Nepal: Transfer Pricing in Nepal: Bird’s Eye View

Background on Transfer Pricing

The Organization for Economic Cooperation and Development (OECD) Council had drafted the OECD Transfer Pricing Guidelines in 1979 CE and officially published the original version in 1995 CE. The OECD Transfer Pricing Guidelines were introduced to address the challenges arising from the pricing of cross-border transactions between related entities within Multinational Enterprises (MNEs). These challenges primarily revolved around ensuring that such transactions are conducted at arm’s length.

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In Nepal, the Inland Revenue Department initially introduced the transfer pricing provision under Section 33 and Rule 15 of the Income Tax Act, 2058 (2002) and Income Tax Regulations, 2059 (2002), respectively. Due to the emerging global trade and cross-border transactions in Nepal, the Inland Revenue Department had assessed the necessity of proper guidelines on transfer pricing and issued a directive, “Directive related to Transfer Pricing, 2081 (2024 CE)” on October 2024.

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Overview of Directive Related to Transfer Pricing

The Directive related to Transfer Pricing, 2081 (2024 CE), marks a significant milestone in Nepal’s efforts to regulate intercompany transactions and align with international tax practices, providing clarity and guidance on arm’s length principles. This Directive aligns with Section 33 of the Income Tax Act, 2058 (2002), empowering authorities to regulate prices in cross-border transactions between related parties based on arm’s length principles.

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This Directive enforces the use of comparability analysis and methodologies like the Comparable Uncontrolled Price Method, Resale Price Method, Cost-Plus Method, Transactional Net Margin Method and Transactional Profit Split Method to determine fair market prices. It also outlines robust documentation, functional analysis, and guidelines for adjustments to ensure compliance and transparency.

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Necessity for introducing the Transfer Pricing Directive in Nepal

The necessity for introducing Transfer Pricing guidelines arose from the growing complexity and challenges in regulating cross-border transactions between related entities and Multinational Enterprises, leading to the need for standardised rules to ensure fair taxation and prevent tax avoidance. The necessity for introducing the Transfer Pricing Directive in Nepal is as under:

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1. Prevention of Base Erosion and Profit Shifting

2. Ensuring Fair Tax Allocation

3. Establishing Consistency Across Jurisdictions

4. Mitigation of Double Taxation

5. Providing a Framework for Dispute Resolution

6. Promoting Transparency and Compliance

7. Facilitating Economic Development and Trade

8. Responding to Globalization

9. Addressing Digital Economy Challenges

10. Reducing Compliance Costs to Businesses

11. Reducing manipulation of intercompany pricing

12. Simplifying compliance for multinational enterprises

13. Minimizing administrative burdens for tax authorities

14. Adoption of consistent Transfer Pricing documentation standards

15. Aligning global TP practices with OECD BEPS action plans.

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Conclusion

Transfer pricing is an indispensable element of Nepal’s fiscal and tax policy in an era of economic globalisation. While challenges exist, there are substantial opportunities to refine the regulatory framework and promote compliance. A balanced and transparent system will not only protect Nepal’s tax base but also foster a fair and attractive environment for foreign investors. For Nepal, the journey to a mature transfer pricing regime is as crucial as it is promising.

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Reference/ Citation

Inland Revenue Department