ARTICLE
14 July 2025

Nigeria Tax Reform Bill – Nigeria's Further Response To Global Deal And Potential Implications On Nigeria Transfer Pricing Landscape

KN
KPMG Nigeria

Contributor

KPMG Nigeria is a member firm of KPMG International. We provide Audit, Advisory and Tax & Regulatory services, across various industries, to national and multinational companies. Our purpose is to inspire confidence and empower change. We have a relentless focus on delivering quality and excellent service to clients. We, therefore, provide insights and innovative ideas to clients to help them achieve their corporate objectives.
The recent developments in the international taxation have significantly impacted Nigeria's Transfer Pricing (TP) landscape.
Nigeria Tax

The recent developments in the international taxation have significantly impacted Nigeria's Transfer Pricing (TP) landscape. These include the Nigeria's position on the adoption and implementation of global deal/consensus on the two-pillar approach to addressing the challenges of taxation of digital economy (extensively detailed in our previous article – Nigeria's Position), the efforts in responding to the potential impact of other OECD Inclusive Framework IF members' implementation of the deal with measures to protect the Nigerian Tax base and, the commencement of Advance Pricing Agreement in the last quarter of 2024 with the issuance of guidelines outlining the procedures and conditions for Advance Pricing Agreements (APAs) in Nigeria, as well as the administration of executed APAs by the Federal Inland Revenue service (FIRS). The guidelines detailed the types of APAs that can be negotiated with the FIRS, eligibility criteria, objectives and stages of the APA process, associated costs and responsibilities, and other key operational procedures and compliance requirements.

Additionally, President Bola Ahmed Tinubu transmitted the proposed 2024 Tax Reform Bills to the National Assembly for consideration. The Tax Reform Bills include the Nigeria Tax Bill, Nigeria Revenue Service (Establishment) Bill, Nigeria Tax Administration Bill, and Joint Revenue Board (Establishment) Bill. These bills aim to, among others, overhaul the Nigerian Tax System, establish uniform procedures for the consistent and efficient administration of tax laws, enhance tax compliance in line with contemporary economic realities. Notably, these bills have reached advanced stage in the Nigerian Legislative process and we anticipate that they will soon be signed into law.

This article explores the key potential changes to the Nigerian Transfer Pricing landscape as a response to the implementation of Global deal by other OECD IF members states, proposed tax reform bills as it relates to TP and their potential implications for taxpayers. It also addresses the House of Representatives' recommendations, highlighting potential issues and proposing solutions.

Deemed Distribution of Profit for Controlled Foreign Companies (CFC) and Minimum Effective Tax Rate

The tax reform bill introduces a provision which allows Nigerian tax authorities to treat a portion of the profits from a foreign subsidiary controlled by a Nigerian company, which could have been distributed but was not, as deemed to have been distributed. This deemed distribution is then added to the Nigerian parent company's taxable profits, subjecting it to tax on that portion, even if the profits were not actually distributed. However, there's no clear-cut basis (guidelines) to objectively determine the 'deemed' portion of the CFC profit to be accounted for by the Nigeria parent.

Also, where a non-resident subsidiary of a Nigerian company (or a member of a multinational group) pays less than the prescribed minimum effective tax rate ETR in the foreign jurisdiction, the Nigerian parent company will be required to pay the difference (Top-up). This is expected to protect Nigerian taxbase in the light of the impact of OECD BEPS Pillar 2 adoption by other host countries where MNEs operate.

In view of this, Nigerian parent companies must account for the shortfall from the minimum ETR of their foreign subsidiaries and invariably re-evaluate their Transfer Pricing policies to avoid base erosion and profit shifting. Moreso, Pillar 2 global acceptance has ended the era of race to bottom.

It is important to note that while this provision aims to end tax deferral and profit shifting to low-tax jurisdictions, it creates a potential double taxation risk, as the Nigerian parent company may be taxed on the foreign subsidiary's profits, which may also be taxed in the foreign jurisdiction.

