Nigeria: Transfer Pricing In Nigeria: The Changing Landscape

Last Updated: 12 December 2018
Article by Joshua Bamfo and Ogochukwu Isiadinso

Introduction

Transfer Pricing (TP) is fast becoming a stay awake issue for Multinational Enterprises (MNEs) in Nigeria with the recent changes in the TP landscape and the increased TP audits being conducted by the tax authorities. To ensure better compliance among taxpayers and provide clarity on certain TP issues, the Federal Inland Revenue Service (FIRS) released the new TP Regulations which imposes stiff penalties for non-compliance with TP rules.

Globally, there have been various developments in the TP space with more countries having signed up to implement various initiatives of the Organisation for Economic Co-operation and Development's (OECD) Base Erosion and Profit Shifting (BEPS) project. A number of these countries have enacted laws to tackle harmful tax practices related to manipulative pricing of goods and services for the purpose of BEPS.

Between 2016 and 2017, Nigeria signed up to two OECD multilateral instruments aimed at tackling BEPS. Further, in 2018, the Nigerian TP space witnessed significant changes driven by the need to implement some of the recommendations of the OECD BEPS project.

These changes include the introduction of the:

  • Income Tax (Country-by-Country Reporting) Regulations 2018 (CbC Regulations); and
  • Income Tax (Transfer Pricing) Regulations 2018 (Revised TP Regulations).

In this newsletter, we have taken a look at the Nigerian TP journey till date and examined the recent changes in the Nigerian TP environment as well as their implications for taxpayers.

The TP Journey in Nigeria

In August 2012, Nigeria introduced her first TP Regulations joining the list of African Countries with TP Legislation. Prior to 2012, taxpayers and tax authorities in Nigeria relied on the General Anti-Avoidance Rules (GAAR) in the Nigerian tax laws in determining the appropriate pricing of related party transactions. The GAAR provisions empowered the tax authorities to adjust the pricing of related party transactions where it appeared that such transactions were artificial/fictitious and did not reflect the arm's length principle. However, the GAAR provisions were not very effective given that there were no clear guidelines and parameters for its application.

The 2012 TP Regulations provided a more structured approach to assessing intra-group structures and determining the appropriate pricing of related party transactions. However, the 2012 TP Regulations was characterized with relatively minimal compliance by taxpayers. Some of the factors identified for low compliance include the inability of taxpayers to understand the relevance of TP and its associated risk to their businesses as well as the non-inclusion of TP specific penalties required to drive compliance. In addition, the 2012 TP Regulations failed to provide adequate guidance on the appropriate treatment of certain related party transactions. Thus, making the administration of the TP regime cumbersome and quite adversarial.

The need to address some of the issues raised by taxpayers on the 2012 TP Regulations, ensure greater compliance with TP rules while also implementing the OECD BEPS project recommendations resulted in the introduction of the Revised TP Regulations and the CbC Regulations in 2018.

The Income Tax (Country-by-Country Reporting) Regulations 2018

After executing the OECD's CbC Multilateral Competent Authority Agreement (MCAA) in January 2016, Nigeria took yet another step in conforming to international best practices in TP by introducing the CbC Regulations in June 2018.

The CbC Regulations requires Multinational Enterprises (MNEs) that have a Consolidated Group Revenue of ₦160 billion or above to furnish the Federal Inland Revenue Service (FIRS) with the tax and financial information of the Group in a specified format, provided that such MNEs are resident in Nigeria for tax purposes. The CbC Report should be filed not later than 12 months after the last day of the accounting year of the MNE Group.

The CbC Report will contain information such as revenue, the allocation of income, taxes, stated capital, number of employees and the nature of business activities of the MNE Group across tax jurisdictions. This information will be available to various tax authorities (including the FIRS) in jurisdictions which are signatory to the MCAA.

The CbC Regulations therefore seeks to increase transparency of MNEs' business transactions as it provides the FIRS with access to the requisite information required to carry out TP risk assessments.

Thus, taxpayers may be buffeted with increased numbers of TP audits and investigations, which could pose reputational risks to taxpayers especially those engaged in Business to Consumer businesses. Although the purpose of the CbC Regulations is TP risk assessment, there is a potential risk that the FIRS may query transactions with entities in tax-friendly jurisdictions and may also seek to adjust the income of local entities where it is observed that foreign entities have limited economic activities vis-à-vis high revenue and/or profit. It is imperative, therefore, that taxpayers are able to provide relevant and adequate justification to substantiate their related party transactions.

