TRANSFER PRICING & BUSINESS PROFIT TAXATION OF MULTINATIONAL COMPANIES IN NIGERIA

CHAPTER ONE
INTRODUCTION
1.1 Background to the Study
Transfer pricing constitute the price determined for the sale of goods and services between a related and controlled organization. An illustration is when a subsidiary firm sells goods to a parent organization. When the parent organization pays for the goods the cost paid by the parent firm constitutes the transfer price. Legal entities which operate under the control of a single corporation consist of those firms and their branches which are wholly or majorly owned ultimately by the parent corporation. Also firms are considered to be under common control if they share family members on their boards of directors. Transfer pricing can be used as a profit allocation method to allocate a multinational firms net profit (or loss) before tax to the countries where it does business.  Consequently transfer pricing results in the setting of prices among firms of divisions within an enterprise. The use of transfer pricing multinationally has a Tax advantage, but this is against the regulatory requirement of Tax collectors as they are against the use of transfer pricing for tax avoidance. This implies that if a company uses transfer pricing they can book profits of goods and services in another country that may have a lower tax rate. But in some cases they can avoid tariff on goods and services exchanged internationally in the transfer of goods and services from one country to another within an interrelated company transaction. The Organization for Economic Cooperation and Development (OECD), and auditing firms within each international location are responsible for international tax laws and audit financial statements according to the Arm’s length principle. Article 9 of the OECD Model Tax Convention is dedicated to the Arm’s Length Principle (ALP).The principle stipulates that the transfer prices set between the corporate entities should be in manner as If they were two independent entities. OCED has provided a framework in the Transfer Pricing Guidelines which stipulate the details regarding the arm’s length price. The benefit of transfer price show that the ALP is based on real markets and gives the governments and MNE a single international standard for the contracts that provide an allowance for various different government entities to collect their share of tax at the same time creating enough room for the MNE’s to avoid the double taxation.  Transfer pricing helps in reducing the duty costs by shipping goods into high tariff countries at minimal transfer prices so that duty base associated with these transactions are low. Reducing income taxes in high tax countries by overpricing goods that are transferred to units in those countries where the tax rate is comparatively lower thereby giving them a higher profit margin.

1.2 Statement of the Problem
Transfer pricing also possess some challenges. Disagreement among the organizational division managers often does ensue as to what should be the nature of transfer policies. Also additional costs are encountered regarding the with the required time and manpower required to execute transfer pricing and designing the accounting system.
Difficulties also arise as to estimating the right amount of pricing policy for intangibles such as services, since these departments do not provide measurable benefits. Dysfunctional behavior could also arise among managers of organizational units. Another matter of concern is the process of transfer pricing is highly complicated and time-consuming in large multi-nationals. Buyer and seller perform different functions from each other that undertakes different types of risks. For instance, the seller may or may not provide the warranty for the product. But the price a buyer would pay would be affected by the difference. The risks that impact prices are as follows .Financial & currency risk, Collection risk , Market and entrepreneurial risk ,Product obsolescence risk, Credit risk.

1.3 Objectives of the Study 
To determine transfer pricing and business profit taxation of multinational companies in Nigeria.

1.4  Research Questions
What is Transfer pricing
What is the effect of transfer pricing on the business profit taxation of multinational companies.

1.5 Research Hypothesis
Ho The effect of Transfer Pricing on the Business Profit of Multinational companies in Nigeria is low
Hi The effect of Transfer Pricing on the Business Profit of Multinational companies in Nigeria is high

1.6 Significance of the Study
The study shall elucidate on the nature and impact of Transfer pricing and business profit taxation of multinational companies in Nigeria .

1.7 Scope of the Study
The study focuses on the appraisal of Transfer pricing and Business profit Taxation of multinational companies in Nigeria.

1.8 Limitations of the Study
The study was confronted by some constraint including logistics and geographical factors.

1.9 Definition of Terms 
Competent authority; is a person identified as such in a Double Taxation Convention and who by that Convention is given the authority to carry out certain functions under that Convention.
Controlled transaction: means a commercial or financial transaction between connected taxable persons;
Connected taxable persons in the context of these Regulations is as defined in regulation 10 of these Regulations;
OECD: means the Organization For Economic Cooperation and Development;
Other regulatory approvals include approvals issued by the National Office For Technology Acquisition and Promotion; Department of Petroleum Resources, the Nigeria National Petroleum Corporation and any other such regulatory authorities or bodies.
“Person” means a natural or legal person;
“Resale Price Method” means a method in which the resale margin that a purchaser of property in a controlled transaction earns from reselling the property in an uncontrolled transaction is compared with the resale margin that is earned in a comparable uncontrolled purchase and resale transaction;
Service means Federal Inland Revenue Service or the FIRS‘;
TP; This typically means Transfer Pricing; (z).
TP Disclosure Form means the form on which a tax payer is required to disclose information on all related transactions.

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