One of the key objectives of the Income Tax (Transfer Pricing) Regulations, 2018 (NTPR) as captured in regulation 2(e) is to provide taxable persons with certainty of transfer pricing treatment in Nigeria. The attainment of this objective should lead to improvement in the ease of doing business in Nigeria and ultimately help to attract the much-needed Foreign Direct Investments (FDI) into the country. Notwithstanding the above, certain provisions in the NTPR and the application of the arm's length principle by the tax authority appears to be contrary to the objective noted above.
For instance, Regulation 5(8) of the NTPR provides that the FIRS is not obliged to accept the value reported for customs duty purposes when considering the income tax implications of a non-arm's length importation. This means that even after valuation by the Nigerian Customs Services (NCS) and subsequent duty payments, the FIRS could still subject such transactions to the arm's length principle. Similarly, the Federal Inland Revenue Service (FIRS) still subjects related party transactions approved by the National Office for Technology Acquisition and Promotion (NOTAP) to the arm's length test. In the instances described above, where the FIRS is able to sustain a TP adjustment, it will create a risk of double taxation thereby negating the lofty objective and goals described above.
This article examines situations where these conflicts could arise, assesses their impact for the taxpayers and the country, reviews the practices in other jurisdictions and makes recommendations on how to resolve these conflicts for the benefit of all stakeholders including the FIRS.
The Issues
Prior to the introduction of the NTPR, Regulation
15 (a) and (b) of the repealed Income Tax (Transfer Pricing) Regulations No.1 2012, relieved connected persons from the requirements to prepare contemporaneous documentation where:
(a) "the controlled transactions are priced in accordance with the requirements of a Nigerian statutory provisions; or
(b) the prices of connected transactions have been approved by other Government regulatory agencies or authorities established under the Nigerian law and satisfactory to the Service to be at arm's length".
While the provision in 15(a) did not create any ambiguity in terms of its application, the implementation of 15(b) by the FIRS created some risks for taxpayers. Transactions involving technical services, management services, trademark and tradenames etc. of which their pricing have been hitherto reviewed and approved by NOTAP were still being subjected to the arm's length test and the FIRS in some instances raised additional assessments on account of those transactions.
In the upstream Oil and Gas industry, the Department of Petroleum Resources (DPR) and the Nigerian National Petroleum Corporation (NNPC) also approve certain prices. For instance, related party costs incurred by a company in a joint venture arrangement with the NNPC will have to be approved by the NNPC. This is also the case in the financial services sector where the Central Bank of Nigeria (CBN) and the National Insurance Commission also fix certain prices or fees for some categories of transactions in that sector. It is clear that these regulatory bodies have over the years exercised control over the pricing of some transactions within the industry they regulate.
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.