Recent economic developments, the expansion of the West African regional market to foreign investors, and the search for emerging markets within the African continent has led to a continuous increase in business mobility and cross border investments with Nigeria.

Borders are artificially delineated, geographic or littoral lines that form the boundaries of a nation. Within this enclosure, a country exercises autonomy and jurisdiction as a political and economic entity. In accordance with the internationally recognized principles of state sovereignty, the government can restrict or totally ban the unauthorized movement of goods and people across both internal and external borders.

The two main socio-economic processes that take place across a country's international borders are the movement of people and goods (for trade). This movement is an integrative process that links people from both within and outside the country; it breaks down artificially imposed barriers, and generates social, legal and commercial interactions.1 Such interactions have to be managed or regulated in a manner that promotes the overall interests on the state including its security, legal, cultural and financial interests.

For instance, the exchange, supply, and exportation of labor between Nigerian businesses and other countries have raised pertinent questions as to how Nigeria is dealing with cross border issues such as jurisdictional matters of mining and oil exploration rights, taxation of income, pension payments, and labor rights. This crucial question is further hinged on the fact that cross border movement is not a single process or a once-and-for- all activity, but a 'form' of migration in its own right, with distinct features.

Since 2012, there have been calls for the Nigerian Federal Government to look into the implementation of its Transfer Pricing Regulations2, as the non-implementation was leading to the loss of Billions of Naira. Transfer Pricing (TP) is a term used to describe all aspects of inter-company pricing arrangement between related business entities, including transfer of tangible goods and services, and intellectual property rights. This also includes the transfer of labor between related entities which may also affects the taxing of income.

The increase in regional trade in West Africa has made it evident that a failure to pursue a more vigorous monitoring of cross border activities would lead to a financial haemorrhage and a situation where the nation's tax revenues will remain inappropriately allocated to other countries or tax jurisdictions. This situation is further exacerbated by the largely bureaucratic manual tax administration system rather than a technology driven risk based approach3. According to the World Bank's Doing Business 2011 report, Nigeria ranks 137 out of 183 countries surveyed on the ease of doing business and 134 on the ease of paying taxes. In the 2010 report, Nigeria ranked 134 and 131 on the ease of doing business and paying taxes respectively. More recently, in the 2015 report, Nigeria ranked 170 out of 189 on the ease of doing business.

Despite sustained efforts by the federal government to improve Nigeria's business environment, indications showed that most of the efforts had not impacted positively on the nation's business climate with its ranking at the 169th position among the 189 countries assessed on economic reforms implementation in the 2016 report. The Doing Business report of 2016 revealed that Nigeria moved just a point higher than the 2015 position of 170th in the global rankings. During the period under review, the country was reported to have carried out two reforms more than it did last year.

Nigeria has been slipping back consistently on the ease of paying taxes index which is a function of three main indicators - number of tax payments, time required to comply with tax obligations and total tax rate. At 170 Nigeria was far behind a number of other African countries such as Mauritius, South Africa, Zambia, and Ghana all competing for foreign direct investments.4 It is instructive to note that eight of the 10 top improvers carried out reforms making it easier to start a business, while 7 implemented reforms making it easier to get credit. Some of these changes were inspired by transnational initiatives such as the revision by the Council of Ministers of the Organization for the Harmonization of Business Law in Africa (OHADA) of the Uniform Act on Commercial Companies and Economic Interest Groups.

An issue of significant concern therefore is the mechanics employed in the taxation of companies, goods and services. This issue is illustrated in instances where a parent company or affiliate has engaged a local entity or subsidiary either in trade, loan arrangements, or supply of employees and the transaction is not concluded at arm's length. Also, the manner with which pioneer status rights and loss declarations are dealt with in a group of companies' accounts are also issues which the Nigerian government must pay attention to and effectively superintend in order to avoid the erosion of its tax base.

In December 2015, Chatham House released a report which asserted that Nigeria was suffering economic losses as a result of obstacles that impede trading through formal channels. As a crucial note, it was revealed that the absence of proper monitoring and implementation of the applicable laws largely contributed to the bane of financial losses in its cross border arrangements. The writer also believes that the introduction of appropriate fiscal and regulatory policies will help in reducing revenue flight. As noted in the World Bank report for 2015 two of the 10 top improvers implemented reforms making it easier to trade across borders. Benin reduced the number of documents needed for customs clearance of imports. The technical standard or health certificate is now no longer required except for food imports. Côte d'Ivoire simplified the process for producing the inspection report for imported cargo and lowered port and terminal handling charges at the port of Abidjan by introducing new customs and port management rules.

