As envisaged at the beginning of the year, 2022 has witnessed a significant increase in Transfer Pricing (TP) audits. In recent months, there has been a significant drive by the Federal Inland Revenue Service (FIRS) to generate more tax revenues to fund government expenditure. The FIRS has continuously selected more clients for audits, issuing correspondence to taxpayers to initiate the audit process or revive old TP audits with the aim of speedily concluding them.

As you may be aware, TP is a highly specialised discipline based on the Arm's Length Principle (ALP), which can be applied and interpreted in various ways. It therefore comes as no surprise that the TP audit process can be contentious and may result in significant additional tax liabilities for taxpayers. This has led to a lot of controversy between taxpayers and the FIRS during the audit process in a bid to conclude the TP audit.

Considering the TP audit process can be contentious, time consuming and very tasking, now more than ever, taxpayers need some certainty in the treatment of their Related Party Transactions (RPTs). One of the ways to achieve this is by implementing Advance Pricing Agreements (APAs).

This article provides an overview of APAs, examines the provisions relating to APA in Nigeria and highlights the benefits of entering into APAs to taxpayers and the FIRS.

What is an APA?

According to the OECD Transfer Pricing Guidelines for Multinational Enterprises and Tax Administrations, 2022 (OECD Guidelines), an “APA is an arrangement that determines, in advance of controlled transactions, an appropriate set of criteria (e.g. method, comparables and appropriate adjustments thereto, critical assumptions as to future events) for the determination of the transfer pricing for those transactions over a fixed period of time”.

An APA requires negotiations between the taxpayer, one or more associated enterprises, and one or more tax administrations. The primary motive of an APA is to improve the efficiency of tax administration by encouraging taxpayers to engage with the tax authorities on all the facts relevant to a proper transfer pricing analysis and to work towards a mutual agreement. Negotiating an APA may consume a lot of time and resources. While completion times vary by country, the average time to process and complete APAs typically runs for up to two years.

Types of APA

An APA can be unilateral, bilateral or multilateral. In a unilateral APA, the agreement is reached between the taxpayer and the competent authority in the country where the taxpayer is resident. This agreement is only binding on this country. A taxpayer may want to enter into a unilateral APA if it determines that the source of TP exposure is mainly from one country and would want to achieve certainty on its treatment going forward. However, RPTs typically affect taxpayers in multiple jurisdictions, as such, unilateral APAs may not be effective. Due to concerns over double taxation, bilateral or multilateral APAs are preferred.

A bilateral/multilateral APA is an agreement between two or more taxpayers and jurisdictions. Under this type of APA, all parties involved would agree to the terms of the APA. Upon reaching an agreement, the APA is binding on the tax authorities and the taxpayers.

The administration of bilateral and multilateral APAs may be very bureaucratic because of the involvement of more than one tax authority and the difficulty associated with reaching a common ground. However, the OECD Guidelines recommend that wherever possible, an APA should be concluded on a bilateral or multilateral basis as they are more likely to reduce the risk of double taxation, ensure equitable treatment to all tax administrations and taxpayers involved, and will provide greater certainty to the taxpayers concerned.

APAs in the Nigerian TP Regulations

Regulation 9 of the Nigerian TP Regulations provides for APAs. The Regulation provides that taxpayers may request that the FIRS enter into an APA to establish criteria for determining whether the taxpayer has complied with the ALP.

The Regulations provides details of how a request may be made and the content of such request including a description of the activities to be addressed by the APA, a proposal of an approach for the determination of transfer prices for the RPT, identification by the taxpayers and jurisdictions involved in the APA and any other relevant information.

Upon reviewing the relevant information, the FIRS may accept, modify or reject a request. The Regulations state that the FIRS may enter into an APA with the taxpayer alone or together with the tax authorities of other jurisdictions. An APA entered into with the FIRS is to be for a period not exceeding three (3) years. 

Though detailed provisions for APAs have been included in the TP Regulations since 2012, the FIRS is yet to implement APAs in Nigeria.

Benefits of implementing APA in Nigeria

APAs generally have become well-established tools for risk management, advanced compliance, and an alternative TP dispute resolution. Some of the benefits of APAs are highlighted below:

  • Elimination of uncertainty in the treatment of RPTs. This is achieved by agreeing in advance the arm's length pricing or pricing methodology to be applied to the RPTs during the period of the APA.
  • APAs may help taxpayers to predict their tax liabilities thereby providing a favourable tax environment, creating certainty in the country's tax regime and eventually increases the ease of doing business in an economy.
  • Eliminates TP disputes to a large extent as long as the terms of the APA are adhered to. APAs may prevent costly and timeconsuming TP audits and may also lead to a substantial reduction of compliance costs over the term of the APA
  • Bilateral and multilateral APAs substantially reduce or eliminate the risk of double taxation or non-taxation as they involve the participation of all relevant jurisdictions.
  • APAs can reduce the burden of record keeping, as the taxpayer knows in advance the required documents to be maintained to substantiate the agreed terms and conditions of the agreement.
  • For tax administrations, it saves the cost of conducting TP audits, appeals and litigation, loss of immediate tax revenue and associated time value of money and frees scarce government resources.
  • Since the tax authorities agree the arm's length pricing for the RPT in an APA, this ensures that the right taxable amounts are recorded by businesses and taxed timely as opposed to the delayed additional tax revenue resulting from TP audits.
  • APAs can provide an opportunity for tax administrations and taxpayers to cooperate in a non-adversarial environment. This helps to open and improve lines of communication between all parties involved. The interaction between tax administrations can foster better relationships across jurisdictions.
  • APAs involve the disclosure of information about RPTs, which the tax authorities may not normally have access to. This can assist in improving the knowledge and understanding of technical transactions conducted by companies.

"In 2023, it is expected that the FIRS will continue conducting TP audits and sustain their drive for revenue. Considering the experience so far with the contentious nature of TP audits, this is a good time for the FIRS to consider the benefits of APAs and commence implementation in the country"


In 2023, it is expected that the FIRS will continue conducting TP audits and sustain their drive for revenue. Considering the experience so far with the contentious nature of TP audits, this is a good time for the FIRS to consider the benefits of APAs and commence implementation in the country.

As clearly discussed above, APAs provides several benefits to taxpayers resulting in a winwin situation for all the stakeholders involved.

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.