Most multinational companies operating in Nepal have a reasonable handle on corporate tax. They file returns, manage withholding obligations, and keep the IRD reasonably satisfied. Then the transfer pricing audit letter arrives, and the situation changes considerably.
Transfer pricing is the area of Nepali tax law where the gap between what companies think they are doing and what the IRD thinks they are doing tends to be largest. It is also where penalties, back-tax adjustments, and audit exposure cluster.
The 2024 Transfer Pricing Directive has tightened the framework significantly. If your group is conducting intercompany transactions in Nepal above the NPR 100 million threshold and your documentation is not in order, the question is not whether this becomes a problem. It is when.
Transfer pricing compliance should be a priority, not an afterthought.
This is what you need to understand about the transfer pricing in Nepal.
Transfer pricing refers to the prices charged between related parties within the same group for goods, services, financing, intellectual property, and other transactions. When a Nepali subsidiary pays a management fee to its parent company in Singapore, buys inventory from a related entity in India, or receives an intragroup loan from a European holding company, those prices are transfer prices.
The concern from a tax perspective is straightforward. If a group can set whatever price it likes between its own entities, it can shift profit to lower-tax jurisdictions and reduce the tax it pays in Nepal. Transfer pricing rules exist to prevent exactly that.
The governing principle is the arm’s length principle: transactions between related parties must be priced as if they were conducted between independent, unrelated parties operating in normal market conditions.
Nepal’s framework for enforcing this sits primarily in Section 33 of the Income Tax Act, 2058, which gives the IRD authority to reallocate income, expenses, and benefits between associated persons if the arrangement does not reflect arm’s length pricing.
Nepal has had transfer pricing provisions since 2002, but for a long time they remained enabling provisions without detailed enforcement infrastructure. That changed materially in October 2024 when the IRD issued the Transfer Pricing Directive, 2081 (2024), effective from fiscal year 2081/82 (2024/25).
The 2024 Directive introduced:
This is a comprehensive regime. The practical challenge, noted by practitioners, is that the Directive mandates comparability analysis without ensuring access to the comparable data. Nepal’s public financial disclosure infrastructure is limited, which means sourcing reliable benchmarking data requires specialist knowledge and access to international databases.
Nepal’s 2024 Directive prescribes five accepted methods for determining arm’s length prices, consistent with OECD standards:
This method compares the price charged in a controlled transaction with the price in a comparable uncontrolled transaction. The most direct method but requires highly comparable data.
This method takes the cost incurred by the supplier and adds an appropriate gross margin. Used most often for manufacturing or service arrangements.
This method starts from the resale price to an independent party and works backward, deducting an appropriate gross margin. Common in distribution arrangements.
This method divides the combined profits from a controlled transaction between the parties based on their relative contributions. Used where transactions are highly integrated and no reliable comparables exist.
This method compares the net profit margin from a controlled transaction with the margin earned by comparable independent entities. The most commonly used method in practice because it is the most flexible.
The choice of method is not simply a preference. It requires a justified, documented rationale. The IRD expects to see that analysis in your transfer pricing file.
Transfer pricing rules in Nepal apply broadly to transactions between associated persons, which means two or more entities where one may reasonably be expected to act in accordance with the intentions of the other. For practical purposes, this includes:
The allocation of head office expenses across group entities is specifically addressed in Section 33, which requires cost allocation to be based on comparative turnover of the businesses involved. This is a common area of dispute in practice.
The penalties for transfer pricing non-compliance under the Income Tax Act 2058 are not symbolic. They are applied on top of any tax adjustment and can accumulate quickly in an audit situation.
The reputational dimension matters as well, particularly for MNCs where group governance and tax transparency are monitored at a board level.
One of the most important practical issues in Nepal’s current transfer pricing environment is the benchmarking data problem. The 2024 Directive requires comparability analysis, but the public data sources required to conduct that analysis are largely inaccessible.
The Office of the Company Registrar’s portal provides only identity-level information. The IRD’s own data is protected as taxpayer confidential under Section 81 of the Income Tax Act 2058. This means a Nepali subsidiary of a multinational that needs to demonstrate its intercompany service fee reflects arm’s length pricing faces a genuine data challenge, not just a paperwork requirement.
In practice, credible benchmarking requires access to commercial databases and the technical expertise to conduct the analysis correctly. Preparing documentation that will withstand an IRD audit is not a task for a generalist. It requires advisors who understand both the Nepali regulatory framework and international transfer pricing methodology.
For companies within the scope of the 2024 Directive, the documentation required includes:
This file should be maintained on an annual basis and updated to reflect changes in the group structure, functions, or market conditions. It does not need to be filed proactively with the IRD but must be available on request during an audit.
G.P. Rajbahak & Co. (GPR) has been advising businesses in Nepal on tax compliance and international tax matters for over 30 years.
Our Audit and Financial Advisory services cover:
If your group is above the NPR 100 million threshold, or if you are uncertain whether your current intercompany arrangements meet the arm’s length standard, the time to address that is before the IRD asks.
Talk to our team directly at GPR. Contact us at [email protected] or call +977-1-4515682.
1. What is the Transfer Pricing Act in Nepal and when did it take effect?
Nepal does not have a standalone Transfer Pricing Act. The framework is built on Section 33 of the Income Tax Act, 2058 (2002), which establishes the arm’s length principle and gives the IRD authority to adjust transactions between associated persons. The detailed operational rules were issued in October 2024 through the Transfer Pricing Directive, 2081, which took effect from fiscal year 2024/25. This Directive is the most comprehensive articulation of Nepal’s transfer pricing requirements to date and aligns closely with OECD Guidelines.
2. What is the golden rule of transfer pricing?
The arm’s length principle. Every transaction between related parties must be priced as if it were conducted between independent, uncontrolled parties dealing in normal market conditions. If a group charges its Nepali subsidiary a management fee that an unrelated company in the same circumstances would not pay, the IRD can adjust that fee and tax the difference. The entire structure of transfer pricing documentation exists to demonstrate, credibly and with supporting evidence, that the arm’s length principle has been met.
3. What are the five methods of transfer pricing?
Nepal’s 2024 Directive prescribes five methods: the Comparable Uncontrolled Price (CUP) method, the Cost Plus method, the Resale Price method, the Profit Split method, and the Transactional Net Margin Method (TNMM). The choice of method depends on the nature of the transaction, the availability of comparable data, and the functional profile of the entities involved. In Nepal, TNMM is most commonly applied in practice because finding directly comparable uncontrolled transactions is difficult given the limited public financial data available.
4. What is the dark side of transfer pricing?
The mechanism that makes transfer pricing useful for legitimate business structuring is the same one that makes it a tool for base erosion and profit shifting (BEPS): the ability to set intercompany prices influences where group profit is recognised and therefore where it is taxed. Groups that price intercompany transactions aggressively can shift profit from higher-tax jurisdictions to lower-tax ones, reducing their overall tax burden at the expense of tax revenues in countries like Nepal. This is precisely why the IRD’s 2024 Directive exists and why transfer pricing is one of the highest-risk areas for multinational companies under audit.
5. What is the main purpose of transfer pricing regulation?
To protect the tax base. Nepal’s transfer pricing rules exist to ensure that profit generated through business activity in Nepal is taxed in Nepal, and not shifted to another jurisdiction through manipulated intercompany pricing. From the perspective of a compliant business, transfer pricing regulation creates the framework within which legitimate intercompany arrangements can be structured, documented, and defended. From the IRD’s perspective, it is the mechanism for ensuring that foreign-owned entities operating in Nepal pay their fair share of tax on the economic activity they conduct here.