It must be understood that Nigeria is a major economic link to Africa through its ports, its oil and gas production capabilities, its rich mineral deposits, as well as the plenitude of its labor force. At the end of 2014, Nigeria's recorded external trade stood at about US$135.8 billion yet it was disclosed that because of the unbridled volume of external trade which remains largely informal, unrecorded and untaxed, the figure may yet be below the actual statistics. The National Bureau of Statistics in its release of the latest capital importation report noted that Nigeria's foreign direct investment declined by 48.7% in the first quarter of 2015 in relation to the preceding quarter in 2014. It indicated a year-on-year decline in inflows, at $96.09 million growing at -14.77%, while on quarter basis, the decline was larger at $374.25 million or -48.68%. Foreign Direct Investment into Nigeria is also known to have slid from a peak of US$8.9 billion in 2011 to US$5.6 billion in 2013.

Cross border trade is therefore a major aspect of Nigeria's economy which requires legal and regulatory fastening. The need for an efficient tax system further demands a re-tooling of the relevant agencies and the proper and efficient application of relevant laws and regulations. The following are relevant areas to consider in harnessing the country's economic opportunities -

  • Engaging in reforms which simplifies business registration,
  • Harmonizing the country's fiscal and monetary policies in order to engender investor confidence and increase foreign direct investment,
  • Understanding that cumbersome, poorly functioning business regulations undermines entrepreneurship and economic performance,
  • Introducing collateral registries and debt recovery tribunals in order to strengthen better-performing credit markets, and
  • Introducing and implementing reforms which will improve access to credit and the efficiency of property registration.

The Concept of Cross Border Arrangement

Cross border rights and obligations are often misunderstood because of the subjectivity of its interpretation. If one of company X's workers carries out employment in more than one state or country, then a worker is considered to be a cross border worker. However, the test to be applied in determining the state or country to which such a worker will be obligated to pay tax for instance or remit pension is a different matter. Questions to consider include: is he a resident in state A or B, and does the company have a permanent establishment in state A or B or both. In the case of an employee aboard a vessel, such an employment is perceived to be connected with the state in which the ship is registered or if the ship is registered in more than one state, the state in which the ship most recently became registered.5

Cross border issues also span continents, for example, a parent company in China may have a Nigerian subsidiary, while it contracts a supplier in London to supply certain materials to the Nigerian office. The Nigerian office may have taken an intra-company loan from the Chinese office to pay the supplier. Potential income tax issues will arise in such a situation, such as a determination of accruing value added tax, transfer pricing issues for China and Nigeria, as well as withholding tax obligations applicable to the services to be performed by the London supplier.

Conceptually, cross border arrangements take place in a country within the borders of federating states. This is particularly with respect to oil & gas, and mining rights, where the deposits discovered straddle two or more jurisdictions. This may lead to onshore and offshore dichotomies, as states are eager to develop their natural resources, while at the same time subject such activities to tax in order to internally generate income to run the state affairs. In such a situation, the fiscal regime to govern the calculation of production costs, allowable expenses for drilling and exploratory operations, taxes due to each state, etc., particularly where the operations are conducted by both governments, are issues which must be settled before hand, through public policy or legislations articulated to pre-empt the potential conflicts that may arise.6

Existing Legal Framework in Nigeria

The Transfer Pricing Regulations of 2012 is one of the most recent legal documents in Nigeria on transfer pricing which attempts to address short falls in tax revenue leakages occurring from cross border activities. Its primary focus however is the evasion of tax by related parties.

As a concept, transfer pricing thrives on the arm's length rule. This demands that pricing indices between related parties in business transactions should achieve the same result as if parties are unconnected. In other words, related parties must act as if they are unrelated to ensure that their business transactions are properly taxed with no loss to the revenue authorities. The essence of this requirement is that the quantum of profit which ordinarily should be subjected to domestic tax does not become a gain to another state to which tax revenues are shifted.

The Regulations were made pursuant to section 13 (2) (d) of the Companies Income Tax Act (CITA) Cap C21 Laws of the Federation of Nigeria 2004 which states as follows:

(2) The profits of a company, other than a Nigerian company from any trade or business shall be deemed to be derived from Nigeria –

(d) Where the trade or business or activities is between the company and another person controlled by it or which has a controlling interest in it and conditions are made or imposed between the company and such person in their commercial or financial relations which in the opinion of the Board is deemed to be artificial or fictitious, so much of the profit adjusted by the Board to reflect arm's length transaction.

