The Federal Inland Revenue Service (FIRS or "the Service") recently issued the keenly awaited Guidelines on Advance Pricing Agreements (APA) via Information Circular No. 2024/006 on 27 November 2024.
The Guidelines, which detail the process through which taxpayers can ensure a satisfactory level of certainty regarding the treatment of their related-party transactions, defines an APA as follows:
"... an arrangement between a taxpayer(s) and a tax administration that determines, in advance of controlled transactions, an appropriate set of criteria (e.g., transfer pricing methodology, comparables, and appropriate adjustments thereto, as well as critical assumptions as to future events) for the determination of the transfer price of those transactions that accords with the Arm's Length Principle over a fixed period based on the fulfilment of certain terms and conditions."
Going by this definition, one can conclude that APAs are a tool for tax dispute prevention. APAs can either be between a taxpayer and a single tax authority (i.e., unilateral), or between multiple taxpayers and tax authorities (i.e., bilateral or multilateral).
The Transfer Pricing (TP) Regulations in Nigeria have included provisions for APAs since they were first issued in 2012. However, Regulation 9(12) of the 2018 Regulations, which revoked the 2012 Regulations, indicated that "the provisions of the Regulations regarding APAs would only come into force upon the publication, by the Service, of relevant Notices and Guidelines". The time lag between the issuance of the first TP Regulations and the release of the Guidelines was required to provide both taxpayers and the FIRS with ample time to develop the depth of practical experience and knowledge required to successfully execute and implement APAs. Consequently, the issuance of the Guidelines heralds a new phase for TP compliance and administration in Nigeria.
This move by the FIRS, which mirrors the actions of countries like South Africa, Saudi Arabia and Sri Lanka that recently introduced/proposed APA programmes, has been lauded by taxpayers and tax practitioners as a step in the right direction, as it is consistent with global best practices. The Guidelines, if well implemented, would not only help to ensure tax certainty, but to also minimise the time spent in resolving lengthy TP audits and disputes and mitigate the risk of double taxation through the use of bilateral or multilateral APAs. What's more, the use of APAs by qualifying taxpayers would afford them the opportunity to effectively resolve potential TP issues in real time rather than retrospectively when key personnel involved in affected related-party arrangements may have exited the organisation.
Criteria for eligibility
APAs are accessible to Nigerian resident companies and non-resident companies with a permanent establishment, significant economic presence, or any other form of taxable presence in Nigeria. As such, all taxpayers with a taxable presence in Nigeria that have controlled transactions that meet the thresholds specified in the Guidelines can apply for an APA. These thresholds are USD 10 million (or its equivalent) per year for each covered (single) controlled transaction and USD 50 million (or its equivalent) per year for a group of covered controlled transactions
Application process
Taxpayers who satisfy the eligibility criteria are required to commence the application process by submitting an APA proposal to the Service. After submitting the proposal, the application process would proceed as follows:
- Stage 1: Pre-filing meeting – Taxpayers
are expected to have a mandatory, pre-filing meeting at least
thirty days after submitting an APA proposal, to discuss the
feasibility of a successful APA. The meeting is expected to hold
prior to submitting a formal APA application and cover topics such
as the nature and scope of the proposed APA, the TP method to be
used and any collateral issues.
After the pre-filing meeting, taxpayers are required to pay a non-refundable application fee of USD 20,000. Further, where the Service incurs costs directly attributable to the APA in excess of the non-refundable application fee, taxpayers would be required to reimburse the excess costs to the FIRS. - Stage 2: Formal application – Where the FIRS agrees to the feasibility of an APA, a taxpayer may initiate the formal application process within the agreed timeline. The application is a robust document detailing the type of APA required by the taxpayer, all relevant entities to the controlled transaction(s), participating treaty partners (if any), functional, industry and value chain analyses, the proposed TP method and other relevant terms and conditions, including the critical assumptions.
- Stage 3: Analysis and evaluation – After the formal application is made, the FIRS will review the submission, collate, analyse, and critically assess the available data and request additional documents or information, if necessary.
- Stage 4: Negotiation and agreement – During this stage of the application process, the tax authority would discuss and align the terms of the APA with the taxpayer (and its treaty partners, in the case of a bilateral or multilateral APA).
- Stage 5: Drafting, execution and monitoring - The final stage of the APA process focuses on finalising and executing the agreement. Thereafter, the APA would be monitored to ensure that its terms are fully complied with, and to reconfirm the continued existence of the facts, circumstances, and other assumptions. Following the execution of the APA, taxpayers are required to prepare and submit annual compliance reports for each year of the APA.
Timeframe for application process
The Guidelines indicate that the timeframe for concluding the APA application process would be 24 months after the acceptance of a taxpayer's formal application and 36 months for a bilateral or multilateral APA. However, this timeframe is dependent on factors such as the timely submission of relevant information, the complexity of the issues and the pace of negotiations with treaty partners.
Duration of an APA and rollback provisions
APAs are valid for a period of up to three (3) years, with the option for renewal for a maximum of three (3) additional years. Taxpayers who opt to renew their APAs will be required to pay a renewal fee of USD 5,000.