Non-deductibility of Royalties, Fees or Similar Payment for IP to Non-residents and Connected Persons

The Bill now prevents Permanent Establishments (PEs) from claiming tax deductions for payments not directly tied to actual business costs on the use of intellectual property. It aims to curb profit shifting, where multinational companies charge royalty or fee payments to move profits to low-tax jurisdictions.

Businesses will now need to prove with adequate documentations that royalty or other fee payments to non-resident parents or connected parties by a PE (fixed base) are reimbursement of actual expenses. Additionally, the 5% of EBITDA relief from the 2018 Transfer Pricing Regulations will no longer applicable in this instance.

Application of Profit Margin to Nigerian Income for Non-resident Person

Section 17 of the Bill outlines how to determine the profit attributable to a PE or Significant Economic Presence (SEP) of a non-resident company in Nigeria, and how to calculate the minimum tax payable. If actual profits can't be determined, tax authorities can apply a profit margin to the total income generated in Nigeria. If the PE/SEP actual profit is lower than the Non-resident/Main entity's profit margin, the tax authorities will use the profit margin to calculate tax, preventing underreporting of profits. However, this measure might not reflect the actual profitability level attributable to the P.E/SEP entity's operations in Nigeria.

The minimum tax payable by the PE/SEP cannot be less than the tax withheld from its income, and if there is no withholding tax, the minimum tax is 4% of total income generated in Nigeria.

This provision requires businesses to properly allocate profits between the Nigerian PE or SEP and its non-resident company (ies). As PE or SEP with low profits in Nigeria may be liable to tax on 4% of their revenue, prompting them to reassess their transfer pricing framework to avoid additional/unnecessary tax burdens.

Introduction of Minimum Effective Tax Rate (ETR) for MNE Group and Large Domestic Companies

The Bill introduces an additional tax liability for Multinational Enterprises (MNEs) and large domestic companies with an aggregate turnover of ₦20,000,000,000 or more in the relevant year of assessment, aimed at ensuring a minimum Effective Tax Rate (ETR) of 15%. However, the House of Representatives recommended that the affected MNEs should be those with a turnover exceeding £750 million, and the threshold for large domestic companies be increased to ₦50,000,000,000. Additionally, they proposed that the base for calculating the 15% minimum ETR should be the net profit before tax.

Its purpose is to protect the nation's tax base by ensuring that MNEs and large domestic companies pay a minimum level of tax, thereby preventing aggressive tax avoidance strategies and discourage the use of tax havens, or other mechanisms that artificially reduce tax rates.

It is important to note that while the proposed 15% ETR seems to align with the OECD BEPS Pillar 2 recommendations, the tax base differs, as the OECD Pillar 2 is based on group income on jurisdiction basis while that of the Tax bill is based on Profit Before Tax PBT. This could create compliance complexities for both MNEs in Nigeria and large domestic companies especially given the existing Company Income Tax (CIT) rate structure.

Additionally, MNEs with operations in multiple jurisdictions may face the risk of double taxation, as their profits could be taxed under both systems, potentially leading to disputes and costly compliance procedures. To mitigate this, we recommend that the net profit before tax base be applied exclusively to large domestic companies, while MNEs should be taxed on their income to ensure compliance with global standards.

Mandatory Reporting of ETR by for all Companies

This Bill also proposes that all companies, including non-residents, to compute and report their ETR when filing their annual self-assessment return. The ETR will most likely serves as an indicator for FIRS in risk profiling returns for audit and adjustment to align with the minimum ETR.

Ultimately, this provision aims to discourage profit-shifting practices that reduce tax liabilities through artificial transactions and payments.

Conclusion

The proposed Nigeria Tax Reform Bill introduces significant changes that will impact the country's Transfer Pricing (TP) landscape and tax administration with provisions such as the minimum ETR for MNEs and large domestic companies, the treatment of CFC profits, and the tightening of deductions for IP payments. The Reforms aim to safeguard Nigeria's tax base in response to the impact of pillar two implementations, address gaps in the current legal framework, and further improve Tax compliance. However, to effectively implement these changes, clear guidelines and coordination will be essential to mitigate potential complexities and create a more favourable tax environment for businesses operating in Nigeria.

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.

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