Navigating Transfer Pricing For Startups And Tech Companies: A Nigerian Perspective By Victoria Taiwo And Omojo Adefila

Introduction

Nigeria’s startup ecosystem has established itself as one of the most dynamic in Africa. Despite global headwinds in venture capital markets, funding into African technology companies remained significant in 2024, with Partech reporting that US$3.2 billion was invested across the continent, much of it concentrated in Lagos, a city that now ranks among the leading global hubs for technology talent and entrepreneurial activity. This vibrancy, however, comes with complexity. Many Nigerian startups are not purely local in their operations. Startups with global ambitions or international investors may choose to establish a foreign company with a Nigerian subsidiary. This structure is preferred to help streamline investment and intellectual property protection. As a result of this, cross-border transactions may be an integral part of their business models.

These cross-border arrangements frequently fall within the scope of transfer pricing (TP) rules. For founders and finance teams already preoccupied with growth and fundraising, TP may appear technical or peripheral. Yet the consequences of ignoring it can be costly: profit reallocations, tax adjustments, penalties, and even reputational harm during investor due diligence. For this reason, transfer pricing should not be seen as a compliance box-ticking exercise, but as a key governance tool that protects value and enables long-term scalability.

In addition, serial entrepreneurship has become increasingly prevalent in Nigeria's tech ecosystem, where founders operate multiple ventures simultaneously or sequentially, often leveraging shared services such as centralized finance, legal, product development, and administrative functions and sharing infrastructure, talent, and capital resources across their portfolio companies. While this approach offers operational efficiencies, it introduces additional transfer pricing complexity, as transactions between related entities, whether service fees, cost allocations, or financing arrangements must still satisfy arm's length requirements.

 Why Transfer Pricing Matters for Startups

It is often assumed that transfer pricing is primarily a concern for large multinationals. In practice, however, startups and scaling tech businesses are equally exposed. The early years of a business often involve rapid cash burn, heavy reliance on intellectual property, and constant injection of capital from investors. At these stages, transfer pricing questions surface at three particularly sensitive moments: when investors conduct due diligence, when the business expands into new jurisdictions, and when tax authorities scrutinize cross-border dealings.

A potential investor, for example, may pause if they perceive that related party transactions are poorly documented or expose the company to material tax risks. Similarly, an expansion strategy that relies on licensing technology or importing services from affiliates must demonstrate that the pricing is aligned with the arm’s length principle. Further, in the event of an audit, the tax authority has the power to reallocate profits, impose additional taxes, and levy interest and penalties if they consider arrangements not to reflect economic reality.

The Income Tax (Transfer Pricing) Regulations, 2018 (the Regulations), makes this exposure very clear for businesses operating in Nigeria. Nigerian entities are required to have contemporaneous TP documentation in place six months after the end of each accounting year where controlled transactions exceed ₦300 million, and they must disclose all related-party transactions in their annual TP returns regardless of the value of such transactions. While the threshold for maintaining contemporaneous TP documentation may suggest that only larger businesses should be concerned about TP matters, the reality is that for high-growth startups with foreign investors, cross-border related-party transactions often exceed those limits much earlier than expected. Also, the threshold for maintaining contemporaneous TP documentation does not grant complete exemption as the Regulations state that the tax authority may still request this from taxpayers. However, taxpayers with controlled transactions that fall below the threshold are provided with additional time to make it available to the tax authority upon receipt of a request.

 Key Transfer Pricing Exposures for Nigerian Tech Startups

Startups in Nigeria’s tech space often work closely with foreign partners or parent companies, and these relationships can create tax risks if not managed properly. One area that causes confusion is intellectual property (IP). For example, a Nigerian fintech may use software built in Europe but sold locally. To determine where profit should be taxed, the tax authority will ask: Who owns the IP? Who paid to develop it? Who makes key decisions about how it is used? These answers matter because they show where value is created. With hard‑to‑value IP like algorithms and customer data, the scrutiny is even higher. This is why startups should keep clear records of documentation such as development notes, contributor logs, version histories, and commercialization decisions.

Another common pressure point is service arrangements within the group. It’s normal for product design, platform engineering, or cloud management to be handled by teams outside Nigeria while the local company focuses on sales or support. But for this to pass a tax review, there must be proper intercompany agreements and supporting documents. Simply receiving invoices from a foreign affiliate without evidence of the services provided (such as activity reports or service descriptions) creates TP risk.

 Financing is also an area where many young companies face challenges. Startups often rely on loans from founders, investors, or foreign affiliates. The issue arises when interest rates or repayment terms do not reflect what independent businesses would agree to. Even interest‑free loans must still look like real loans from a commercial perspective. Nigerian startups borrowing in foreign currency must also be prepared to justify their terms, especially as tax authorities increasingly question whether some loans should instead be treated as equity. Proper documentation is essential to defend these arrangements.

Finally, cost allocation can become tricky when a parent company provides shared global tools such as cloud services, analytics platforms, cybersecurity infrastructure, and so on. The Nigerian entity must pay its fair share using a reasonable allocation key, such as number of users, transaction volumes, or headcount to determine its contribution to the total cost. Whatever allocation key that is chosen must be applied consistently and documented. Without this, the tax authority may argue that profits are being shifted out of Nigeria.