The Guidelines also include rollback provisions. These provisions allow taxpayers to apply the agreed methodology retrospectively for up to three (3) years immediately preceding the year of the agreement where the controlled transactions are identical to the transactions under the scope of the APA. The rollback provisions are intended to address pre-existing risk areas associated with the relevant transactions and enhance the appeal of APAs. It is important to note, however, that the rollback provisions will not apply to controlled transactions on which either the Tax Appeal Tribunal or a court of competent authority has issued a ruling regarding the appropriate arm's length price either prior to or after concluding the APA process.
Termination of an APA
Either a taxpayer or the FIRS can terminate an APA by issuing a notice of termination of the APA where there is a change in the nature of the covered transaction(s), the critical assumptions underpinning the APA or a tax law that is materially relevant to the APA.
Interplay between ongoing TP audits and APAs
Taxpayers with APAs may still undergo TP audits. However, these audit exercises will focus on issues that are not covered by an APA. Further, taxpayers with ongoing tax audits can choose to apply for an APA provided that such applications are not in respect of transactions already being reviewed under the tax audit.
Based on the Guidelines, the FIRS will not discontinue or postpone an ongoing tax audit solely because the affected taxpayer has filed an APA application, as the two processes are separate and will be resolved independently of each other. The exception to this is where there are clear similarities between the audit years and the facts and circumstances of the APA. In this case, the outcome of the APA may be applied to the audit issues if doing so would not delay either the audit exercise or the APA process.
Conclusion
Tax authorities globally have embraced the pursuit of increased tax certainty for taxpayers. This is underscored by the fact that over 75 countries have now implemented either an APA programme or a similar process.1 And this development has been influenced by the push for tax certainty by institutions like the Organisation for Economic Cooperation and Development (OECD).
A few days before the FIRS issued its APA Guidelines, the OECD published its first ever country-specific statistics on APAs with a focus on members of the OECD/G20 Inclusive Framework during its annual Tax Certainty Day. The data showed a four percent increase in the global APA inventory, underscoring the growing popularity of APAs as a dispute-prevention mechanism. This rising acceptance of APAs may not be unrelated to the high success rate of APAs: Most of the APA cases concluded in 2023 were resolved successfully, with about 88% of the APA cases concluded in 2023 granted by the relevant competent authorities.2
These are heartwarming statistics for taxpayers in Nigeria who may be interested in taking advantage of APAs to ensure certainty of the tax treatment of their controlled transactions, especially those of a bilateral or multilateral nature.
Beyond the optimism arising from the success rate of APAs, though, taxpayers that seek to negotiate such agreements are typically keen on the timeline for processing an APA and the duration the agreement would cover. The OECD's report puts the average processing time for an APA application at about 36.8 months. This is consistent with the time frame of 36 months indicated in the Guidelines for concluding bilateral and multilateral APAs and shows that the FIRS may have carefully reviewed the experience of other jurisdictions with APA programmes in determining the time frames. Where the FIRS is able to quickly develop its capacity and channel adequate resources towards the APA programme, it may be able to better ensure that a vast majority of APAs, particularly unilateral ones, are concluded in line with its target of 24 months.
On the other hand, Nigeria's standing on the APA duration scoreboard is somewhat mixed: The initial maximum term of three years to be covered by APAs under the Guidelines is relatively short when compared to the average five-year term that applies in many jurisdictions. However, the cumulative duration appears reasonable for taxpayers that successfully negotiate APAs that cover not just an initial term of three years but are also eligible to enjoy rollback provisions for a maximum period of three years and/or renew the APA for up to three years after the initial term. This would result in the APA providing certainty to taxpayers for a total maximum period of six to nine years.
Two key hindrances that may affect taxpayers' adoption of Nigeria's APA programme are the application cost – which is a minimum of USD 20,000 – and application thresholds specified in the Guidelines. Some jurisdictions like the UK have chosen not to charge application fees, while others like Poland have adopted a stratified fee structure, with domestic entities applying for unilateral APAs paying lower fees than foreign entities and a different fee range for all entities applying for either bilateral or multilateral APAs.3 Where the Service chooses to retain application fees, adopting a stratified fee structure may open up the process to more taxpayers.
In addition, the threshold of USD 10 million (i.e., about NGN 16 billion) for single transactions and USD 50 million (i.e., about NGN 80 billion) for group transactions will exclude the vast majority of taxpayers, as even the typical MNE may not have controlled transactions that fall within the threshold. The 2012 TP Regulations had specified a threshold of NGN 250 million, which amounted to about USD 1.5 million at the time. Lowering the APA application threshold to this threshold will ensure that local businesses and more MNEs are able to take advantage of the APA programme.
Overall, the release of APA Guidelines demonstrates the FIRS's commitment to one of the focal objectives of Nigeria's TP Regulations, which is to "provide taxable persons with certainty of transfer pricing treatment in Nigeria." We hope to see the benefits of the APA programme soon as taxpayers take full advantage of it to proactively prevent TP disputes. The Guidelines may still require the updates suggested in this article to enhance the impact of the APA programme and expand the base of taxpayers that can benefit from the cover that it provides.
Footnotes
1 See kpmg-global-transfer-pricing-review.pdf
2 See https://www.oecd.org/en/data/datasets/advance-pricing-arrangement-statistics.html
3 See https://www.podatki.gov.pl/en/advance-pricing-arrangements-apa/
The opinion expressed in this article is solely personal and does not represent the views of any organization or association to which the authors belong.