Key Provisions of the CbC Regulations

  • Each Ultimate Parent Entity (UPE) of an MNE Group having Consolidated Group Revenue of ₦160 billion or above is required to file a CbC Report in a specified format with the FIRS on an annual basis, provided that such entity is resident in Nigeria for tax purposes;
  • A Constituent Entity (CE) which is not the UPE of an MNE Group which meets the following conditions will also be required to file a CbC Report with the FIRS within the time specified:
  1. The CE is resident in Nigeria for tax purposes; and
  2. One or more of the following conditions apply:

    • The UPE of the CE is not obliged to file CbC Report in its jurisdiction of tax residence;
    • The UPE's tax resident jurisdiction is not part of the MCAA which allows for automatic exchange of information across tax jurisdictions or any similar agreement that Nigeria is a part of;
    • The FIRS has been notified of a systemic failure arising from the tax jurisdiction of the UPE
  • Any CE that is resident in Nigeria for tax purposes shall notify the FIRS whether it is a UPE or a Surrogate Parent Entity. Where it is neither of the two, it shall notify the FIRS of the identity and tax residence of the Reporting Entity.

The CbC Regulations provides for the following penalties:

S/N Offence Penalty
1 Late Filing of CbC Report ₦10 million in the first instance; ₦1 million for every month in which default continues
2 Incorrect or false CbC Report ₦10 million
3 Failure to file notification ₦5 million in the first instance; ₦10,000 for each day the default continues

The Income Tax (Transfer Pricing) Regulations 2018

The FIRS released the revised TP Regulations in August 2018 which repealed the 2012 TP Regulations. The revised TP Regulations incorporated some of the updates to the OECD 2017 TP Guidelines as well as some recommendations from the African Tax Administrators Forum (ATAF). The Revised TP Regulations introduced major changes aimed at encouraging compliance and providing certainty on appropriate TP treatment of related party transactions.

The revised TP Regulations expands the scope of TP in Nigeria to cover certain aspects of Capital Gains Tax (CGT) and Value Added Tax (VAT). By implication, transactions involving the disposal of tangible assets between related parties should be guided by the arm's length principle (ALP) to ensure that the costs of assets disposed and the sales proceeds mirror similar transactions between independent parties. Similarly, any adjustment by the FIRS on the sales and/or purchase transactions would result into corresponding adjustment of VAT payable on such transactions.

Furthermore, the revised TP Regulations includes a provision that exempts taxpayers from preparing contemporaneous TP documentation where the taxpayer's total value of controlled transactions is below ₦300 million. Notwithstanding this exemption, the FIRS may issue a specific request to such companies to prepare and submit contemporaneous documentation within 90 days of receipt of the notice. Given that it does take some time to prepare the contemporaneous TP documentation, taxpayers with turnover of less than ₦300million should consider taking steps to ensure that the pricing of their controlled transactions are in line with the ALP requirement.

Another interesting inclusion in the revised TP Regulations is the guidelines on the pricing of intangible transactions. While the 2012 Regulations was silent on transactions relating to intangibles, the new Regulations provides that the determination of ALP for intangibles would depend on the functions performed and risks borne with regard to the development, enhancement, maintenance, protection and exploitation of the intangible asset. In addition, the new Regulations limits allowable deductions for payments for transfer of rights to intangibles to 5% of Earnings Before Interest Tax Depreciation and Amortisation (EBITDA). This limitation appears to be in contradiction to the generally accepted TP principles relating to arm's length pricing of transactions. It may well be that the introduction of this provision stems out of the need to restrict capital outflow from Nigeria to other jurisdictions as Nigeria relies heavily on imports and is constantly paying out capital to other jurisdictions as opposed to receiving. However, given that Section 22 of the CITA specifically requires the FIRS to adopt the ALP in assessing the value of related party transactions, restricting the price of intangibles payable to related parties to 5% runs afoul of the ALP as the prices for such intangibles may well be as high as 20% in transactions with unrelated parties, as the case may be.

Moreover, a number of jurisdictions that have introduced limitations on pricing of intra-group transactions have done so via legislative enactments and have also streamlined the category of transactions to which such restrictions apply as opposed to restricting payments for all intangibles. For example, India enacted its Finance Act in 2017 which limits interest expense deductions on related-party debts to 30% of the debtors EBITDA, or 30% of interest paid (or payable) to related parties in the previous year, whichever is lower. Similarly, in 2013, South Africa introduced Section 23(m) to its Income Tax Act. Section 23(m) caps the deduction of connected interest payments at a percentage of EBITDA, from an initial cap of 40% to a flexible formula linked to the South Africa Reserve Bank interest rate.

