Transfer Pricing Documentation Requirements.

TRANSFER PRICING

The Income Tax (Transfer Pricing) Regulation No 1, 2012 released by the Federal Inland Revenue Service (FIRS) in October 2012 which set guidelines on related party transactions. Companies are required to file their Transfer Pricing documentation together with their Income Tax Returns from 2014.For example; companies whose financial year are January 1st to 31st December are required to file Transfer Pricing documentations with their Income Tax Returns by 30th June 2014.

To avoid Transfer Pricing penalties, companies needs to maintain and upon request by FIRS, produce in a timely manner, documentation with sufficient quality so as to accurately and completely describe the transfer pricing analysis conducted by the company and the efforts to comply with the arm’s length principle.

TRANSFER PRICING DOCUMENTATION TO BE PROVIDED BY TAXPAYERS

Organizational structure

• Identification of the participants in the related party dealings and their relationship (with a brief history of and any significant changes in the relationship), including associated enterprises whose transactions directly or indirectly affect the pricing of the related party dealings
• A description of taxpayer’s worldwide organizational structure (including an organization chart)covering all associated enterprises engaged in transactions potentially relevant to determining an arm’s length price for the documented transactions

Nature of the business/industry and market conditions

• An outline of the business including a relevant recent history of the taxpayer, the industries operated in, the general economic and legal issues affecting the business and industry, and the taxpayer’s business lines
• The corporate business plans to the extent they give an insight into the nature and purpose of  the relevant transactions between the associated enterprises
• A description of internal procedures and controls in place at the time of the related party dealings
• Analysis of the economic and legal factors that affect the pricing of taxpayer’s property and services
• A description of the structure, intensity and dynamics of the relevant competitive environment(s)
• A description of intangible property potentially relevant to the pricing of the taxpayer’s property or services in the controlled transactions
• Copies of annual reports and financial statements for the year to which the Package relates and the prior five years
• Information as to the functions performed, assets employed and risks assumed relevant to the transactions
• An explanation of capital relationships (e.g., balance and source of debt and equity funding)relevant to the transactions

Controlled transactions

• A description of the controlled transactions that identifies the property or services to which the transaction relates and any intangible rights or property attached thereto, the participants, the scope, timing, frequency of, type, and value of the controlled transactions (including all relevant related party dealings in relevant geographic markets), as well as the currency of the transactions, and the terms and conditions of the transactions and their relationship to the terms and conditions of each other transaction entered into between the participants.
• Identification of internal data relating to the controlled transactions
• Copies of all relevant inter-company agreements

Assumptions, strategies, policies

• Relevant information regarding business strategies and special circumstances at issue, for example, set-off transactions, market share strategies, distribution channel selection and management strategies that influenced the determination of transfer prices
• If the taxpayer pursues a market share strategy, documentation demonstrating that appropriate analysis was done prior to implementing the strategy, that the strategy is pursued only for a reasonable period, and that the costs borne by each associated enterprise are proportionate to projected benefits to such enterprise.
• Assumptions and information regarding factors that influenced the setting of prices or the establishment of any pricing policies for the taxpayer and the related party group as a whole

Comparability, functional and risk analysis

• Description of the comparables including, for tangible property, its physical features, quality, availability; for services, the nature and extent of the services; and for intangible property, the form of the transaction, the type of intangible, the rights to use the intangible that are assigned, and the anticipated benefits from its use
• Documentation to support material factors that could affect prices or profits in arm’s length dealings
• For the taxpayer and the comparable, identify the factors taken into account by the taxpayer to evaluate comparability, including the characteristics of the property or service transferred, the functions performed (and the significance of those functions in terms of their frequency, nature and value to the respective parties), the assets employed (taking into consideration their age, market value, location, etc.), the risks assumed (including risks such as market risk, financial risk, and credit risk), the terms and conditions of the contract, the business strategies pursued, the economic circumstances (for example, the geographic location, market size, competitive environment, availability of substitute goods and services, levels of supply and demand, nature and extent of government regulations, and costs of production, etc.), and any other special circumstances.
• Criteria used in the selection of comparables including database screens and economic considerations
• Identification of any internal comparables
• Adjustments (and reasons for those adjustments) made to the comparables
• Aggregation analysis (grouping of transactions for comparability)
• Supporting transfer pricing methodology or methodologies used, if any
• If a range is used, documentation supporting the establishment of the range
• Extension of the analysis over a number of years with reasons for the years chosen, where relevant

Selection of the transfer pricing method

• Description of the method selected and the reasons why it was selected, including, for example, economic analysis and projections relied upon
• Description of the data and methods considered and the analysis performed to determine the transfer pricing and an explanation of why alternate methods considered were not selected

Application of the transfer pricing method

• Documentation of assumptions and judgments made in the course of determining an arm’s length outcome (refer to the comparability, functional and risk analysis section above)
•  Documentation of all calculations made in applying the selected method, and of any adjustment factors, in respect of both the taxpayer and the comparable
• Appropriate updates of prior year documentation relied upon in the current year to reflect adjustments for any material changes in the relevant facts and circumstances

Background documents

• Documents that provide the foundation for or otherwise support or were referred to in developing the transfer pricing analysis

Olatunji is a Manager (International Tax & Advisory Services) with Saffron Professional Services(Member firm of Geneva Group International), Lagos, Nigeria.

E-mail:Oabdulrazaq@saffron-ng.com,Oabdulrazaq11@gmail.com