|
Getting your Trinity Audio player ready...
|
New Zealand Government’s recent release of an explanatory memorandum on the technical provisions to counter base erosion and profit shifting in the taxation (Neutralising Base Erosion and Profit Shifting) Bill holds lessons for Nigeria.
The memorandum explains that the proposed measures in the Bill aim to prevent multinationals from using: artificially high interest rates on loans from related parties to shift profits out of New Zealand (interest limitation rules); artificial arrangements to avoid having a taxable presence (a permanent establishment) in New Zealand; transfer pricing payments to shift profits into their offshore group members in a manner that does not reflect the actual economic activities undertaken in New Zealand and offshore; and hybrid and branch mismatches that exploit differences between countries’ tax rules to achieve an advantageous tax position.
In recent years, central governments and tax authorities around the world have paid more attention to transfer pricing. Different countries are introducing legislation, rules or regulations with detailed requirements for taxpayers (mostly companies) to document and support the application of the arm´s-length principle to their inter-company transactions.
The arm’s-length principle of transfer pricing states that the amount charged by one related party to another for a given product must be the same as if the parties were not related. An arm’s-length price for a transaction is therefore what the price of that transaction would be on the open market.
Globalisation has also had a great impact on the importance of transfer pricing, as a large part of global trade takes place within multinational enterprises (MNEs).
From the tax authorities’ perspective, transfer pricing is important in that setting of prices for the provision of services or sale of tangible or intangible property has significant impact on the profitability of companies, which may in turn affect tax payable. The tax authorities would usually strive to defend its tax base and ensure it collects adequate tax that reflects the level of economic activity taking place within its jurisdiction.
On the other hand, the taxpayer often sees transfer pricing as a way of optimising its group profit. This is achieved by evaluating the performance of each entity within the group, anticipating possible double taxation issues and areas for supply chain management.
The opposing perspective and objective of the tax authorities and taxpayer often lead to controversies. It is therefore important for taxpayers to know the existing transfer pricing risks so they can proactively address them without compromising the law.
Transfer price is the price at which services, tangible and intangible properties are traded among related entities. Nigeria introduced transfer pricing regulations (Regulations) in 2012. With effect from August 2, 2012, every company with related party or intra-group transactions is required to conduct such transactions at arm’s-length.
The Regulations require a taxpayer to conduct and document an adequate transfer pricing study to demonstrate arm’s-length by conducting and documenting. While it is clear that transfer pricing is relatively new in Nigeria, it is vital that taxpayers start on a good note by managing their transfer pricing risk proactively.
In the Zealand, many of the measures introduced in the bill are in line with those that were proposed by the Organisation of Economic Cooperation and Development (OECD) as part of its BEPS Action Plan.
To illustrate “eBay France (the taxpayer), a French company incorporated in 2000 and wholly owned by eBay International AG (Swiss Company), provides marketing and sales support services for the benefit of its parent company, the Swiss entity. It is also the registered owner of the internet domain name “ebay.fr”. eBay International AG conducts business in France and leverages on the marketing and sales support services from eBay France. On auditing the company, the French tax authority held the view that the right to use the internet domain name “ebay.fr” was an intangible asset that eBay France had failed to recognise upon registration under its name” said Victor Adegite, Senior Manager, Tax, Regulatory & People Services at KPMG Advisory Services, Lagos.
“The French tax authority then made a transfer pricing adjustment equal to 2 percent of the turnover realised by eBay International AG through “ebay.fr” to reflect what the French tax administration considered to be arm’s-length compensation for the registered owner of the domain name” Adegite added.
The tax authorities’ assessment was challenged but the court confirmed the assessment. The court held that the exclusive right to use an internet domain name entails the recognition of an intangible fixed asset, for which arm’s-length compensation must be paid if used by a related party.
STEPHEN ONYEKWELU
