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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15 (a) and (b) of the repealed Income Tax (Transfer Pricing)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.
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The Finance Bill, 2019 (the Bill) was presented together with the 2020 Appropriation Bill to the National Assembly by President Muhammadu Buhari and is being considered for passage into law.
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