Introduction
Advance Pricing Agreements (APAs) are currently being discussed by most transfer pricing practitioners in Nigeria. This is sequel to the issuance of the Guidelines on APA by the Federal Inland Revenue Service's (FIRS) in November 2024. For Multinational Enterprises (MNEs) with large volumes of related party transactions looking to establish certainty with the FIRS in the treatment of their controlled transactions, APAs are poised to offer a level of assurance that excludes such MNEs from the post-transactional scrutiny that comes with transfer pricing (TP) audits.
The FIRS' release of the Guidelines on APAs evidences the development of the Nigerian TP landscape. However, an important point of consideration is to evaluate how the newly established framework compares with similar ones in other jurisdictions.
For this article, our discissions will compare the provision of Nigeria's APA rules with those of other jurisdictions and provide recommendations drawn from our analysis of global practices to improve the implementation of our local APA rules.
Nigeria's implementation of the new APA rules
The FIRS' Guidelines on APAs which came into effect on January 1, 2025, establishes a framework for MNEs to determine Transfer Pricing (TP) methodologies with the FIRS in advance of the occurrence of their controlled transactions. The Guidelines make provision for unilateral, bilateral, and multilateral APAs. The Guidelines also prescribe eligibility grounds which MNEs must satisfy to qualify for the establishment of APAs.
MNEs with a presence in Nigeria who are desirous of setting up APAs are required to pay a non-refundable application fee of USD 20,000. A non-refundable deposit of USD 5,000 also applies where those MNEs choose to renew existing APAs upon their expiration. The Guidelines prescribe a maximum validity period of three years for the operation of established APAs. The Guidelines also provide that APAs may be rolled back for another maximum period of three years.
MNEs are required to meet minimum thresholds in the value of their controlled transaction amounts to qualify for an APA application. Single transactions must be up to an equivalent of USD 10 million for each covered controlled transaction for each year, while group transactions must meet the threshold of USD 50 million.
It is important to note that the existence of an APA between MNEs and the FIRS does not reduce MNEs' compliance obligation to file TP returns and maintain contemporaneous TP documentation. The Guidelines require the annual compliance reports to be submitted on an annual basis to the FIRS for evaluation at the same time the company's income tax returns are being filed. It is important to establish that the compliance report required of the APA guidelines is an additional compliance document separate from the TP local file which MNEs are required to maintain as a separate compliance document in accordance with the Income Tax Transfer Pricing Regulations, 2018.
Comparing jurisdictions
It is interesting to note that Nigeria is among the few countries in Africa with an established APA framework. At the time of this article, proposals in some developing countries like Kenya and South Africa for the establishment of a regulatory framework for APAs are still being debated, while some other developed and developing countries like the United Kingdom, India, Malaysia and Egypt have established functional APA frameworks.
The key components of the various frameworks however highlight differences between the compliance guidelines in those jurisdictions and those that have been set for Nigeria. The successive paragraphs contain a summary of key provisions of the APA rules in different jurisdictions covering areas like the forms of APAs, tenors, application fees and renewal fees, etc.
Malaysia
Taxpayers can apply for three types of APAs under Malaysia's APA guidelines: Unilateral APAs Bilateral APAs and Multilateral APAs. The Malaysian tax authority has designed their APA system to apply in cases where the applicants earn a revenue in relation to business operations of covered transactions exceeding RM100 million, of their taxable income and the value of the proposed covered transaction is: for sales, if it exceeds 50% of the revenue, for purchases, if it exceeds 50% of the purchases, or for other transactions, if the total value exceeds RM 25 million. Where a taxpayer is undergoing an audit or investigation, they do not qualify to apply for an APA until the audit or investigation has been concluded.
The APA process is also divided into the following stages: pre-filing meeting, submission of formal application, reviewing and negotiating the application, implementation of the APA and APA monitoring and compliance review. Formal APA applications are required to be submitted to the DGIR within 6 months after receipt of the outcome of the pre-filing meeting.
Where connected parties are from countries with existing tax treaties with Malaysia, only a bilateral or multilateral APA may be applied for. Where no tax treaties exist, only unilateral APAs may be applied for.1 The Malaysian APA rules also contain a threshold for an APA application. Applicant entities must satisfy the following conditions among others:
- Earn a revenue in relation to the business operation of the covered transactions above RM 100 million of its taxable business income; and
- Ensure the value of the proposed covered transaction is:
- For sales transactions, exceed 50% of the revenue.
- For purchase transactions, exceed 50% of total purchases; or
- For other transactions, the total value must exceed RM25 million.
The application process under the Malaysian APA rules is similar to the FIRS' framework in Nigeria, however, the Malaysian APA rules prescribe a minimum covered validity period of three years and a maximum of five years. Additionally, the Rules provide for the extension of the maximum period, subject to the agreement of the competent authorities.
