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 of the Study

Transfer pricing refers to the pricing of goods, services, and intangible assets transferred within a multinational company. It is a critical issue in international taxation, as it can be used by multinational companies to shift profits from high-tax jurisdictions to low-tax jurisdictions, thereby reducing their overall tax burden.

In Nigeria, transfer pricing regulations are governed by the Federal Inland Revenue Service (FIRS) and are aimed at ensuring that transactions between related entities are conducted at arm’s length, meaning the same prices and terms that would apply between unrelated parties in similar circumstances (Aderounmu, Oyebanji and Ewert (2023).

According to Anyaduba,  & Emenyonu,  (2019), multinational companies operating in Nigeria are subject to business profit taxation based on their taxable income derived from Nigerian sources. The taxation of multinational companies in Nigeria is governed by the Companies Income Tax Act (CITA) and the Personal Income Tax Act (PITA).

The CITA provides for the taxation of companies’ profits, while the PITA governs the taxation of individuals’ income. The tax laws in Nigeria require multinational companies to prepare their financial statements in accordance with International Financial Reporting Standards (IFRS) and to comply with transfer pricing regulations to determine their taxable income.

TRANSFER PRICING AND BUSINESS PROFIT TAXATION OF MULTINATIONAL COMPANIES IN NIGERIA

Taxation is seen as the main source of government revenue (GR) all over the world. As a revenue-generating instrument, taxation is used to achieve objectives that will ensure the well-being of the country’s citizens, such as the maintenance of law and order, provision of securities, and regulation of trades and businesses for social and economic maintenance (Oyunda 2015).

Adegbite (2019) is of the view that the reason for the low GR from taxation can be attributed to tax avoidance, record falsification, tax evasion, gross inefficiency, and total leakages. There is a need for the proper monitoring of taxes received from the host and foreign companies.

Multinational corporations (MNCs) are managed separately with different branches globally but have a common corporate objective of generating abnormal profits. The major aims of business with diversification include risk reduction, increasing growth, stabilisation of income or earnings, and discretional change.

Diversification is also a source of revenue and assists to reduce dependence on a particular business segment. This decentralisation may be in a certain country or across borders. Omoye and Okafor (2004) view MNCs as firms with global affiliates and head offices situated in a developed region.

In addition, between 2005 and 2007, Nigeria lost £502m in transfer pricing through trade miss-invoicing (Christian Aid Report 2009). Oil companies such as Chevron, Halliburton and Shell International Petroleum have avoided some taxes to domestic and foreign governments using accounting and tax transaction packages. In Nigeria, Shell International Petroleum avoided approximately $710 506 000 during 1992, Halliburton $14 285 714.20 in 2002 and Chevron $17 857 142.86 in 2003 (Bakare 2006).

Insufficient information from the parent company’s results in transfer pricing and other forms of tax avoidance in Nigeria, leading to various forms of tax avoidance and other capital flight issues. Production in the oil sector is handled by multinational companies with tendencies toward tax avoidance through under-invoicing export or over-invoicing imports (Bakare 2006).

The need to determine the causes for low revenue from taxation, despite the volume of transaction done by the local and foreign companies, has attracted several investigations alike. Various researchers have found that TPM prevents economic growth. Ibitoye (2020), for example, examines transfer pricing manipulation and its effect on the Nigerian economy. It was found that the gross domestic product (GDP) reacted significantly negative to the rise in transfer pricing.

Obasi (2015b) also shows a negative relationship between both transfer pricing, unemployment and economic growth in the normalised long-term equilibrium. In contrast to these findings Nguyen (2019) finds an insignificant and even negligible effect of transfer pricing on economic growth in Vietnam which is a low-tax country.

Grubert and Mutti (1991) also adopt the augmented Dickey-Fuller (ADF) test on cross-sectional data for US MNCs and stated that taxes and transfer pricing in multinational companies indicate that the reporting of profits in high- and low-tax countries is in line with income shifting behaviour.

Income shifting implies that the multinational companies usually intent to move their profit before tax to countries or jurisdictions with low tax in order to reduce the burden from tax.

In a nutshell the result implies that the low tax determines the level of attraction of foreign companies which also determines the revenue generated. In the same vein, the authors find that real investment also depends on the effectiveness of the host country’s tax rates and tariff strategies. They found evidence of divergence in the results of the investigation from the perspectives of foreign investment in other countries and in host countries on TPMs.

The intention, therefore, is to answer the question of the effect of transfer pricing manipulation on economic growth in Nigeria. Nigeria has been chosen as the ‘laboratory’ because of the volume of MNCs in the country and the expected impact of the revenue generated from the tax received from the MNCs on economic growth. Therefore, this research work aimed to examine transfer pricing and business profit taxation of multinational companies in Nigeria.

