Understanding Nepal's New Transfer Pricing Regulations: What Businesses Need to Know

Nepal's Inland Revenue Department (IRD) has taken a significant step forward in the country's international tax framework by introducing comprehensive transfer pricing regulations under the Income Tax Act 2058. These regulations represent a major development for multinational enterprises (MNEs) and their related party transactions in Nepal.

What Are Transfer Pricing Regulations?

Transfer pricing refers to the prices set for transactions between related parties — such as a parent company and its subsidiary, or between sister companies within the same corporate group. The new IRD guidelines require that such transactions be conducted at arm's length prices, meaning the prices should reflect what unrelated parties would agree to in a comparable transaction.

Key Requirements Under the New Guidelines

The regulations introduce the following key obligations:

1. Documentation Requirements: Taxpayers with related party transactions exceeding NPR 50 million in a fiscal year are required to maintain contemporaneous transfer pricing documentation.

2. Benchmarking Studies: Companies must demonstrate that their transfer prices are consistent with arm's length principles, supported by economic analyses and comparability studies.

3. Disclosure in Tax Returns: The annual income tax return now includes a specific section for disclosure of related party transactions.

4. Advance Pricing Agreements (APAs): The IRD has introduced a framework for APAs, allowing taxpayers to agree on transfer pricing methodologies in advance, providing certainty.

Which Methods Are Accepted?

The IRD has adopted the OECD Transfer Pricing Guidelines, accepting the following primary methods: - Comparable Uncontrolled Price (CUP) - Resale Price Method (RPM) - Cost Plus Method (CPM) - Transactional Net Margin Method (TNMM) - Profit Split Method (PSM)

Penalties for Non-Compliance

Failure to comply with transfer pricing documentation requirements can result in penalties under the Income Tax Act, including surcharges on adjusted income and interest on underpaid taxes.

Implications for Businesses

If your company has related party transactions in Nepal — whether importing goods from a parent company abroad, paying management fees, licensing intellectual property, or providing intercompany loans — you will need to assess your exposure under these new regulations and take steps to ensure compliance.

How Pinnacle Can Help

Our international taxation team has extensive experience in transfer pricing across Nepal. We can assist with: - Transfer pricing risk assessment - Documentation preparation - Benchmarking studies - APA applications - IRD representation in transfer pricing audits

Contact us to discuss how these regulations affect your specific situation.