Advance Pricing Agreements And Transfer Pricing Audits In Nigeria: A Cost-Benefit Analysis For Taxpayers

Introduction

In recent years, transfer pricing (TP) has emerged as a significant concern for multinational enterprises (MNEs) operating in Nigeria. With the Nigeria Revenue Service (NRS) (formerly Federal Inland Revenue Service) intensifying efforts to generate revenue through taxation, taxpayers face heightened scrutiny, prolonged audits, and increasing risk of double taxation.

This article explores Advance Pricing Agreements (APAs), and TP audits and offers a cost-benefit analysis for Nigerian taxpayers considering their options for improving transfer pricing outcomes and reducing risk.

Understanding the two mechanisms

A TP audit is a post-transaction review initiated by the tax authority to determine if a company’s related-party transactions comply with the arm’s length principle. In Nigeria, such audits are often complex, lengthy, and extensive, with potential exposure to significant interest and penalties for any identified are of non-compliance.

On the other hand, APA is a proactive agreement between the taxpayer and the tax authority on the appropriate TP methodology to be adopted for specific transactions over a fixed period, typically three to five years. APAs can be unilateral, bilateral, or multilateral.

On 27 November 2024, the FIRS issued the long-awaited Guidelines on Advance Pricing Agreements (Information Circular No. 2024/006). These Guidelines outline the procedure through which taxpayers can seek advance approval from the FIRS regarding the related-party transactions. The Guidelines define an 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 fulfilment of certain terms and conditions.”

Although APAs have been mentioned in Nigeria’s TP framework since 2012, their implementation was hinged on the issuance of formal guidelines (Regulation 9(12) of the 2018 TP Regulations, which superseded the 2012 Regulations). The publication of these Guidelines marked a pivotal shift in Nigeria’s TP administration – one that further aligns the country with global best practices.

Cost-benefit analysis for taxpayers in Nigeria  

1. Time and administrative burden: In Nigeria, a typical transfer pricing (TP) audit may last between two to three calendar years. TP audits are also reactive, oftentimes complex, exercises that may require the involvement of personnel outside of the finance function particularly during the fact-finding stage.

According to the Guidelines, the APA application process is expected to be completed within 24 months following the acceptance of a taxpayer’s formal submission. For bilateral or multilateral APAs, the timeframe extends to 36 months.              The application and renewal process, however, is proactive, clear, and structured.

Overall, APAs appear to offer more time-saving benefits in the long run, especially for taxpayers with recurrent or complex transactions. This is because APAs in Nigeria can provide tax certainty for up to nine years. An APA is typically valid for an initial three‑year period and can be renewed for an additional three years. Further, where the covered transactions have not changed materially, taxpayers may apply the agreed APA methodology retrospectively for up to three years.

2. Financial cost: Both APAs and transfer pricing audits may require taxpayers to engage professional advisors, resulting in the incurrence of professional fees. These costs can be substantial, particularly in cases where the APAs involve complex transactions or where the audit process is prolonged. In addition to professional service fees, APAs require the payment of upfront application fees of a minimum of USD 20,000 and a renewal fee of USD 5,000 for taxpayers that opt to renew their APAs.

Further, there is a significant risk of additional tax liabilities arising from adjustments made during the TP audit process. Such adjustments may also attract interest and penalty charges. The APA process is designed to mitigate these risks by providing greater certainty and reducing the likelihood of TP adjustments and associated penalties.

3. Risk management and certainty: Transfer pricing audits are initiated at the discretion of the tax authority, and their outcomes are often unpredictable. These audits can significantly increase the risk of double taxation and may lead to disputes between taxpayers and the tax authority, particularly where there are disagreements over documentation or pricing positions.

In contrast, Advance Pricing Agreements (APAs) are initiated by taxpayers and offer a clear advantage by enhancing certainty, reducing the risk of double taxation, especially in bilateral and multilateral cases, and minimizing the potential for tax disputes.

4. Relationship with tax authorities: APAs require cooperative engagement with the tax authority as both parties work towards achieving a mutually acceptable position regarding the arm’s length pricing arrangement to be adopted for the covered transactions. The APA process also requires taxpayers to be thoroughly transparent and willing to disclose information as required by the Guidelines.

In contrast, transfer pricing audits may compel taxpayers to adopt positions that significantly differ from those of the tax authority. This can lead to a more adversarial relationship, with tax authorities sometimes suspecting that taxpayers are withholding relevant information or documentation.

In general, APAs promote a more constructive, transparent relationship with the FIRS, which is valuable in the long-term.

Challenges and limitations

Despite the clear advantages of APAs, there are two key factors that may hinder taxpayers from adopting Nigeria’s APA programme. These factors are the application cost—currently set at a minimum of USD 20,000—and the transaction thresholds outlined in the Guidelines. While some jurisdictions, such as the UK, do not impose application fees, others like Poland have implemented a tiered fee structure. In Poland, domestic entities applying for unilateral APAs pay lower fees than foreign entities, and a separate fee range applies to all entities seeking bilateral or multilateral APAs. Should the NRS choose to retain application fees, adopting a stratified fee structure could make the programme more accessible to a broader range of taxpayers.

Moreover, the current thresholds—USD 10 million (approximately NGN 15 billion) for single transactions and USD 50 million (approximately NGN 75 billion) for group transactions—are likely to exclude the majority of taxpayers. Even typical multinational enterprises may not have controlled transactions that meet these thresholds. By comparison, the 2012 TP Regulations set a threshold of NGN 250 million, equivalent to about USD 1.5 million at the time. Reducing the APA application threshold to this level would enable more local businesses and MNEs to benefit from the programme.

Conclusion

While transfer pricing audits remain the status quo in Nigeria, they often come with high costs – financially, administratively, and reputationally. As an alternative, Advance Pricing Agreements present a valuable opportunity for taxpayers to achieve certainty, minimize risk, and foster better working relationships with tax authorities.

In order to take advantage of the benefits of APAs, taxpayers can preemptively identify high-risk transactions that could benefit from prospective certainty and seek to maintain robust TP documentation as this is a foundational requirement for the successful implementation of APAs.

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.