In addition to the fact that the restrictions in India and South Africa were enacted into law, they also appear to be more lenient than the 5% restriction on payment for intangibles in Nigeria. Thus, this provision may be unfavourable to MNE Groups operating in Nigeria. Other notable changes contained in the Revised TP Regulations include the following:

a. Safe harbour provision

The safe harbour provisions of the TP Regulations provides a safety net for taxpayers by exempting taxpayers from maintaining contemporaneous documentation where related party transactions are priced in accordance with specific guidelines issued by the FIRS.

Following the release of the revised TP Regulations, the FIRS released Guidelines on TP documentation (the Guidelines). In the Guidelines, the exemption from maintaining contemporaneous TP documentation is applicable where related party transactions are priced in accordance with the terms of an Advanced Pricing Agreement (APA), Nigerian statutory provisions or other guidelines, as may be issued periodically by the FIRS.

It is pertinent to note that while the TP Regulations 2012 provides that only transactions worth ₦250 million and above may be covered by APAs, the revised TP Regulations does not provide any threshold for APAs. In addition, while the 2012 Regulations included "prices fixed by regulatory agencies" under the safe harbour provisions, the revised TP Regulations clearly omits it. This suggests that approvals from other governmental agencies such as the National Office for Technology Acquisition and Promotion, the Department of Petroleum Resources and Customs may not translate into a safe harbour, if such prices are not consistent with the ALP. This comes with significant double taxation risk for taxpayers. Thus, it is important that the relevant governmental agencies mutually agree the best approach to eliminate the risk of double taxation which the Regulations seeks to achieve.

b. Pricing for commodity transactions

In the case of import of commodity products, where information is available on the price of the product in an internationally recognized exchange market, the quoted price on the date of the transaction would be the basis for the ALP unless the taxpayer is able to substantively justify the variations to the prices. Interestingly, in the case of export of commodity products, the revised TP Regulations provides that the quoted price would be applied as the transaction price only where the quoted price as at the date of the transaction is higher than the actual transfer price.

This provision suggests that the FIRS may be cherry-picking while trying to establish ALP because in cases of export, there will be capital inflow into the Nigerian entity, thus creating a larger tax base in Nigeria and consequently more taxes for the Government. Although the higher of the quoted price or the transaction price will result in more taxes for the Government, it is important for the government to be consistent in its approach for determining the pricing of related party transactions to provide certainty to taxpayers.

c. Penalties

The various offences and the applicable penalties are as summarised below:

S/N TP Offence Penalty
1 Failure to file TP declaration within the specified period ₦10 million in the first instance and ₦10,000 for every day the failure continues
2 Failure to file updated TP declaration/ notification about changes in Directors ₦25,000 for each day in which the failure continues
3 Failure to file TP disclosures within the specified period The higher of: ₦10 million or 1% percent of the value of the controlled transaction not disclosed, and ₦10,000 for every day the failure continues
4 Incorrect disclosure of transactions The higher of: ₦10 million or 1% percent of the value of the controlled transaction incorrectly disclosed
5 Failure to file TP documentation upon request The higher of: ₦10 million or 1% percent of the value of all controlled transactions and ₦10,000 for every day the failure continues
6 Failure to furnish information or document within the specified period 1% of the value of each controlled transaction for which the information or documentation was required and ₦10,000 for every day the failure continues

Following the release of the TP Regulations, the FIRS released an Information Circular granting taxpayers a grace period up to 31 December 2018, to enable them fulfil all outstanding TP obligations such as filing of TP returns, submission of TP documentation etc. Upon failure to regularize these obligations by the expiry of the grace period, the FIRS shall commence the full imposition of the administrative penalties as contained in the TP Regulations.

The Nigerian TP Outlook Post-Regulations

The implementation of the revised TP Regulations will impact the Nigerian TP Space in a very significant way as it is expected to drive greater compliance on the part of taxpayers. Thus, MNEs that have previously arranged their affairs to shift profits to low tax paying jurisdictions would have to ensure that they carry out sufficient economic activities in such jurisdictions or consider alternative tax efficient structures. In addition, it is expected that the FIRS would intensify TP audits in the coming years. With the issuance of the CbC Regulations, the Nigerian government has taken a major step in implementing the OECD automatic exchange of information programme. Thus, the Nigerian government would have access to information on the activities of MNEs in various jurisdictions.

