The Impact of Transfer Pricing on Financial Reporting: A Nigerian Study

Abstract

The issue of transfer pricing arises where companies are divisionalised and have responsibility centres operating as strategic business units. This kind of situation is associated with the challenge of determining suitable prices for intra-group transactions. The transfer pricing problem becomes even more critical where a company has subsidiaries spread around the world especially in countries that have varying tax rates. Under this situation, it is common for multinational companies to attempt to minimise their tax liabilities by shifting profits from higher tax countries to lower tax regimes. Of course tax authorities all over the world are not comfortable with this kind of arrangement. Thus efforts are being made like what the FIRS is doing in Nigeria to stop it. The issue of transfer pricing as it relates to financial reporting is usually associated with uncertain tax positions in terms of the extent to which tax reserves may need to be recorded due to uncertainty with respect to tax return position. Transfer pricing has income tax consequences which of course, is more pronounced when the parties to a transaction are taxed in different jurisdictions. So it is really a problem for multinational companies and governments all over the world. Therefore, this study was carried out to examine the impact of transfer pricing on financial reporting. And it was gathered that governments and multinational companies in Nigerian and those of other developing countries world over are constrained by the required resources to be able to effectively implement transfer pricing. Nevertheless, it is strongly recommended that appropriate transfer prices be established for intra-group and/or intra-firm transfer of goods, intangibles and services.

Keywords: Transfer Pricing, Financial Reporting, Arm’s Length Principle.