Aligning Startup Operations with Nigeria’s New Tax Laws and Existing Transfer Pricing Rules

The Nigeria Revenue Service (NRS), through the Regulations, established a clear framework for how businesses should manage their related-party dealings. The rules emphasize the preparation of documentation to justify pricing, the disclosure of relationships in annual returns, and the need to align economic substance with contractual arrangements. While some startups may believe they can delay compliance until profitability, this approach is risky. Even loss-making entities are required to document their transactions. Losses must be explained with evidence of market conditions, strategic choices, and the allocation of risks, otherwise, tax authorities may question them.

Further, the Nigeria Tax Act (NTA or the Act), which was signed into law on 26 June 2025, and took effect on 1 January 2026, introduced salient changes to the Nigerian tax landscape that startups need to be aware of. These reforms represent the most comprehensive overhaul of Nigeria's tax framework in decades, consolidating previously fragmented legislation into a unified regime. Some provisions that may be relevant to startups are highlighted below.

 The Act redefines "small companies" as those with annual gross turnover of ₦100 million or less (increased from the previous ₦25 million threshold) and total fixed assets not exceeding ₦250 million. Qualifying small companies are now exempt from Companies Income Tax (CIT), Capital Gains Tax (CGT), and the newly introduced 4% Development Levy, effectively providing a 0% tax rate for eligible entities. However, this exemption explicitly excludes companies providing professional services.

 The NTA also introduces Controlled Foreign Company (CFC) rules, which have implications for Nigerian startups with foreign subsidiaries. Under these provisions, where a Nigerian company controls a foreign entity that fails to distribute its profits, the Nigerian parent may be taxed as if those profits were distributed, provided such deemed distribution does not negatively affect the foreign subsidiary's business operations. This measure is designed to counter profit shifting and tax deferral strategies.

The Act also broadens the definition of a permanent establishment to cover foreign companies with a place of management in Nigeria. This change means that if a foreign startup’s founders or leadership team are making key decisions from Nigeria the company could now be treated as having a taxable presence in the country, regardless of where it was legally incorporated. For fast‑growing tech companies with distributed or hybrid teams, this makes it crucial to track where strategic decisions are actually made. Something as simple as routinely running board meetings, approving budgets, or directing operations from Nigeria could unintentionally trigger a Nigerian tax obligation.

For startups with transfer pricing and international tax exposure, these reforms necessitate immediate review of existing arrangements and practices, financing structures, and documentation to ensure alignment with the new framework.

 Managing Transfer Pricing Proactively

The key for startups seeking to proactively manage risk is to embed transfer pricing considerations early, in a way that is proportionate to the scale of their transactions. This does not mean commissioning expensive studies at every stage. Instead, it involves maintaining a clear functional analysis of the business: who performs the critical functions, who owns the risks, who controls strategic decision-making and ensuring that intercompany agreements reflect this reality.

Functional analysis is particularly important in determining the tested party in a TP arrangement. For instance, a Nigerian subsidiary that primarily undertakes sales and support might reasonably earn a limited return, while the parent company that owns and develops the intellectual property would expect residual profits. Without a functional analysis, however, such positions are hard to defend.

Agreements should also be simple but substantive. For example, a development services agreement between a Nigerian affiliate and its foreign parent should outline deliverables, timelines, and acceptance criteria. Where Nigerian teams contribute enhancements or unique features for local markets, their contributions should be acknowledged through a cost-sharing or co-development arrangement, rather than ignored. Similarly, service agreements should include clauses that allow for renegotiation when significant business events occur, such as a new funding round or regulatory change.

Where comparables are scarce, which is often the case in young technology markets, businesses should avoid forcing poor comparables into transactional net margin method (TNMM) analyses. Instead, they may consider an alternative approach such as profit-split method. Crucially, any departure from standard methods should be explained transparently in documentation, rather than left unaddressed.

Practical Pitfalls to Avoid

While the best practices are clear, so are the pitfalls. One common mistake is assuming that because the business is loss-making, transfer pricing does not matter. On the contrary, losses must be justified and explained, otherwise they can be disallowed.

Another pitfall is relying on informal or undocumented cross-charges. Even a basic written agreement that reflects commercial reality is far better than silence.

Finally, businesses should resist the temptation to rely on weak comparables simply to satisfy formal requirements. Transparency in explaining why certain comparables or even transfer pricing methods are unsuitable is far more persuasive to tax authorities.

 Conclusion

For Nigerian startups and technology companies, transfer pricing is not a distant concern reserved for global corporations. It is a pressing governance issue that intersects directly with fundraising, expansion, and tax compliance. The complexity of intellectual property, the reliance on intercompany services, and the challenges of financing and cost allocation mean that TP risks arise from the very earliest stages of growth.

The path forward is not to treat TP as a compliance burden but as a framework for building investor trust and safeguarding value. By embedding proportionate documentation, aligning agreements with actual substance, and drawing on both local regulations and international best practices, Nigerian startups can manage risk effectively while positioning themselves for sustainable expansion. In a rapidly evolving ecosystem, transfer pricing is less about ticking boxes and more about demonstrating that the business is governed, transparent, and ready to scale across borders.

Footnote

1. Partech Africa ‘2024 Africa Tech Venture Capital Report’ (https://partechpartners.com/africa-reports/2024-africa-tech-venture-capital-report)

The opinion expressed in this article is solely personal and does not represent the views of any organization or association to which the authors belong.