Nepal's Inland Revenue Department (IRD) has long had the power to reallocate income between related parties. What changed in 2081 is the machinery: a statutory reference to methods set by the Department, and a directive that says how the work is to be done. This guide explains that machinery for groups with Nepali entities, and for Nepali companies that pay or charge related parties abroad.
It is based on the Directives as summarised by NBSM & Associates and on the statute. Read the Directives themselves and the current Finance Act before you rely on a figure, because schedules and thresholds are revised.
The legal basis
Section 33 of the Income Tax Act, 2058 lets the IRD distribute, allocate or apportion income and deductions between associated persons so that the result reflects what independent parties would have agreed. It can also re-characterise the transaction. The Finance Bill 2081 added a subsection under which the pricing of transactions between associated persons is to follow the valuation methods specified by the Department.
The Transfer Pricing Directives, 2081 were issued under Sections 33 and 139 of the Act and apply from FY 2081/82 (2024/25). They focus on cross-border controlled transactions: transactions in goods, services, assets or loans between associated persons that affect income, profit, loss, assets or liabilities.
A later Finance Act added a safe harbour provision (Section 33A), under which eligible taxpayers may price specified transactions using prescribed benchmarks. A safe harbour does not remove other duties, including documentation, withholding and filing. Check which transactions are eligible and the benchmarks that apply in the year concerned.
Who is an associated person
The Directives define an associated person broadly. It includes:
an individual and that individual's relatives or partners
a foreign permanent establishment and the persons who own it
an entity that controls 50 per cent or more of the income, capital or voting rights of another entity, or receives benefits from it, directly or through related persons or subsidiaries
Employees are excluded, as is a person the Department determines is not associated.
Look beyond headline shareholdings. Common control through a common parent, a joint arrangement or a family group can all create association, and so can a benefit arrangement that sits below the 50 per cent line.
What counts as a controlled transaction
Anything that moves income, profit, assets or liabilities between associated persons. In Nepali groups the usual items are:
management fees and shared service allocations
royalties and technology or brand licences
intercompany loans, guarantees and interest
goods bought from or sold to group companies
cost-sharing and recharges of staff or expenses
Comparability: the core of the analysis
The Directives expect a structured comparability analysis, in this order:
Analyse the economically significant characteristics of the business and the transaction.
Examine the comparability factors of the controlled transaction.
Select the tested party, normally the least complex entity.
Identify and select comparables.
Make appropriate adjustments to the comparables.
Select the most appropriate arm's length method.
A functional, asset and risk analysis sits underneath all of this. It records what each party does, which assets it uses and which risks it bears, and it is what separates a routine distributor from an entrepreneur. The same price can be arm's length for one and not for the other.
The methods
The Directives list five methods:
Comparable Uncontrolled Price (CUP): compares the controlled price with the price in identical or similar uncontrolled transactions, internal or external.
Resale Price Method: starts from the price at which goods bought from an associated party are resold to an independent party, less an appropriate gross margin.
Cost Plus Method: adds an appropriate mark-up to the costs of the goods or services supplied.
Transactional Net Margin Method (TNMM): compares the net profit margin relative to a base such as sales, costs or assets with those of comparable independent companies.
Transactional Profit Split Method: divides combined profit by the relative contribution of each party.
Choose the method that best fits the functions performed, the data you can get and the reliability of the comparables, and record why. For routine service and distribution entities, TNMM is often the practical choice. CUP is strongest where a real internal comparable exists, for example a loan on the same terms from an independent bank.
How the arm's length price is decided
Once comparables are chosen, the Directives apply one of two tests based on how many there are:
Range method, for seven or more comparables. The acceptable range is the 35th to the 65th percentile of the indicators. The tested party's indicator is accepted if it falls in that range, or within 5 per cent above or below the range's limits as the Directives provide. Outside the range, an adjustment is required.
Average method, for six or fewer comparables. The tested party's indicator is accepted if it is within 5 per cent above or below the average of the comparables. Outside that, the adjustment is made to the average.
Practical consequence: the quality and number of your comparables matters in itself. A thin set moves you from a range to an average test, and a few outliers can move the answer.
Documentation and certification
Taxpayers must keep records of cross-border controlled transactions and the further documents in Schedules 1 and 2 of the Directives. The requirement is described as not mandatory for taxpayers with annual turnover below NPR 10 crore.
Only auditors who are ICAN members holding a certificate of practice may certify transfer pricing documents.
Where cross-border goods or services transactions exceed NPR 50 crore, certification by a different auditor from the one conducting the financial or tax audit is required, and that auditor must have at least five years of experience.
Documentation should be kept for at least five years after the end of the relevant income year.
Build the file alongside the transactions rather than after them: the intercompany agreement, the functional analysis, a register of transactions reconciled to the accounts, the benchmarking, evidence that services charged were received and benefited the Nepali entity, and the board approvals behind the pricing.
Penalties, advance pricing and disputes
Penalties and interest: failure to keep documents or file required statements attracts a fee under Section 117. Interest and further fees apply under Sections 118 to 120 for late tax payment and understatement.
Advance Pricing Arrangement: Rule 15 of the Income Tax Regulation allows the Department to determine pricing in advance. For recurring high-value transactions this is worth considering, though the Department has said it will issue its own guidance on the process.
Dispute route: a taxpayer unhappy with an assessment applies for administrative review to the IRD, paying the undisputed tax and one quarter of the disputed amount. If the Department does not decide within sixty days, the taxpayer may appeal to the Revenue Tribunal, paying the undisputed tax and giving a bond or bank guarantee for 50 per cent of the disputed tax, plus any fees and penalties. For how that process works in practice, see our guide on appealing an IRD assessment.
A practical sequence
Map every related-party transaction, in and out, with annual values.
Test the thresholds for documentation and certification against your turnover and cross-border volumes.
Check each transaction against a method: is there a comparable, an agreement and evidence of benefit?
Fix before you file. Re-pricing prospectively, or documenting why the price is arm's length, is cheaper than defending an adjustment.
Consider an advance pricing arrangement for recurring, high-value flows.
Calendar the file so it is complete by the time the return and audit are due.
If you need help testing a group's pricing or preparing the file, our team of chartered accountants can work through the transactions with you.
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*Prepared from the Income Tax Act, 2058 and published summaries of the IRD Transfer Pricing Directives, 2081, October 2026. General guidance, not advice on your circumstances. Confirm thresholds, schedules and safe harbour benchmarks against the current IRD text.*
