Following the recent decline in global crude oil prices and the consequential decreases in oil tax revenue, the Nigerian government has increased its focus on other sources of tax revenue generation. One new area of focus is transfer pricing (TP) auditing conducted by the Nigerian tax authority - the Federal Inland Revenue Service (FIRS) - resulting in assessments of additional tax liabilities against tax payers who fail to abide with the provisions of extant TP regulations.
In August 2018, the FIRS published the Income Tax (Transfer Pricing) Regulations 2018 (the 2018 Regulations), which repeal the Income Tax (Transfer Pricing) Regulations No. 1, 2012 (the 2012 Regulations). The newly introduced 2018 Regulations align with the Organisation for Economic Cooperation and Development (OECD) Transfer Pricing Guidelines (TP Regulations). Since the TP Regulations came into force in 2012, taxpayers have complied by submitting annual transfer pricing returns and transfer pricing documentation. The FIRS has also undertaken numerous transfer pricing audits of enterprises since the TP Regulations came into force.
Issues of note and trends relating to TP
Repeal of the Income Tax (Transfer Pricing) Regulations No. 1, 2012 and the introduction of the Income Tax (Transfer Pricing) Regulations 2018
The 2018 Regulations was introduced by the FIRS in 2018 to repeal the 2012 Regulations owing to some issues with the latter which include:
- the vague definition of ‘connected taxable persons’;
- the lack of express provision on the TP documentation requirement;
- an advanced pricing arrangement provision that is yet to be implemented; and
- vague penalty provision.
The inherent issues with the 2012 Regulations were addressed under the 2018 Regulations. Unlike the 2012 Regulations, with their vague penalty clause, the 2018 Regulations introduced specific provisions on administrative penalties for TP-related offences to ensure clarity.
Other significant changes introduced under the 2018 Regulations include the following:
- Threshold for maintaining contemporaneous documentation: a connected person whose total value of controlled transactions is less than 300 million nairas is no longer required to maintain contemporaneous documentation. However, such a connected person will be required to prepare and submit relevant documentation within 90 days upon receipt of a notice from the FIRS.
- A new safe-harbour regime where taxpayers may be exempted from verifying the arm’s-length nature of controlled transactions if controlled transactions are priced in accordance with the guidelines published by the FIRS, as opposed to the adoption of statutory or ‘regulator prescribed’ prices as contained in the 2012 Regulations.
- Introduction of specific criteria for determining the arm’s length nature of intra-group transactions.
- Inclusion of guidelines on the use of quoted prices in determining the pricing for the exportation and importation of commodities: customs valuation prices applied for customs valuation purposes will not automatically be accepted by the FIRS as arm’s length for TP purposes.
- Inclusion of clear procedures and document requirements for the application for advance pricing agreements.
OECD Base Erosion and Profit Shifting implementation
The Nigerian tax authorities are largely focused on implementing the BEPS project as a means of preventing tax avoidance and tax evasion. The OECD defines BEPS as tax avoidance strategies that exploit gaps and mismatches in tax rules to artificially shift profits to low or no-tax locations. BEPS can be direct or indirect movement of taxable profits from one tax jurisdiction to another in order to reduce the effective tax liability of a multinational enterprise. To address the problem of BEPS, the OECD, with the backing of the Group of Twenty (G20), introduced the BEPS project in 2013. This project is aimed at equipping governments with the domestic and international instruments needed to tackle base erosion and profit shifting. It sets out 15 actions to fundamentally change the rules for the taxation of cross-border profits. The OECD’s final BEPS reports - released on 5 October 2015 - provide guidance, recommendations and minimum standards on the 15 action plans. Since the start of the BEPS project, Nigeria has worked alongside other non-OECD countries on an equal footing to build consensus on the project’s final outcomes. The BEPS Action Plan is based on three broad principles: coherence in tax systems, substance in cross-border dealings and transparency across governments and entities. After release of the first set of BEPS Action Plans, the FIRS has incorporated several aspects of the BEPS deliverables into its TP audit process.
Notable TP developments following the BEPS Action Plans
Nigeria signs the OECD’s multilateral instrument to curb tax avoidance and evasion
Implementing the BEPS Action Plan, participating countries made changes to the local tax legislation and double taxation agreements they have with other countries. On the 17 August 2017, Nigeria signed the OECD’s Multilateral Convention to Implement Tax Treaty Related Measures to Prevent Base Erosion and Profit Shifting (Multilateral Instrument (MLI)) and the Common Reporting Standard Multilateral Competent Authority Agreement (CRS MCAA). The MLI is a legal instrument designed to prevent base erosion and profit shifting by multinational enterprises. It allows jurisdictions to transpose results from the OECD/G20 BEPS project into their existing networks of bilateral tax treaties in a quick and efficient manner, including adopting minimum standards for implementation in tax treaties to prevent treaty abuse and ‘treaty shopping’. The CRS MCAA is a multilateral competent authority agreement, which aims to implement the automatic exchange of financial account information pursuant to the OECD/G20 Common Reporting Standard and to deliver the automatic exchange of CRS information between 101 jurisdictions by 2018.
Income Tax (Country-by-Country Reporting) Regulations 2018
Nigeria recently issued the Income Tax (Country-by-Country Reporting) Regulations 2018 (CbCR Regulations). The CbCR Regulations form part of the BEPS Action 13 implementation plans. The CbCR Regulations compliment Nigeria’s membership of the Multilateral Competent Authority Agreement (MCAA) to automatically exchange country-by-country reports, which was ratified by the Federal Executive Council in August 2017. The CbCR Regulations provide guidance to multinational enterprises on their reporting obligations to the FIRS in relation to their group income, taxes paid and other indicators of their economic activity. This information enables the FIRS to perform high-level TP risk assessments and evaluate other BEPS-related risks. Issuing the CbCR Regulations further underscore Nigeria’s resolve to fight aggressive tax avoidance schemes and profit shifting. The CbCR Regulations shall empower the FIRS to put in place adequate frameworks and mechanisms enabling it to collaborate with the revenue authorities of other tax jurisdictions combating BEPS.
Nigeria has demonstrated significant efforts towards improving its TP regime in line with the BEPS Action Plan. These efforts include the repeal of the 2012 Regulations and the introduction of the 2018 Regulations in line with the BEPS Action Plan and OECD Guidelines, as well as signing the treaty to curb TP tax avoidance and tax evasion. These efforts have led local and multinational companies to bring their business models in line with evolving TP regulations. In light of these developments, taxpayers will need to review their ‘related party-connected person’ transactions and relevant documents to ensure that they are fully compliant with the arm’s length principle and documentation requirements. This will help mitigate the risks associated with the incidence of significant assessment of additional tax liabilities and administrative penalties.
Back to top