Transfer Pricing in Nigeria – Operating large firms has everything to do with proper accounting and documentation, as well as checks and balances especially on the financials of the enterprise. This is to ensure not just the smooth running of the firm, but so as to ensure that the enterprise is run at an appreciable profit margin. The accountants and money professionals know that this has everything to do with the differential inflow and outflow of cash within and without the firm, everything from purchasing, manpower, materials, and everything that is involved in the business concerns of the company.
One of the minute checks that determine to a large extent the financial health of the company is a phenomenon known as transfer pricing.
This is defined as the price at which different entities or departments transfer costs from one of them to the other. This is particularly applicable when an accountant is interested in breaking down a large company or conglomerate into its constituent departments in order to do its auditing as separate entities.
What is a transfer price?
A transfer price is known as the price at which divisions of a company transact with each other, such as the trade of supplies or labor between departments. Transfer prices are talked about when individual departments of a larger multi-entity firm are treated and measured as separately run parts. A transfer price can also be referred to as a transfer cost.
When top management staff audit their accounts, it is often assumed or sometimes is the real practice that different departments of the enterprise are in charge of their profits or Return on Investment (abbreviated as ROI). Therefore, when divisions are required to transact with each other, a transfer price is used to determine the final selling costs of the product or service ensuing from the company.
Separate divisions of an oil company may produce, refine, and sell gasoline. Many large entertainment companies own film studios, movie theaters, and cable networks. The movie theaters and cable networks both feature movies and shows produced by the film studio. A company that produces confectioneries or pastries will have need of flour, sugar, additives, preservatives and the likes.
Transfer pricing is referred to as the price at which the cost of flour leaves the company store to the kneading department, the kneaded flour goes to the creaming department, and so on until the finished product, and it increases steadily in value until it gets to the quality control section and so on. Transfer prices tend not to differ much from the price in the market because one of the entities in such a transaction loses out; they start either buying for more than the prevailing market price or selling below the market price, and this affects their performance.
There are laws and regulations on transfer pricing which ensure the fairness and accuracy of transfer pricing among related entities of a company or business. Most countries apply the arms length principle, though with some variation, in their transfer pricing regulations.
The ALP requires companies to allocate income and expenses between parties as if the parties are unrelated and are acting in their own best interest. The ALP is articulated under the OECD Transfer Pricing Guidelines(OECD Guidelines) and in specific country regulations. Regulations stipulate an arm’s-length rule that states that companies must establish pricing based on similar transactions done between parties not of the same related company but at arm’s length.
Aggressive transfer prices has a way of inflating profits in places where the taxing is low and reduce profits in high-tax climes. Thus, “transfer pricing” is the system of laws and practices used by countries to ensure that goods, services and intellectual property transferred between related companies are appropriately priced, based on market conditions, such that profits are correctly reflected in each jurisdiction.
Especially as it concerns managerial accounting and even reporting purposes for large corporations and multinationals, they have caps and some level of tact with which they release funding to their subsidiaries in different locations, as well as sharing its profits to them for their day to day activities.
The subsidiaries may be accounted for as standalone businesses or entities, or they may be integrated into larger business segments or geographies. Again, in contrast, host governments are only interested in the returns made to the subsidiaries in the government’s jurisdiction. Since the profit margin of the corporation depends largely on the rate at which inter-company transactions are consummated, inter-company transactions have become a matter of keen interest to most governments, being that these governments seek to either maintain or increase their tax regimes and bases.
It is therefore important that businesses with cross-border inter-company transactions understand the concept of transfer pricing, defined as the prices at which companies sell goods, services and intangible assets to related parties, as well as the intricacies of the global environment in which transfer pricing takes place, the requirements for compliance, and the risks of non-compliance.
Transfer pricing is watched with keen eagle eyes within a company’s financial reporting and requires strict and detailed documentation that is included in financial reporting documents for external or internal auditors and regulators. This documentation is monitored;, and if there are discrepancies in documentation, it can lead to added expenses for the firm in the form of added taxation or restatement fees. These prices are closely checked for exactness and tact to ensure that profits are booked appropriately within arm’s-length pricing methods and associated taxes are remitted accordingly.