Solving Transfer Pricing Complications

Project Name: Transfer Pricing Compliance Service for Xxxx(withheld for confidentiality) Group of affiliated companies (“the Xxxx(withheld for confidentiality) group”) for the financial year (“FY”) ended 31 December 2018
Client: Group of 9 companies
Project Commencement Date: February 18, 2019
Project Completion Date: July 1, 2019
Project URL: Project URL

Over the years, since 2012, Nigeria has taken the issue of ‘Transfer Pricing’ (TP) very serious. This focus on TP and the perceived depletion/ erosion of the Nation’s tax base by multinational companies has led to continuous reviews of the TP process, which also cumulated in the issuance of a revised TP Regulations in 2018.

 

The Nigeria’s TP Regulations, as well as the OECD Guidelines and UN TP Manual require inter-company transactions to take place at prices that are at arm’s length. That is, inter-company transactions must be priced as if the related parties to the transactions were dealing with each other as independent (i.e. unrelated) parties.

 

Our Client, Xxxx(withheld for confidentiality) group offers comprehensive services within Group, oil servicing, terminal operation, clearing and forwarding, underwater engineering, electrical and electronic supply and installation, transformer manufacture, fishing, food product importation and distribution. They were desirous of complying with the TP Regulations in Nigeria, and so engaged us to test the arm’s length nature of the related party transactions (“controlled transactions”) entered into by the related parties within the group during the review period (January 2016 to December, 2018), to determine the arm’s length outcome of the controlled transactions and to recommend a range of correct arm’s length pricing for its intracompany transactions in the light of:

 

  1. Companies’ Income Tax Act (“CITA”)
  2. Value Added Tax Act (VATA)
  3. Capital Gains Tax Act (CGTA)
  4. Personal Income Tax Act (PITA)
  5. Income Tax (Transfer Pricing) Regulations 2018 (“TP Regulations”)
  6. Organization for Economic Co-operation and Development (OECD) “Transfer Pricing Guidelines for Multinational Enterprises and Tax Administrations” (“OECD Guidelines”)
  7. the United Nations’ Practical Manual on Transfer Pricing for Developing Countries

 

The major intracompany transactions tested were:

  1. Provision of centralised support services to all group entities companies. The support services included Administrative and logistic services; Management and accounting services: This means that one or two designated centralised functions/ groups of employees (usually from the parent company, head office or major shareholding company) handle  these services (or functions) for all the other group companies. Our client had also centralised these functions for management and administrative convenience, without recognising the transfer pricing import, the possible mis-pricing of these functions/ services, the lack of recognition of the arm’s length values in the financial statements and the tax impact on the affected companies .
  2. Cash Pooling Arrangement: This is a cash management technique employed by multiple related companies for their funds that are lodged in banks/ financial institutions.  Cash pooling allows companies to combine their credit and debit positions in various accounts into one account, and includes techniques like notional cash pooling and cash concentration. Notional cash pooling has the company combine the balances of several accounts in order to limit low balance or transaction fees. Cash concentration or zero balancing has the company physically combining various accounts into one single account. Cash pooling arrangement is also used to fund the cash deficits or transactions of some of the group companies with the surplus cash of related parties. Unfortunately, most group companies in Nigeria engage in cash pooling without realising nor actually recognising the Transfer Pricing/ Financial Reporting/tax import of this practice.