The Act further empowers the Federal Inland Revenue Services to make adjustments in order to reflect arm's length transaction in situations where in its opinion it deems the trade or business or activities between related parties to be artificial or fictitious. Section 22 of the Companies Income Tax Act provides the meaning of artificial transaction thus:

"Where the Board is of opinion that any disposition is not in fact given effect to or any transaction which reduces or would reduce the amount of any tax payable is artificial or fictitious, it may disregard any such disposition or direct that such adjustments shall be made as respects liability to tax as it considers appropriate so as to counteract the reduction of liability to tax affected, or reduction which would otherwise be affected, by the transaction and any company concerned shall be assessable accordingly".

Controlled relationships between affiliated or associated companies have elements of conditions imposed by the controlling entity and such conditions impact on profits because they are not at arm's length. A subsidiary often owes its economic survival to its parent company suggesting that the commercial terms guiding their relationship are not evenly bargained. Where there is a controlling interest by the parent company in the business of the subsidiary, the tax authority reserves the right to deem any suspected transaction artificial and fictitious and thereupon it can make transfer pricing adjustment for the appropriate tax payable.

Another relevant legal document of importance is the Guidelines for Cross Border Arrangement under the Pension Reform Act7 published by the National Pension Commission. The Guidelines seeks to address cross border issues relating to foreign employees in Nigeria, Nigerians working abroad, Nigerian employees moving abroad, Nigerians returning from foreign employment, exchange rate rules, taxation rules, money laundering rules, percentage contributions, overseas remittances, and withdrawals.8

The Guidelines restate Section 1 of the Pensions Reform Act which provides that:

"...there shall be established for any employment in the Federal Republic of Nigeria a contributory Pension Scheme for payment of retirement benefits of employees to whom the scheme applies".

The above provision includes any individual (including expatriates) engaged in an employment with an organization having at least five (5) employees within the Nigerian jurisdiction. It is expected that there would be instances where some Nigerian retirement savings account holders move abroad for new employment, secondment, transfers, etc., and some Nigerian employees abroad would return home on transfers or to secure new jobs. Following the increasing interest shown by Nigerians abroad to take part in the Nigerian Contributory Pension Scheme and enjoy the benefits accruing thereof, and expression of interest in the scheme by expats working in Nigeria, it became imperative to initiate the guidelines which has now set the stage for cross border arrangements under the Scheme.

Arguably, the Guidelines was an attempt to streamline several labor related issues particularly those which stemmed from cross border arrangements and strove to provide for the protection of pension rights both for Nigerians and foreigners employed or engaged to work in Nigeria9. These Guidelines constitute one of the formalized channels through which the Nigerian government is monitoring informal employment and supply of labor, whilst encouraging foreign entities in Nigeria and foreigners contracted in Nigeria to participate in the pension scheme. This is also in accord with the ILO social security convention no. 102 of 1952 and has taken care of attributable loss of pension rights as a result of waiting or vesting periods imposed by some schemes as can be found in some countries which do not permit transfers of rights to other countries with whom they do not have formalized cross border arrangements.

An additional merit of the Guidelines is that it seeks to checkmate money laundering mechanisms which may be applied through the repatriation of funds under the guise of pension. Clearance and anti-laundering approval forms are to be obtained and completed through the recognized channels of the Central Bank of Nigeria, Economic and Financial Cries Commission, and National Drug Law Enforcement Agency, thus ensuring that actual pension funds are repatriated10. Some of the documents to be supplied include: evidence of employment in host country, evidence of remuneration (pay advice), evidence of nationality (i.e. copy of identification page of international passport), and evidence of work permit in host country. There are similar requirements for a foreigner coming to work in Nigeria and returning Nigerian employees.

Furthermore, any individual making contributions from outside the country in foreign currency, shall make such contributions through the licensed banks to ensure that the transactions are subject to necessary CBN approvals and anti-money laundering checks within the financial system and shall report to the EFCC and NDLEA, all foreign currency contributions in excess of N1 million or its equivalent, in compliance with the provisions of Section 10 (1) of the Money Laundering Act11.

The pension fund administrators are also not left out of these regulations and are required to open domiciliary accounts with any bank of their choice when dealing with individuals involved in cross border arrangements, but shall before the opening of any domiciliary account, obtain prior consent from the Commission.

