TRANSFER PRICING AND BUSINESS PROFIT TAXATION OF MULTINATIONAL COMPANIES IN NIGERIA
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TRANSFER PRICING AND BUSINESS PROFIT TAXATION OF MULTINATIONAL COMPANIES IN NIGERIA
TRANSFER PRICING AND 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 transactio: 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.
TRANSFER PRICING AND BUSINESS PROFIT TAXATION OF MULTINATIONAL COMPANIES IN NIGERIA
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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. .. accounting project topics
TRANSFER PRICING AND BUSINESS PROFIT TAXATION OF MULTINATIONAL COMPANIES IN NIGERIA