1.2          Statement of the Problem

Transfer pricing and business profit taxation of multinational companies in Nigeria is a complex issue that has garnered significant attention from policymakers, tax authorities, and scholars. Transfer pricing refers to the pricing of goods, services, and intangible assets transferred within a multinational company, particularly across different countries. The primary concern with transfer pricing is the potential for multinational companies to manipulate prices in order to shift profits to low-tax jurisdictions, thereby reducing their overall tax liability. This practice can have significant implications for the tax revenue of host countries such as Nigeria.

Nigeria, like many other developing countries, faces challenges in effectively regulating transfer pricing and ensuring that multinational companies pay their fair share of taxes. The country’s tax authorities are tasked with establishing arm’s length prices for intra-group transactions to prevent profit shifting and ensure that taxable profits accurately reflect the economic activities undertaken within Nigeria. However, achieving this goal requires a deep understanding of transfer pricing regulations, international tax laws, and the complexities of multinational business operations.

Furthermore, the taxation of multinational companies in Nigeria is not limited to transfer pricing issues. The determination of business profits attributable to Nigeria for tax purposes involves intricate considerations such as permanent establishment rules, profit allocation methods, and the application of double tax treaties. These factors contribute to the broader discourse on how Nigeria can effectively tax the profits generated by multinational companies operating within its borders.

Addressing the challenges associated with transfer pricing and business profit taxation of multinational companies in Nigeria requires a comprehensive understanding of international tax principles, domestic tax laws, and the specific economic context of Nigeria. Therefore, this research work aimed to examine transfer pricing and business profit taxation of multinational companies in Nigeria.

1.3          Objectives of the Study

The main purpose of this study is to examine transfer pricing and business profit taxation of multinational companies in Nigeria. Specifically, the study aimed:

• To determine transfer pricing and business profit taxation of multinational companies in Nigeria.
• To ascertain the relationship between transfer pricing and business profit taxation of multinational companies in Nigeria
• To find the challenges of transfer pricing in multinational companies in Nigeria.

1.4          Research Questions

The following research questions guided the study:

• What are the transfer pricing and business profit taxation of multinational companies in Nigeria?
• What is the relationship between transfer pricing and business profit taxation of multinational companies in Nigeria?
• What are the challenges of transfer pricing in multinational companies in Nigeria?

1.5          Research Hypotheses

The following research questions guided the study:

Hypothesis 1

There is no significant benefit of transfer pricing and business profit taxation of multinational companies in Nigeria

There is significant benefit of transfer pricing and business profit taxation of multinational companies in Nigeria

Hypothesis II

There is no relationship between transfer pricing and business profit taxation of multinational companies in Nigeria

There is significant relationship between transfer pricing and business profit taxation of multinational companies in Nigeria

1.6          Significance of the Study

This study will help the Nigerian authorities in gaining insights into the strategies employed by multinational companies in managing their transfer pricing activities, Nigerian authorities can develop effective policies and regulations to ensure that these companies pay their fair share of taxes.

Also, this study is importance for both academic research and practical policy-making, offering insights that can contribute to more effective taxation policies and regulations in Nigeria and potentially other developing economies facing similar challenges.

Moreover, this study can contribute to the existing body of knowledge on transfer pricing and taxation in the context of developing economies, providing valuable insights for academics, researchers, and practitioners interested in international taxation and transfer pricing practices.

This study can potentially inform global discussions on transfer pricing regulations and their implications for developing economies.

The study will serve as a reference point or material for other researchers who may like to carry out research on the similar topic.

CONCLUSION

In Nigeria, transfer pricing regulations are aimed at ensuring that transactions between related entities are conducted at arm’s length prices, thereby preventing profit shifting and tax evasion. The country’s tax authorities have established guidelines to govern transfer pricing practices, with a focus on promoting fairness and transparency in business profit taxation for multinational companies operating within its borders.

Transfer pricing regulations in Nigeria are designed to align with international best practices and prevent the erosion of the country’s tax base through aggressive transfer pricing strategies. The Nigerian government has implemented transfer pricing rules that require multinational companies to document their related-party transactions and demonstrate that they comply with the arm’s length principle. This approach aims to ensure that taxable profits accurately reflect the economic activity undertaken within Nigeria, thereby safeguarding the country’s tax revenues.

Moreover, Nigeria’s tax authorities have established mechanisms for enforcing transfer pricing rules, including conducting transfer pricing audits and imposing penalties for non-compliance. These measures are intended to deter multinational companies from engaging in transfer pricing practices that could erode Nigeria’s tax base and undermine the integrity of its tax system. By addressing transfer pricing challenges, Nigeria seeks to create a conducive environment for business operations while safeguarding its fiscal interests.

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