Transfer Pricing and Business Profit Taxation of Multinational Companies in Nigeria
CHAPTER ONE
INTRODUCTION
1.1 Background of the Study
Nigeria is a country blessed with both human and natural resources. It has a population of over 200 million people, ranked the ninth-largest country in the world in terms of natural gas reserves, and eleventh in crude oil production.?The nation represents over 70% of the market shares in the West African countries, and one of the most sort after destination for investors (Odutola, 2019).
In spite of these enormous resources, Nigeria is ranked among one of the poorest country in the world. The decline in the price of crude oil in the world’s market has added more pressure on the government to seek alternative means of revenue. Due to this, the government reviewed its tax laws, among which are the Income Tax (Transfer Pricing). Regulations 2012, which was replaced by the Income Tax (Transfer Pricing) Regulations 2018. The aim among other is to increase the revenue base of the government by blocking loopholes and bringing more taxpayers into the tax net (Income Tax (Transfer Pricing) Regulations, 2018).
Transfer Pricing and Business Profit Taxation of Multinational Companies in Nigeria
Transfer Pricing (TP) by all standards is a coherent business practice where inter-related companies transact under the arm’s length principle (ALP). On the contrary, it is suspicious. Through TP abuse, Multinational Companies (MNCs) move their profits offshore, leaving behind a dwindling tax base in their host countries by exploiting mismatch between tax jurisdictions (Vijayakumar, 2016). For example, selling goods or services to subsidiaries in low-tax areas at a reduced price resulted in low revenues for the high-tax area companies and high revenues and profits in the low tax jurisdiction. Wong et al. (2011) posit that the tax authority of the subsidiary will not complain about this abuse because of the tax revenue accruing to them whereas the parent company will consider it unacceptable.
Nigeria, a host to some of the MNCs in the world, has continued to experience a significant loss in revenue through profit shifting techniques which have increased public debt. Debt profile is N36.3 trillion and it will continue to rise if nothing urgent is done to address these revenue losses (Babatunde, 2021). MTN in 2013 set aside N11.398 billion and paid to MTN Dubai. Similarly, MTN confirmed it made unauthorized payments of N37.6 billion to MTN Dubai between 2010 and 2013 (Maya, 2015). These transfers out of Nigeria through a sophisticated tax planning strategy have left the government with no other option rather than seeking loans from bilateral, multilateral creditors as well as domestic loans.
In 2015, the federal government of Nigeria paid the total sum of N1.06 trillion on debt servicing. And in 2016 and 2017 respectively Nigeria paid up to 96 and 98% of the debt service projection. Similarly, in 2018, the amount paid on debt servicing was 2.084 trillion, and by the end of the 3rd quarter of 2019 the government had paid the sum of N1.92 trillion which is 11.98% higher than the budgeted debt servicing amount. In 2020, the government paid N 3.26 trillion on debt servicing which is 24.85% higher than the target of N2.45 trillion, which constitutes 82.92% of revenue (Budget, 2020).
Studies have been carried out on TP and related concepts in Nigeria. For instance, Osho et al. (2020) studied the impact of taxation on TP in Nigeria economy. Olaoye and Aguguom (2017) examined tax base erosion and profit shifting through TP evidenced from Nigeria. Adum (2015) studied the impact of TP on financial reporting: a Nigerian study. Also, Obasi (2015) examined the impact of TP on economic growth in Nigeria. OlatunjiIsau (2014) studied TP: the Nigerian perspective. Similarly, Akhidime (2011) examined the international TP regulation: Nigerian experience. Aruomoaghe and Atu (2010) studied the multinational TP: issues and effects on the Nigerian economy.
Despite the fact that the branches of MNC are managed separately, they have common corporate objectives to achieve. One of such objectives is “good profit”. To achieve this, MNCs engage in international trade among the various units of the MNCs, such as between the parent company and its foreign subsidiaries or between its subsidiaries in different countries. This “trade” among the various units of MNCs is normally carried out at a price referred to as ‘transfer price”. Kayode (2003:252), describe transfer Price as “a price attached to goods and services being exchanged among divisions operating under the canopy of a central management”.
One could make a distinction between intra-corporate transfer price and inter-corporate transfer price by using the former to refer to transactions among divisions of a single corporate entity and the latter to refer to transactions among different corporate entities of one large company. In this study, inter-corporate refers to any transfer made within a global corporate family. Inter-corporate pricing is also used synonymously with transfer pricing.
This study will create awareness on the issues associated with multinational corporate transfer pricing policy, identify the various conditions that facilitate transfer pricing, identify the methods adopted in transfer pricing, show the effect of international transfer pricing on the economy and recommend a general guideline for determining a minimum transfer price in transfer pricing situations. The term “transfer price” has been defined variously by different authors. Okoye (1997:462), in his own view, defines transfer price as “a price used to measure the value of goods or services furnished by one division to another division within a company”.
Adeniji (2005:211) defines it as “the monetary value attached to goods manufactured by a particular decision making unit and then transferred to another division for the purpose of being utilized for the divisional final product”. While Dean, Feucht and Smith (2008:12), are of the view that it is “pricing of goods and services that are transferred between members of a corporate family including parent to subsidiary, subsidiary to parent and between subsidiaries”. From the above definitions, multinational transfer price could be referred to as the price used to measure the value of goods and services being exchanged among the different units of the MNCs. Inter-corporate transfers are important to most MNCs not just because of the profit motive but for the going concern of the MNCs.
This of course may be the reason why most MNCs are engaging in intercorporate transfers despite stringent measures put in place by governments of host countries of their subsidiaries to checkmate them. Adediran (2006:12) cites some reasons why MNCs will continue in inter- corporate transfers. However, the study will examine the transfer pricing and business profit taxation of multinational companies in Nigeria.
Transfer Pricing and Business Profit Taxation of Multinational Companies in Nigeria
1.2 Statement of the Problem
Policy decisions regarding the taxation of multinational companies frequently expose a tension between two competing goals: first, enhancing the competitiveness of the location for multinational company activity; and second, protecting the corporate tax base as a revenue source. In most tax systems these goals are in tension. Countries making their tax system more favorable to multinational companies by lowering their tax rates, or by instituting favorable regimes for particular activities or companies, typically erodes their corporate tax revenues.
On the other hand, raising additional revenue through the corporate tax— by raising rates, clamping down on international profit shifting, or other measures—risks reducing the attractiveness of the location for mobile multinational activity. While booked profits are far more tax sensitive than physical investment or employment, the latter activities also respond to tax incentives. Policymakers are particularly reluctant to be aggressive in their corporate tax collection efforts for fear of discouraging jobs or investment.
Corporate tax rates have declined steadily among OECD countries since the mid-1980s: In 1985 the average statutory tax rate among OECD countries was 43 percent; in 2000 it was 30 percent; and in 2019 it was 21.7 percent. Arguably, corporate taxation has been inhibited by a prisoner’s dilemma situation. Absent coordination, countries have an incentive to lower their tax rates to try to gain tax base at other countries’ expense. But if countries were to coordinate, they could sustain higher tax rates and a similar distribution of economic activity. (The aggregate amount of investment is far less tax sensitive than investment in any particular location.)
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.