The CbC Regulations has stated that information obtained from the CbC Report would only be used for the following:

  • assessing transfer pricing and other BEPS related risks;
  • assessing the risk of non-compliance by members of the MNE Groups; and
  • economic and statistical analysis.

However, considering that the exchange of information across international borders would provide the Nigerian tax authorities with information regarding taxpayers' arrangements/ transactions in tax friendly jurisdictions, it is necessary for taxpayers to manage their tax exposures to meet up with relevant legal requirements.

Conclusion

With the changing landscape in the TP space in Nigeria, it is imperative for taxpayers to be proactive and have strategies in place that would facilitate compliance with the provisions of the revised Regulations. Taxpayers are advised to strategically evaluate how these changes would affect their businesses and tax objectives.

Undoubtedly, it has become necessary for taxpayers to ensure their transactions are consistent with the ALP. Also, taxpayers who had hitherto not filed their TP returns are advised to file on or before the 31 December 2018 to avoid the heat of the stringent penalties imposed by the Regulations.

The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.

To print this article, all you need is to be registered on Mondaq.com.

Click to Login as an existing user or Register so you can print this article.

Authors
 
In association with
Related Topics
 
Related Articles
 
Up-coming Events Search
Tools
Print
Font Size:
Translation
Channels
Mondaq on Twitter
 
Mondaq Sign Up
Gain free access to lawyers expertise from more than 250 countries.
 
Email Address
Company Name
Password
Confirm Password
Position
Industry
Mondaq Newsalert
Select Topics
Select Regions
Registration (you must scroll down to set your data preferences)

Mondaq Ltd requires you to register and provide information that personally identifies you, including your content preferences, for three primary purposes (full details of Mondaq’s use of your personal data can be found in our Privacy and Cookies Notice):

  • To allow you to personalize the Mondaq websites you are visiting to show content ("Content") relevant to your interests.
  • To enable features such as password reminder, news alerts, email a colleague, and linking from Mondaq (and its affiliate sites) to your website.
  • To produce demographic feedback for our content providers ("Contributors") who contribute Content for free for your use.

Mondaq hopes that our registered users will support us in maintaining our free to view business model by consenting to our use of your personal data as described below.

Mondaq has a "free to view" business model. Our services are paid for by Contributors in exchange for Mondaq providing them with access to information about who accesses their content. Once personal data is transferred to our Contributors they become a data controller of this personal data. They use it to measure the response that their articles are receiving, as a form of market research. They may also use it to provide Mondaq users with information about their products and services.

Details of each Contributor to which your personal data will be transferred is clearly stated within the Content that you access. For full details of how this Contributor will use your personal data, you should review the Contributor’s own Privacy Notice.

Please indicate your preference below:

Yes, I am happy to support Mondaq in maintaining its free to view business model by agreeing to allow Mondaq to share my personal data with Contributors whose Content I access
No, I do not want Mondaq to share my personal data with Contributors

Also please let us know whether you are happy to receive communications promoting products and services offered by Mondaq:

Yes, I am happy to received promotional communications from Mondaq
No, please do not send me promotional communications from Mondaq
Terms & Conditions

Mondaq.com (the Website) is owned and managed by Mondaq Ltd (Mondaq). Mondaq grants you a non-exclusive, revocable licence to access the Website and associated services, such as the Mondaq News Alerts (Services), subject to and in consideration of your compliance with the following terms and conditions of use (Terms). Your use of the Website and/or Services constitutes your agreement to the Terms. Mondaq may terminate your use of the Website and Services if you are in breach of these Terms or if Mondaq decides to terminate the licence granted hereunder for any reason whatsoever.

Use of www.mondaq.com

To Use Mondaq.com you must be: eighteen (18) years old or over; legally capable of entering into binding contracts; and not in any way prohibited by the applicable law to enter into these Terms in the jurisdiction which you are currently located.

You may use the Website as an unregistered user, however, you are required to register as a user if you wish to read the full text of the Content or to receive the Services.

You may not modify, publish, transmit, transfer or sell, reproduce, create derivative works from, distribute, perform, link, display, or in any way exploit any of the Content, in whole or in part, except as expressly permitted in these Terms or with the prior written consent of Mondaq. You may not use electronic or other means to extract details or information from the Content. Nor shall you extract information about users or Contributors in order to offer them any services or products.

