On November 27, 2024, the Federal Inland Revenue Service ('the FIRS or the Service") issued the Advance Pricing Agreement (APA) Guidelines (the Guidelines) through Information Circular No. 2024/006, with an effective date of 1 January 2025.
An APA is an agreement between a taxpayer and tax authority that predetermines transfer pricing (TP) methodology, comparables, adjustments, and critical assumptions for related party transactions over a fixed period.
The primary objective of the APA is to create tax certainty by mitigating the risks of double taxation and TP disputes, which could lead to additional tax liabilities for multinational enterprises (MNEs) operating in Nigeria. Furthermore, the APA aims to enhance Nigeria's tax compliance practices in line with global standards, ensuring that intercompany transactions involving Nigerian entities adhere to the arm's length standard.
This article aims to highlight some of the important considerations for taxpayers and FIRS from the review of the APA Guidelines.
Important Considerations for Taxpayers
Documentation and Application Process
The process of applying for an APA requires comprehensive documentation, including detailed financial data, a description of business operations, and the transfer pricing policies applied. The Guidelines highlight the need for thorough preparation and submission, and taxpayers should be ready to provide extensive data and justifications to avoid delays or rejection of applications. The timeous provision of information by applicants would ensure that the timelines for concluding APAs as indicated in the Guidelines are achievable.
Cost and Time Considerations
Taxpayers need to budget for the administrative costs, including hiring external advisors or consultants to assist with the APA application. APA applicants should be aware of the timeline for APA approval and plan their operations and compliance strategies accordingly.
Cross-Border Considerations
For MNEs, the new Guidelines are significant because they may require coordination with tax authorities in other jurisdictions. This is especially true for bilateral and multilateral APAs. Taxpayers may face challenges related to differing TP rules in other countries and should seek to align their Nigerian APA application with their global tax strategy.
Retroactive and Future Applications
The Guidelines provide for the possibility of retroactive applications, which could be important for taxpayers seeking to resolve past transfer pricing disputes. However, roll back is only feasible for prior years that are yet to be audited by the FIRS and limited to three (3) years.
Review and Monitoring
After an APA is granted, taxpayers will be required to comply with ongoing monitoring and reporting requirements. This includes annual reports to the FIRS to demonstrate adherence to the terms of the APA. Taxpayers need to maintain up-to-date documentation and be prepared for periodic reviews by the tax authorities to ensure continued compliance. Eligible taxpayers also need to be aware of the requirement to maintain document/records connected or relevant to the controlled transactions under APA for up to eight (8) years.
Potential for Dispute
While the APA process is intended to provide certainty, it is not entirely immune to challenges. Taxpayers should be prepared for possible disputes or negotiations with the tax authorities if there are disagreements on the terms or application of the APA.
Important considerations for FIRS
Eligibility threshold and cost of application
The Guidelines set transaction thresholds for companies to be eligible for APA programme. First, the annual value of $10 million (N15.5 billion) and $50 million (N77.2 billion) for an individual transaction and a group of transactions, respectively is high and would significantly limit the number of APA applications in Nigeria. Second, the transaction thresholds quoted in USD may create a situation where an eligible company on expiration of the initial APA with the FIRS, may not be eligible for a renewal due to positive fluctuation in exchange rates. The FIRS may consider reducing the threshold in subsequent updates to the Guidelines and consider either stating the threshold in Naira or pegging the exchange rate as was done for the N160 billion compliance threshold in Income Tax (Country by Country Reporting) Regulations, 2018.
The non-refundable application fee of $20,000 (N30.9 million) seems fair in light of the size of companies targeted for the APA programme. Other jurisdictions such as the United Kingdom (UK), Netherlands, Canada and China neither charge any application fees nor do they have stringent annual eligibility threshold for applying for an APAs. It is quite understandable that the FIRS need to manage the cost of tax administration considering the nation's need to manage cost at all levels. However, one area of major concern is that the APA applicant is expected to bear all cost directly incurred by the FIRS above the application fee, including the cost of engaging an expert whose opinion is not binding on the FIRS.
What we have seen in other jurisdictions that have operated the APA programme for longer is that the application fee covers all the cost to be incurred by the tax authorities. In the US for example, the Internal Revenue Service (IRS) is required to charge a user fee to recover the cost of the APA process from the applicant. The IRS is also required to review the application fee to determine whether they are recovering their cost. The FIRS should be able to adopt similar approach after running APA in Nigeria for at least two (2) years. In the meantime, the FIRS should find a way of ensuring transparency by accounting for the costs incurred during the APA process and also, discuss with the APA applicant when it is expedient to engage the services of an expert.
Duration
The Guidelines provide that any APA involving the FIRS is typically valid for a maximum of three (3) years, with the option for renewal. The timeframe proposed for the completion of an APA application is 24 months for unilateral APAs and 36 months for bilateral or multilateral APAs. The timeframe for concluding the APA application, particularly the unilateral APA is quite commendable while the duration of for completing the bilateral or multilateral APAs as proposed in the Guideline generally aligns with the average timeframe in most countries. The UK, Netherlands and China, for example, all have a timeframe of 24 months negotiation period for unilateral and bilateral APAs.
Considering the cost of the APA application and timeframe to complete the process, the validity period of an APA as prescribed by the Guidelines is short. Other jurisdictions such as Belgium, France and Sweden allow taxpayers to enjoy APAs for a maximum of 5 years with a renewal option. The FIRS should consider extending the validity period in subsequent updates to the Guidelines.
Annual Compliance Report and Record-Keeping
The Guidelines require the taxpayer to submit an Annual Compliance Report (ACR) for each accounting period covered by the APA by the due date for filing the annual company income tax returns. The requirement of preparation and maintenance of the ACR is necessary to demonstrate compliance with the terms of the APA. We note that similar documentation requirement exists across other jurisdictions that has the APA. In terms of the deadline for submitting the ACR, it coincides with the Statutory deadlines for filing companies' income tax and transfer pricing returns. This may put pressure on affected taxpayers coupled with the fact that some of the information or document required as part of the ACR may not be readily available.
In addition, the FIRS requires the taxpayer to include, as part of the ACR, the Audited Financial Statements (AFS) of connected persons to the controlled transactions and the consolidated AFS (CAFS) of the group. We acknowledge that the FIRS have powers under Section 26 of the FIRS Establishment Act, 2007 to request for documents and information. However, such request should be limited to information or documents within the control of the taxpayer or those the taxpayers are expected to have based on their dealings with other associated enterprises within their groups. The inability of MNEs to provide the CAFS of the Group should not be a basis for terminating an APA, particularly if the information/document has no bearing on the controlled transactions covered under the APA.
Conclusion
The release of the APA Guidelines by the FIRS is a commendable effort to enhancing compliance and minimize TP disputes. However, the high eligibility thresholds and the APA process cost could create barriers for smaller MNEs engaged in complex transactions, thus excluding them from the benefits of the APA programme. Additionally, the short validity period, combined with lengthy negotiation timelines, may deter taxpayers seeking long-term certainty in their TP arrangements.
Furthermore, the requirement for extensive documentation, including group CAFS, may discourage MNEs, particularly where the CAFS does not have any impact on the covered transaction subject to the APA.
To fully achieve the intended purpose of the APA, the FIRS should consider revising key aspects of the Guidelines, such as making provision for small companies with complex controlled transactions, quoting the eligibility thresholds in Naira or pegging the exchange rate.
Finally, the FIRS should be very prudent and transparent in managing the cost of the APA process considering that the entire cost is to be borne by the applicant.
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.
