Comprehensive Guide to Transfer Pricing in Nepal (2024/25 Update)

Transfer Pricing in Nepal has become a critical area for multinational groups and foreign companies operating in the country. With the introduction of the Transfer Pricing Directives, 2081 (2024), Nepal has aligned itself more closely with international standards, particularly the OECD Guidelines. These rules govern Transfer Pricing applicability in Nepal, define compliance requirements, and establish strict documentation and certification standards. For taxpayers, this means increased scrutiny, higher compliance costs, but also opportunities to achieve certainty through Transfer Pricing reports, audits, and Advance Pricing Agreements (APAs).

In this guide, we provide a structured overview of the legal framework, methods, compliance, and reporting obligations relating to Transfer Pricing in Nepal.

1. Introduction to Transfer Pricing

Transfer pricing in Nepal is primarily governed by Section 33 of the Income Tax Act, 2058 (2002). This empowers the Inland Revenue Department (IRD) to re-allocate income, expenses, or benefits between associated persons to ensure that all controlled transactions comply with the arm’s length principle (ALP).

Although the Act contained enabling provisions since 2002, Nepal introduced a comprehensive transfer pricing regime in 2024 through the Transfer Pricing Directives, 2081 (2024), effective from fiscal year 2081/82 (2024-25).

These Directives:

• Prescribe accepted TP methods, documentation standards, and auditor certification requirements.
• Align closely with OECD Guidelines.
• Introduce Advance Pricing Agreements (APAs) for certainty.
• Integrate compliance with the annual Income Tax Return (ITR).

Overall, the regime aims to:

• Prevent base erosion and profit shifting (BEPS).
• Protect Nepal’s tax base.
• Provide certainty to taxpayers.
• Strengthen the capacity of Nepal’s tax administration in an increasingly globalized business environment.

2. Key Definitions (As per TP Directives)

• Controlled Transaction: Any transaction in goods, services, assets, loans, or business/financial dealings between associated persons that may affect income or profits.
• Cross-border Business: Trade or business/financial activity between two or more countries impacting income, profit, loss, assets, or liabilities.
• Associated Person: Associated person” means any one or more than one person or group of persons who act as per the intention of each other, and the term also includes the following persons: –
• An individual and relative of that person or any person or a partner of that person,
• A foreign permanent and
• Any entity which by itself or jointly with any other person related with it controls fifty percent or more of the income, capital or voting right
• Tested Party: The entity whose financial indicators are used for ALP determination. A non-resident can be the tested party only if reliable comparable data is available to the IRD.
• Arm’s Length Transaction: “Arm’s length transaction” means a purchase, sale or transaction, dealing, or exchange of any property or service conducted at market value between unrelated persons.

3. Arm’s Length Principle (ALP)

The arm’s length principle ensures that prices in controlled transactions mirror those between unrelated parties in comparable circumstances.

• Section 33 of the Act empowers IRD to adjust, reallocate, or re-characterize income where ALP is not observed.
• Purpose: To ensure fair distribution of profits and prevent profit shifting to low-tax jurisdictions.

4. Transfer Pricing Methods

Nepal recognizes five internationally accepted methods:

• Comparable Uncontrolled Price (CUP) – compares controlled prices with comparable independent transactions.
• Resale Price Method (RPM) – resale price to an independent party minus an appropriate gross margin.
• Cost Plus Method (CPM) – costs incurred plus an appropriate mark-up.
• Transactional Net Margin Method (TNMM) – net profit margin relative to costs, sales, or assets compared with uncontrolled transactions.
• Profit Split Method (PSM) – allocation of combined profits/losses based on contributions, functions, assets, and risks.

ALP Determination Approaches:

• Interquartile Range Method: For ≥7 comparables (35th–65th percentile with 5% tolerance).
• Average Method: For ≤6 comparables (average + 5% tolerance).

5. Documentation & Compliance

A. Local File

• Mandatory if cross-border related-party transactions ≥ NPR 100 million.
• Must follow Schedule 1 format (organization details, business overview, FAR analysis, methodology, financial results).
• To be submitted with annual ITR (within 3 months from year-end, i.e., mid-October).
• Retention: 5 years.

B. Certification by Auditor

• Taxpayers carrying out cross-border controlled transactions
• Must have the documents specified in Schedule-1
• To be certified by an auditor in the format prescribed in Schedule-2.

C. Independent Auditor’s Certification

• Required if transactions ≥ NPR 500 million.
• Auditor must have at least five years of experience
• To be filed with annual ITR.

If your organization is dealing with cross-border transactions, Transfer Pricing compliance in Nepal is no longer optional — it’s a legal necessity. From preparing Transfer Pricing reports in Nepal to handling Transfer Pricing audits and certifications, our team assists multinational companies and foreign-owned entities in meeting every regulatory requirement.

Drop us an enquiry at info@manishanilgupta.com or raise a query to discuss more about this or similar compliance requirements

Disclaimer: The information provided in this blog is for general education purposes only and should not be considered as professional advice.