Bordering Cross Border Activities

Nigeria has in the past few years seen much stronger interests from foreign investors, attracted by its rich mineral deposits, the development of its telecommunications and banking services, and by the general push in the various sectors towards privatisation, the strengthening of institutions, deregulation and trade liberalisation. As would be the case with emerging and developed economies, foreign investors are primarily concerned about security and political stability, transparency of doing business in the country, tax obligations, costs of doing business, ability to repatriate capital, ease of importation of technology and the general regulatory framework. The articulation of these issues will provide the needed clarity in trade and investment thus, ensuring that investors undertaking cross boundary arrangements have certainty on the applicable economic and fiscal regulations, restrictions and tax planning options.

The focus of tax planning for an investor will be to minimise the local tax charges in the country where it is subject to tax, within permissible boundaries, and mitigate residual taxes on income outflows. Where there are favourable double tax treaties, then the corporate and operating structures could be optimised by investing or carrying out activities through companies based in the relevant treaty country. A favourable location could reduce withholding taxes, avoid tax on divestments and generally minimise double taxation for the company and the employees.

The Nigerian government can also as part of its cross border activities control, focus on taxes that are easier to collect from such business activities, as well as on labor security measures that ensure the taxation of labor in Nigeria to generate income irrespective of the source. Incidentally, this will also assist the government in deciding on preferred locations for setting up free trade zones, as well as tax incentives and exemptions that will further increase foreign direct investment.


In dealing with cross border arrangements and taking full advantage of the opportunities that come with it, the Nigeria tax laws and regulations are long due for a comprehensive overhaul. Cross border activities are increasing and in the absence of efficient and effective fiscal controls and enforcement mechanisms in place, Nigeria will continue to suffer huge revenue losses.

Intellectual property importation, staffing allocation, are additional aspects of transfer pricing which must be examined and regulated in the context of cross border arrangements to give some sense of certainty to our legal framework and ensure that doing business in Nigeria provides optimal benefits in terms of conductivity of the economy as well as close any loopholes in revenue inflow to the Nigerian government.


1 Trans-border Studies by Labo Abdulahi &. Afolayan A. A. New Ed. (Ibadan: Institut Francaise de Recherche en Afrique, 2000.

2 The Income Tax (Transfer Pricing Regulations) 2012 was made pursuant to the Federal Inland Revenue Service (Establishment) Act 2007 and came into force on 2nd August 2012.

3 The FIRS has introduced a tax payer friendly platform for payment of tax and self-assessment which is expected to help stem the increase in tax evasion. Taxes are paid on the relevant website which details steps from payment, to receipt generation and the issuance of tax identification number.

4 PWC Nigeria at 50, Top 50 Tax Issues (Pub. 2010).

5 In Australia one of the tests that are applied is if a worker's employment is connected with a state/territory if the worker is in that state/territory when an injury happens to that worker and there is no place outside Australia under the legislation of which the worker may be entitled to compensation for the same.

6 An example of a trans-boundary mining project is Pascua-Lama, a major gold and silver mine situated over the border between Chile and Argentina. This is a large-scale project, so States involved are willing to reconcile their public policies to encourage this project to be developed. In this regard Chile and Argentina have celebrated a Mining Integration and Complementation Treaty between the Republic of Argentina and the Republic of Chile, which is one of the most significant legal instruments in this matter. In this treaty, the States agreed that revenues or profits would be taxed according to the fiscal regime of Chile or Argentina depending on the origin of the relevant mineral produced. Another example is the Frigg field between United Kingdom and Norway.

7 Released in December 2008 pursuant to powers provided under section...of the Pension Reform Act (

8 These guidelines have been put in place for the purpose of establishing a standard set of rules and procedures for the Contributory Pension Scheme established in Nigeria for foreign nationals and Nigerians resident abroad to participate in the Contributory Pension Scheme.

9 The Guidelines made foreign participation optional. See section 2.2.1. Nigerians abroad working in a foreign office of a Nigeria company may take part in the scheme to their benefit especially where the country of residence does not regulate pension schemes.

10 Section 2.5.3 and 2.5.4 of the Guidelines.

11 Sections 3.5.1 and 3.5.2 of the Guidelines. The anti-money laundering aspirations are pursued principally by the Independent Corrupt Practices Commission established by statute in 2002, and the Economic and Financial Crimes Commission established by statute in 2004.

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.