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Effective January 1, 2025, the Federal Inland Revenue Service (FIRS) released its first-ever Guidelines on Advance Pricing Agreements ("APA Guidelines"), introducing a new compliance tool for eligible companies. The Guidelines offer detailed guidance on the administration and methodology for setting transfer prices in future related transactions, which may be agreed upon for a maximum period of three years. This aims to ensure compliance with the OECD's arm's length principle while enhancing transparency and providing greater certainty for both taxpayers and the tax authorities.
The Guidelines define the Advance Pricing Agreements (APA) as 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 fulfillment of certain terms and conditions. An APA could be unilateral, bilateral, or multilateral.
A unilateral APA is an agreement between a taxpayer and the FIRS alone. A bilateral APA involves the Nigerian taxpayer and a related party based in another country. A multilateral APA is similar to a bilateral one, but it includes related parties in two or more foreign countries. The 2023 Mutual Agreement Procedure (MAP) Guidelines will work alongside the APA Guidelines to ensure smooth cooperation with tax treaty partners.
Conditions for Eligibility
The Guidelines provide that before an applicant can qualify for an Advance Pricing Agreement (APA), the applicant must be a company resident in Nigeria or a non-resident company having a permanent establishment, significant economic presence, or any other taxable presence in Nigeria. It must also satisfy a minimum threshold of USD 10 million per annum for each covered controlled transaction, or USD 50 million per annum in the case of a group of such transactions for each year covered by the APA.
Furthermore, the applicant shall bear all costs incurred by the Federal Inland Revenue Service (FIRS) in processing the APA application which is a non-refundable application fee deposit of USD 20,000. These would cover, among others, the cost of engaging external experts, travel expenses, and other direct costs associated with the development of the agreement. But where the actual expenses exceed the deposit, the applicant is required to reimburse the excess. For the renewal of an existing APA, a non-refundable deposit of USD 5,000 shall also apply.
Stages of the APA Process
The Guidelines breaks down the APA process to five distinct stages:
Preliminary Consultation (Pre-Filing Meeting): This stage entails the taxpayer meeting with FIRS to provide a transparent overview of all material facts including details of the related-party transactions and its business operations but this meeting does not constitute a formal application.
Submission of Formal Application: Following FIRS's confirmation to proceed, the taxpayer is required to submit a comprehensive application. This should contain detailed information on its business activities, intercompany dealings, the type of APA sought (unilateral, bilateral, or multilateral), a thorough functional and risk analysis, and the proposed transfer pricing methodology. The contents must align with the understandings reached during the pre-filing meeting.
Review and Evaluation: FIRS will conduct a detailed review of the taxpayer's submission. This may involve the use of internal analysts or external experts, whose role is only to provide persuasive advisory input.
Discussions and Agreement: FIRS will engage in substantive discussions with the taxpayer and where applicable, with the competent authorities of foreign tax treaty partners to evaluate the data submitted, review the transfer pricing approach, and clarify the roles and responsibilities of each party to the covered transactions.
Finalization and Implementation: Once all parties have agreed on the terms of the APA, FIRS will prepare a formal draft of the agreement based on the standard format provided in the Guidelines to be reviewed and signed by both parties
Duration
The Guidelines state that the agreement will take effect from a specified start date, set to align with the beginning of the taxpayer's financial year or another mutually agreed period. Although the standard duration of an APA is three years going forward, the Guidelines also allow for retrospective coverage of up to three previous years provided the terms and conditions of those years are consistent with the final agreement.
The Guidelines stated that unilateral APAs be finalized within 24 months of the acceptance of the application, and bilateral or multilateral APAs within 36 months. Nonetheless, the actual timeline may vary depending on the complexity of the issues, the completeness of submitted information, and the pace of negotiations.
Conclusion
The Guidelines provide a robust framework to ensure compliance amongst multinational companies and offer the companies greater clarity and confidence in managing their transfer pricing obligations.
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.