The APA fee consists of a non-refundable application fee of five thousand ringgit (RM 5,000.00) for a fresh application or renewal of APA made within two months from the date of the notification or ten thousand ringgit (RM 10,000.00) for a fresh application of APA made after two months but within six months from the date of notification.
Egypt
The Egyptian Transfer Pricing Guidelines (EGTP Guidelines) provide guidance for Egyptian taxpayers to agree with the tax administration in the determination of arm's length standards for their related party transactions. The APA framework is still in its early stage in Egypt, therefore the tax authority has restricted its application to unilateral APAs. This is in contrast with Nigeria's APA rule that currently accommodates bilateral and multilateral APAs; arrangements which Egypt has reserved for future implementation after testing the APA regulation with unilateral APAs.
India
India, on the other hand, has developed a robust APA framework that accommodates unilateral, bilateral, and multilateral APAs through its Finance Act, 2012. Under the rules, bilateral or multilateral APAs should be made where amongst other things, a tax treaty containing an article on 'Mutual Agreement Procedure' exists between India and the other country(ies). In India, the annual compliance report is required to be filed within 30 days of the due date of filing the income tax return for the assessment relevant to the previous year or within 90 days of entering into an agreement, whichever is later.
Under India's APA rules, the application fee is computed on a graduated transaction threshold basis. For proposed transactions not exceeding Rs. 100 crores, the application fee is 10 lacs, while those not exceeding Rs. 200 crores and those exceeding Rs. 200 crores attract an application fee of 15 lacs and 20 lacs respectively.
Persons who are eligible to apply for an APA in India are those who have undertaken an international transaction or are contemplating to undertake an international transaction. India has no financial threshold that qualifies persons to apply for APAs under its rules. Approved agreements are valid for a maximum period of five years under India's rules.
The filing timeline for the annual compliance report is different from the Nigerian rule which requires the annual report to be filed alongside the income tax return. This may potentially be burdensome to taxpayers struggling to meet multiple filing deadlines.
The United Kingdom
The UK's revenue authority: the HM Revenue and Customs (HMRC) expresses a preference for bilateral APAs, as unilateral APAs are generally considered to be of less value to HMRC and potential applicants. 2 It is interesting to note that HMRC places no monetary restriction on the MNEs that qualify to apply for an APA under the UK Rules. It is also interesting to note that HMRC does not levy any charge on a business for their assistance during the APA process. 3 Approved APAs under the UK rules are typically valid for a period of three to five years.
According to HMRC, "APAs will not be declined solely by reference to the size of the transactions giving rise to the transfer pricing issues, because HMRC recognises that complex transfer pricing issues can be encountered by smaller businesses as well as by large multinationals. However, many small and medium enterprises are exempt from the UK transfer pricing legislation by virtue of Section 166 TIOPA 2010 and so there may be limited occasions where the APA process will be appropriate for smaller businesses."4
HMRC also monitors compliance through the submission of an annual report signed by an authorised representative of the entity. Like the Nigerian APA rule, HMRC requires an annual report to be submitted at the time the company's income tax returns are filed. Other matters including rollbacks, revision, and renewals of APAs are also present in the UK APA rules. For ease of development, HMRC has also published a template APA to be adopted by MNEs.
Conclusion
The APA rules in various jurisdictions share many similarities ranging from the forms of APAs recognised, application and renewal processes, APA tenors and rollbacks. However, we have noted that application fees are denominated in local currencies in countries where they apply. This is different under Nigeria's Guidelines where the application fees have been priced in foreign currency.
Taxpayers are eager to see how the implementation of the new rules play out in Nigeria, especially in consideration of the FIRS' pursuit of numerous TP audits across companies in various industries, and in comparison to the workings of other jurisdictions with similar APA rules.
It would be interesting to note the FIRS' disposition to accommodate additional taxpayers under its rules, like HMRC's approach that reduces the barriers to entry for MNEs to qualify for the implementation of APAs, especially considering the complex nature of TP transactions.
Taxpayers also look forward to reviewing the data collected by the FIRS on its implementation of its APA rules in Nigeria. This would contribute in no small measure to evaluating the feasibility of the new rules and determining the necessity to maintain or adjust existing provisions to enable Nigeria measure up to global standards.
Footnotes
1 Paragraph 6(6.2) of the Inland Revenue Board of Malaysia Advanced Pricing Arrangement Guidelines
2 Paragraph 13, HMRC's internal manual on APAs INTM422030 - Transfer pricing: methodologies: Advance Pricing Agreements: types of agreement - HMRC internal manual - GOV.UK
3 Paragraph 8, HMRC's internal manual on APAs INTM422020 - Transfer pricing: methodologies: Advance Pricing Agreements: what is an APA? - HMRC internal manual - GOV.UK
4 See 3 above.
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.