 

Work performed during this project included the following activities:

  1. Conducted meetings with personnel of Xxxx(withheld for confidentiality) Group to obtain financial information and other background information;
  2. Prepared a functional analysis and detailed transfer pricing profile for the group;
  3. Reviewed financial statements for the years ending 31 December 2016 to 31 December 2018, inter-company, shareholding and third party agreements, and other relevant information
  4. Clarified issues and obtained additional information through telephone conversations and correspondence;
  5. Determined the most reliable method for evaluating the company’s inter-company transactions;
  6. Searched for potential comparable companies in public company databases using Orbis TP Catalyst;
  7. Narrowed group of potential comparable companies applying various screening and selection criteria;
  8. Selected a final group of comparable companies;
  9. Obtained financial and other relevant information on the comparable companies;
  10. Performed an economic analysis to compare the financial results of tested companies with those of comparable companies;
  11. Discussed our findings with the management of Xxxx(withheld for confidentiality) Group;
  12. Performed additional fact gathering and additional economic analysis based on comments received from Xxxx(withheld for confidentiality) Group ; and
  13. Issued transfer pricing report for 31 December 2016 to 31 December 2018.
  14. Completed transfer pricing declaration and disclosure forms for submission with the group entities’ Companies Income Tax returns.

 

Worthy of note is that the entities in the Xxxx(withheld for confidentiality) group covered in our analyses of related party transactions included companies from diverse industry sectors, operating within and outside Nigeria.

 

They are:

  1. Xxxx (withheld for confidentiality) shipping company
  2. Xxxx(withheld for confidentiality) Vessels supply company
  3. Xxx Fishing company
  4. Xxxx diving and marine company
  5. Xxxx engineering, maintenance and fabrication services company
  6. Xxxx Logistics company
  7. Xxxx electrical and electronic engineering company
  8. Xxxx importer of food and beverages company
  9. Foreign part shareholding and management services supply company

 

In the end, the exercise not only helped the group ascertain acceptable arm’s length pricing for the intracompany transactions reviewed, but also revealed gaps in organisation of intergroup transactions and so many financial reporting and tax process inefficiencies. Most importantly, the group has now become fully compliant with regards to Nigeria’s TP Regulations.

THE CHALLENGE

To test the arm’s length nature of the related party transactions (“controlled transactions”) entered into by the related parties within the group during the review period (January 2016 to December, 2018), to determine the arm’s length outcome of the controlled transactions and to recommend a range of correct arm’s length pricing for its intracompany transactions in the light of:

 

  1. Companies’ Income Tax Act (“CITA”)
  2. Value Added Tax Act (VATA)
  3. Capital Gains Tax Act (CGTA)
  4. Personal Income Tax Act (PITA)
  5. Income Tax (Transfer Pricing) Regulations 2018 (“TP Regulations”)
  6. Organization for Economic Co-operation and Development (OECD) “Transfer Pricing Guidelines for Multinational Enterprises and Tax Administrations” (“OECD Guidelines”)
  7. the United Nations’ Practical Manual on Transfer Pricing for Developing Countries

THE STRATEGY

Our execution strategies were to:

  1. Ensure compliance with Nigeria’s TP Regulations, in conjunction with the ‘Organization for Economic Co-operation and Development (OECD) “Transfer Pricing Guidelines for Multinational Enterprises and Tax Administrations” (“OECD Guidelines”)’ and the United Nations’ Practical Manual on Transfer Pricing for Developing Countries.
  2. Document all the background and relationship information for the group in one control documentation
  3. Document the intracompany relations and financial interactions in one control document – analyse the functions performed, assets employed, risks assumed and other necessary details for ascertaining the substance of the inter-company transactions entered into by the group entities and the pricing indications thereof.
  4. Ascertain acceptable arm’s length pricing range for the group’s intracompany transactions reviewed.
  5. Review processes involved in inter-group functions / transactions for gaps, incomplete or inconsistent records, weaknesses in processes and tax exposures.
  6. Assist the group of companies become fully compliant with the TP Regulations.
  7. Follow up/ work with the groups to fix or remedy the gaps identified.

CLIENT’S TESTIMONIALS

Vi-M’s work not only helped us understand this whole ‘Transfer Pricing’ concept, but helped us become complaint. Most importantly, this project opened our eyes to many gaps and loopholes in our financial and tax processes. The next phase of work to be performed by the Vi-M team would be to assist us with tax planning and structuring for the group.

Project Manager
XXX Group