The world has fast become a global village; therefore it is common to find instances of existing business relationships between two entities in separate countries.

Entities are now able to extend their business endeavours to other countries with the aid of technology, which has additionally helped to ensure a smooth sailing of business operations between different ventures.

As a resultant effect of this development, business entities have also been able to develop ingenious ways to either avoid or evade tax obligations arising from such relationships, and find themselves an escape route despite specific provisions contained in the applicable tax laws. Their identified escape measures range from setting up subsidiary establishments in tax havens through which they divert taxable profits, to over-pricing or under-pricing their transactions with subsidiary companies just to reduce their tax obligations.

These acts are deliberately carried out to achieve undue tax advantages which is the major culprit leading to loss of revenue to the government.

As a counter-tactic, tax authorities have also developed methods of dealing with these ingenious schemes, hence the development of transfer pricing regimes. The concept of transfer pricing gives tax authorities the power to adjust the pricing of related entity transactions for tax purposes, in order to ensure that same is conducted at arm’s length.


Transfer Pricing Regulations in Nigeria

Transfer pricing regulations are statutory documents containing the regulations and methods for pricing transactions between connected entities under common ownership or control, for tax purposes. They ensure that such transactions are carried out at arm’s length. Arm’s length is a principle which specifies that the conditions of a transaction between connected entities should not differ from the conditions that would have applied if they were unrelated, in comparable transactions or under comparable circumstances.

The Organisation 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 countries have developed their transfer pricing regulations.

Nigeria made its first attempt at developing transfer pricing regulations in 2012. The transfer pricing guidelines were released in 2012 through the Federal Inland Revenue Service (FIRS), and it was named Income Tax (Transfer Pricing) Regulation No. 1, 2012.

According to the 2012 regulations, the objectives of transfer pricing guidelines are:

  • To ensure that Nigeria is able to tax on appropriate taxable basis corresponding to economic activities deployed by taxable persons in Nigeria, including in their transactions and dealings with associated enterprises;
  • To provide Nigerian authorities the tools to fight tax evasion through over or under pricing of controlled transactions between associated enterprises;
  • To reduce the risk of economic double taxation;
  • To provide a level playing field between multinational enterprises and independent enterprises doing business within Nigeria;
  • To provide taxable persons with the certainty of transfer pricing treatment in Nigeria.

The regulation applies to transactions between connected taxable entities in respect of their transactions, to ensure that they corresponds with the arm’s length principle.

The regulation require connected entities to attach a Transfer Pricing Declaration Form while filing their annual tax returns, and also require them to produce information or documents as requested by FIRS. It is important to note that the burden of proving that a particular transaction is consistent with arm’s length principle is that of the taxable entity.

In determining whether the result of a transaction is consistent with the arm’s length principle, the FIRS will apply one of the following methods:

  • The Comparable Uncontrolled Price Method
  • The Resale Price Method
  • The Cost Plus Method
  • The Transactional Net Margin Method
  • The Transactional Profit Split Method
  • Any other method prescribed by the FIRS from time to time

Where it is discovered that a transaction fails to comply with the arm’s length principle, the FIRS shall make the necessary adjustments using the comparability factors provided in the regulations.

As an update on the Income Tax (Transfer Pricing) Regulation No 1, 2012, the FIRS has released a new regulation called Income Tax (Transfer Pricing) Regulations 2018on August 27, 2018, which has also repealed the 2012 regulation.

Although the 2018 regulation adopted the provisions of the 2012 regulations to a large extent, the following updates are now relevant:

  • Contemporaneous documentation: connected entities with total value of controlled transaction of less than three hundred million naira may now choose not to maintain contemporaneous documentation, that is, a record of information or data to verify that the pricing of a controlled transaction is at arm’s length. This however does not preclude the FIRS from demanding same where necessary.


  • Penalties: the 2018 regulation has now highlighted specific penalties for some transfer pricing offences. For example failure to file a transfer pricing declaration within the specified time now attract a penalty of ten million naira in the first instance and ten thousand naira for everyday the failure continues.
  • Safe Harbour: the 2018 regulation now exempts a connected entity from preparing transfer documentation where the controlled transactions are priced with the guidelines published by the FIRS.


  • The new regulation now contains provisions on clear procedures guiding Advance Pricing Agreements.


  • The new regulation also gives effect to the anti-avoidance provisions in the Capital Gains Tax Act and Value Added Tax Act in addition to the Personal Income Tax Act, Companies Income Tax Act and Petroleum Profits Tax Act originally provided for in the 2012 regulation.


  • The new regulation expands the definition of connected persons to include persons considered in the Value Added Tax Act, OECD, and United Transfer pricing regulations.


  • The new regulation now stipulates that the Head of the Transfer Pricing Unit of FIRS will now have the power to decide whether or when to refer a case to the Decision Review Panel, as opposed to the concerned entity doing so itself. The decision of the Panel in this instance shall be the final position of FIRS, without prejudice to the right of the entity’s right of appeal.



The decision of the FIRS to review of the transfer pricing regulations operative in Nigeria is a commendable one, particularly because it has incorporated suggestions from the Base Erosion and Profit Shifting program and that of the African Tax Administration Forum and brings Nigeria in line with contemporary tax initiatives.

It is therefore evident that the Nigerian tax regime will no longer condone tax evasion tactics from business entities, and tax payers need to ensure they align their business activities with the regulatory requirements to avoid the penalties that follow.


The above information is for educational purposes only and does not constitute professional advice by Blackwood & Stone LP. Readers are advised to consult the services of a tax consultant in ensuring that tax liabilities under Personal Income Tax are accurately computed.

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