In your use of the Website and/or Services you shall: comply with all applicable laws, regulations, directives and legislations which apply to your Use of the Website and/or Services in whatever country you are physically located including without limitation any and all consumer law, export control laws and regulations; provide to us true, correct and accurate information and promptly inform us in the event that any information that you have provided to us changes or becomes inaccurate; notify Mondaq immediately of any circumstances where you have reason to believe that any Intellectual Property Rights or any other rights of any third party may have been infringed; co-operate with reasonable security or other checks or requests for information made by Mondaq from time to time; and at all times be fully liable for the breach of any of these Terms by a third party using your login details to access the Website and/or Services

however, you shall not: do anything likely to impair, interfere with or damage or cause harm or distress to any persons, or the network; do anything that will infringe any Intellectual Property Rights or other rights of Mondaq or any third party; or use the Website, Services and/or Content otherwise than in accordance with these Terms; use any trade marks or service marks of Mondaq or the Contributors, or do anything which may be seen to take unfair advantage of the reputation and goodwill of Mondaq or the Contributors, or the Website, Services and/or Content.

Mondaq reserves the right, in its sole discretion, to take any action that it deems necessary and appropriate in the event it considers that there is a breach or threatened breach of the Terms.

Mondaq’s Rights and Obligations

Unless otherwise expressly set out to the contrary, nothing in these Terms shall serve to transfer from Mondaq to you, any Intellectual Property Rights owned by and/or licensed to Mondaq and all rights, title and interest in and to such Intellectual Property Rights will remain exclusively with Mondaq and/or its licensors.

Mondaq shall use its reasonable endeavours to make the Website and Services available to you at all times, but we cannot guarantee an uninterrupted and fault free service.

Mondaq reserves the right to make changes to the services and/or the Website or part thereof, from time to time, and we may add, remove, modify and/or vary any elements of features and functionalities of the Website or the services.

Mondaq also reserves the right from time to time to monitor your Use of the Website and/or services.

Disclaimer

The Content is general information only. It is not intended to constitute legal advice or seek to be the complete and comprehensive statement of the law, nor is it intended to address your specific requirements or provide advice on which reliance should be placed. Mondaq and/or its Contributors and other suppliers make no representations about the suitability of the information contained in the Content for any purpose. All Content provided "as is" without warranty of any kind. Mondaq and/or its Contributors and other suppliers hereby exclude and disclaim all representations, warranties or guarantees with regard to the Content, including all implied warranties and conditions of merchantability, fitness for a particular purpose, title and non-infringement. To the maximum extent permitted by law, Mondaq expressly excludes all representations, warranties, obligations, and liabilities arising out of or in connection with all Content. In no event shall Mondaq and/or its respective suppliers be liable for any special, indirect or consequential damages or any damages whatsoever resulting from loss of use, data or profits, whether in an action of contract, negligence or other tortious action, arising out of or in connection with the use of the Content or performance of Mondaq’s Services.

General

Mondaq may alter or amend these Terms by amending them on the Website. By continuing to Use the Services and/or the Website after such amendment, you will be deemed to have accepted any amendment to these Terms.

These Terms shall be governed by and construed in accordance with the laws of England and Wales and you irrevocably submit to the exclusive jurisdiction of the courts of England and Wales to settle any dispute which may arise out of or in connection with these Terms. If you live outside the United Kingdom, English law shall apply only to the extent that English law shall not deprive you of any legal protection accorded in accordance with the law of the place where you are habitually resident ("Local Law"). In the event English law deprives you of any legal protection which is accorded to you under Local Law, then these terms shall be governed by Local Law and any dispute or claim arising out of or in connection with these Terms shall be subject to the non-exclusive jurisdiction of the courts where you are habitually resident.

You may print and keep a copy of these Terms, which form the entire agreement between you and Mondaq and supersede any other communications or advertising in respect of the Service and/or the Website.

No delay in exercising or non-exercise by you and/or Mondaq of any of its rights under or in connection with these Terms shall operate as a waiver or release of each of your or Mondaq’s right. Rather, any such waiver or release must be specifically granted in writing signed by the party granting it.

If any part of these Terms is held unenforceable, that part shall be enforced to the maximum extent permissible so as to give effect to the intent of the parties, and the Terms shall continue in full force and effect.

Mondaq shall not incur any liability to you on account of any loss or damage resulting from any delay or failure to perform all or any part of these Terms if such delay or failure is caused, in whole or in part, by events, occurrences, or causes beyond the control of Mondaq. Such events, occurrences or causes will include, without limitation, acts of God, strikes, lockouts, server and network failure, riots, acts of war, earthquakes, fire and explosions.

By clicking Register you state you have read and agree to our Terms and Conditions