Nigeria: The Role Of Safe Harbours In Effective Administration Of Transfer Pricing Regulations In Nigeria

Last Updated: 26 February 2019
Article by Suleiman Yahaya and Glory Steve
Most Read Contributor in Nigeria, February 2019

Taxpayers and tax administrators have continued to grapple with the burden of undertaking complex Transfer Pricing (TP) analyses in order to justify the arm's length principle. For taxpayers, these complexities in TP analysis often lead to uncertainties, which create TP risks, and increase their compliance costs. In order to mitigate these risks, tax administrators in other jurisdictions have introduced safe harbour provisions which help to simplify TP compliance and provide certainty on the treatment of related party transactions.

This article examines the concept of safe harbour, reviews the benefits of clear safe harbour provisions and calls on the Nigeria tax authority to incorporate safe harbours into the TP Regulations in order to improve the administration of TP in Nigeria.

The concept of safe harbour

According to the Organisation for Economic Cooperation and Development Transfer Pricing Guidelines for Multinational Enterprises and Tax Administrations (2017) (the OECD Guidelines), a safe harbour in a TP regime is "...a provision that applies to a defined category of taxpayers or transactions and that relieves eligible taxpayers from certain obligations otherwise imposed by a country's general TP rules".

Benefits of Safe Harbours

Safe harbour provisions are instrumental to achieving the following:

  • Reduced compliance costs for taxpayers in documenting the reasonableness of the pricing of controlled transactions.
  • Certainty to taxpayers that the transfer price(s) in controlled transactions will be accepted by the tax authorities as long as the conditions of the safe harbour provisions have been met.
  • Minimizes the level of scrutiny and therefore the cost to tax authorities to ascertain that transfer prices are consistent with the arm's length principle.
  • Gives room for tax administrations to focus its limited resources on higher risk and complex transactions.

Designing an effective safe harbour regime

The biggest potential drawback of a safe harbour provision is the risk of double taxation in the event that the counter-party's tax authority rejects the safe harbour pricing for the controlled transactions and insists on applying the arm's length principle. As such, this has led the OECD to provide guidance on mechanisms of putting in place an effective safe harbour regime.

One of the key points from the guidance is that an effective safe harbour provision must approximate the result of an arm's length study on such transactions. This will effectively minimize the incidence of double taxation risk, should the foreign tax administration not recognize the safe harbour provision.

Experiences from other jurisdictions

Below are some of the experiences of other countries with safe harbour provisions.

India – The safe harbour rules which were originally issued in September 2013 provided minimum profit margins a taxpayer is expected to earn for certain categories of international transactions. The transactions include the provision of software development services, IT services, Knowledge Process Outsourcing (KPO) services, contract Research and Development (R&D) services etc.

In 2017, India's Central Board of Direct Taxes (CBDT) issued an amended safe harbour rule which has been extended to include an additional category of international transactions (receipt of Low Value-Adding Services- LVAS) as well as revising the applicable safe harbour prices/margins to reflect the arm's length results, including the adoption of the 5% mark-up on LVAS.

Taxpayers have the option to choose from the old rules or the amended rules, whichever is more beneficial. The amended rules were issued to ensure that they are more attractive to tax payers with the aim of reducing prolonged TP litigations which currently stand above four hundred (400) cases.

Singapore - Safe harbour provisions cover transactions such as related party loans where both entities are Singapore based, related party services, pass through costs, and a cash pooling arrangements.

In 2017, the Inland Revenue Authority of Singapore (IRAS) issued a fourth edition of its TP guidelines. The revised guidelines introduced a safe harbour in the form of an "indicative margin" to price related party loans. Once a taxpayer has opted for the safe harbour of indicative margin to price related party loans, they are not required to prepare TP documentation to justify the arm's length rate for those loans.

United States of America – Limited safe harbours are available for controlled borrowing and controlled service transactions.

The Treasury Regulations provides for an 'interest free' period for intercompany trade accounts arising as a result of certain controlled transfers of tangible property or the provision of services. There is also a safe harbour for interest on certain loans that fall within 100% to 130% of the 'applicable federal funds rate'. Finally, there are rules for a simplified cost-only charge for controlled service transactions. Services eligible to be charged at cost include services that the Internal Revenue Service (IRS) designates in a revenue procedure. The listed services would generally be considered general and administrative services for accounting purposes.

Safe Harbour Regime: The Nigerian experience

Under the old TP regulations, a connected taxable person may be exempted from the requirements of preparing TP documentation where (a) the controlled transactions are priced in accordance with the requirement of Nigerian statutory provisions or (b) the prices of connected transactions have been approved by other Government regulatory agencies or authorities established under Nigerian law and satisfactory to the Service to be at arm's length.

While part (a) was clear, the implementation of part (b) did not provide certainty to tax payers. For instance, approvals granted by the National Office for Technology Acquisition and Promotion (NOTAP) for transactions were challenged by the tax authority on the basis that they were not consistent with the arm's length principle. Thus, approvals of prices or rates for controlled transactions by other Government regulatory agencies such as NOTAP were "not safe" under the old TP Regulations.

With the release of the Income Tax (Transfer Pricing) Regulations, 2018, it was expected that this provision will be amended. Unfortunately, it wasn't. Rather, it provided that a connected person may be exempted from the requirement to prepare a TP documentation where the controlled transactions are priced in accordance with specific guidelines that may be published by the Service.

Subsequently, the FIRS issued guidelines stating that if a controlled transaction has been priced in accordance with a statutory provision, it will qualify as a safe harbour.

Notwithstanding this, the tax authority has a unique opportunity to ease the compliance burden for tax payers by issuing a more robust set of guidelines.

Implementing the safe harbour regime in Nigeria

To improve the administration of TP in Nigeria, we suggest that the FIRS publish effective guidelines on safe harbours by considering the following:

  • The FIRS should ensure that safe harbour provisions should approximate the outcomes of arm's length studies for the relevant transactions.
  • The safe harbour provision should be elective and not binding to the taxpayer as evidenced in other jurisdictions. Thus, a taxpayer can opt for the safe harbour or apply the arm's length principle.
  • The FIRS should encourage the government agencies that give regulatory approvals to consider using the arm's length principle during their reviews. If this is achieved, it is likely that those approvals will be acceptable to the FIRS and the taxpayer will not suffer potential TP adjustments.
  • The FIRS should also ensure that the safe harbour guidelines grant taxpayers relief from TP compliance burden and extensive audits.
  • The FIRS should consider the adoption of the OECD recommendation of 5% mark-up on service costs for LVAS (such as accounting, legal, HR and routine IT services).
  • The FIRS should ensure robust engagement/ consultation with key stakeholders (taxpayers and tax advisers) before the release of any guideline on safe harbour.

Conclusion

The inclusion of clear provisions on safe harbour in the TP regulations will lead to a TP regime that will provide taxpayers with compliance relief and certainty as well as administrative simplicity for the tax authorities. The combined effects of these will be an improvement in the ease of doing business and the tax system which will contribute significantly to increase in Foreign Direct Investment and ultimately the general improvement of the Nigerian economy.

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
Country
Position
Industry
Mondaq Newsalert
Select Topics
Select Regions
Registration (please 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