between your Nigerian entity and any related person in another country
- Establish your pricing policy: document why the price charged reflects what unrelated parties would agree
- Select a transfer pricing method: choose the most appropriate method and document your reasoning
- Maintain your records contemporaneously: do not wait until your tax return is due
- File on time: your transfer pricing return is due with your Companies Income Tax return
Conclusion
Transfer pricing compliance in Nigeria is no longer a concern reserved for the Big Four’s multinational clients. If your SME has any cross-border related-party transactions, the FIRS expects documentation, arm’s length pricing, and timely filing. The good news: with proper planning, compliance is straightforward and the risk of a costly adjustment is manageable. Our team can help you map your transactions, select the right method, and prepare the documentation FIRS requires.