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.


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.