Transfer Pricing, Thin Capitalisation and the Cost-Plus Defence at Zuma Pharma
Zuma Pharma Nigeria Ltd, a Nigerian company wholly owned by an Indian parent, had revenue of ₦9.2bn, EBITDA of ₦2.4bn and API purchases of ₦3.0bn for the year ended 31 December 2025. It paid its parent ₦1.1bn in management fees (12% of revenue), ₦600m in royalties (6.5% of sales), and ₦2.1bn interest on a US$10m intra-group loan at 14%; the arm's-length rate is 9%. The loan has 3:1 debt-to-equity gearing. The parent also supplies active pharmaceutical ingredients at 18% above the price charged to the parent's Kenyan subsidiary. The tax authority has issued a transfer pricing assessment denying the entire management fee and applying the 30% EBITDA interest limitation. The CFO says the group has a global transfer pricing policy and the fees are 'charged at cost plus 10%', so no adjustment is due. The company has a five-year tax holiday on one product line that expires in 2026. The group is considering an advance pricing agreement and a principal structure in Singapore.
1. Quantify the main transfer pricing and thin-capitalisation exposures and evaluate the CFO's defence. Show the order of adjustments.
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Interest: the intra-group loan is USD 10m at 14%. At ₦1,500/US$, interest is ₦2.1bn. The arm's-length rate is 9%, so the transfer-pricing adjustment reduces interest to ₦1.35bn. The 30% EBITDA limitation gives a cap of 30% x ₦2.4bn = ₦720m. Even after the rate adjustment, ₦630m is disallowed (₦1.35bn - ₦720m). At 30% CIT, that is ₦189m of tax before penalties and interest. The disallowed amount may be carried forward only if the law permits; do not assume it is lost.
Management fee: ₦1.1bn is 12% of revenue. A cost-plus-10% policy is not enough. The parent must show actual services, benefit to Zuma and no duplication. A benchmark of 3-5% of revenue gives ₦276m-₦460m; the excess is ₦640m-₦824m.
Royalty: ₦600m is 6.5% of sales. Royalties require DEMPE analysis (development, enhancement, maintenance, protection, exploitation) and a benefit test. A 2-3% benchmark gives ₦184m-₦276m; the excess is ₦324m-₦416m.
API overprice: purchases are ₦3.0bn. If the price is 18% above comparable, the excess is ₦3.0bn - (₦3.0bn/1.18) = about ₦458m.
CFO's defence: a global policy and 'cost plus 10%' do not bind the tax authority. The arm's-length principle requires comparability, functional analysis and documentation. The tax holiday on one product line does not exempt the company from TP rules and may require allocation of profits. Conclusion: the assessment is not limited to the management fee; the interest cap alone creates a material exposure, and the combined potential adjustments could exceed ₦2bn. The company should quantify scenarios, not accept the CFO's blanket defence.
2. Advise on a defensible restructuring, the proposed APA and the Singapore principal structure, including the tax holiday and withholding tax issues.
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Defensible restructuring: (1) Prepare full TP documentation: functional analysis, benchmarking studies for management fees, royalties, API and interest, including the parent's cost base and service evidence. (2) Reduce the management fee to a benchmarked rate and eliminate duplicate or empty services. (3) Recast the loan: reduce the rate to 9%, consider equity injection to lower 3:1 gearing, and document the lender's credit rating and comparables. (4) For the API, use a comparable uncontrolled price and adjust future invoices; consider a mutual agreement procedure if double taxation arises. (5) Consider an APA only after the documentation is credible. An APA gives certainty but requires disclosure, a detailed application and may take 12-24 months; it does not erase past exposure.
Singapore principal structure: moving principal risks to Singapore may shift profits but will be challenged if there is no substance, no DEMPE functions and no commercial rationale. It may create a permanent establishment, withholding tax on royalties and fees, and controlled foreign company issues. The group should not implement it before a tax and legal opinion and economic substance analysis.
Tax holiday: allocate income and expenses to the exempt and taxable lines consistently. TP adjustments relating to the exempt line may not produce immediate tax, but they can affect losses and future years. Withholding tax: management fees, royalties and interest may attract withholding tax; gross-up and treaty relief must be checked. Governance: the board should approve a TP policy, document related-party transactions, disclose contingencies, and consider voluntary disclosure to reduce penalties.