Nigeria: Transfer Pricing In Nigeria: The Changing Landscape

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


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.


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.

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