Since the introduction of Transfer Pricing (TP) Regulations in Nigeria, there have been some significant events which have shaped the TP landscape some of which include the introduction of the Income Tax (Country-by-Country Reporting) Regulations, 2018 [CbCR Regulations], the Income Tax (Transfer Pricing) Regulations, 2018 [2018 TP Regulations] and the first TP court case in Nigeria (Prime Plastichem vs the Federal Inland Revenue Service [FIRS]). These events were significant for various reasons including the introduction of TP specific administrative penalties, new, revised or updated provisions and in the Prime Plastichem case, the exhibition of the riskiness of TP audits and the potential for huge additional tax liabilities.
17 August 2023 may well be a momentous day in Nigeria's ever evolving TP history, as on this day, the Tax Appeal Tribunal (TAT or the Tribunal) sitting in Lagos in the case between Check Point Software Technologies B.V Nig Ltd (Checkpoint or the Company) v FIRS ruled that since the FIRS Board, which is the body legally authorized to make regulations was not in existence between 2012 – 2020, the notices of administrative penalties issued by the FIRS in enforcement of the CbCR Regulations are unconstitutional and void and likewise the CbCR Regulations in itself is also void and unconstitutional. You can refer to the The New Practice's article of 19 September 2023 in Business Day for more details of this case.
This seemingly small decision has huge, specific, terrifying and interestingly far-reaching potential implications for the Nigeria TP regime. Based on this case, the fact that the FIRS Board (and other boards of all federal parastatals and agencies) was not constituted between 2012 and January 2020 implies that regulations introduced by the FIRS during this period may also be null and void. This therefore throws up salient and pressing questions about the validity of other regulations in the country like the Income Tax (Transfer Pricing) Regulations, 2012 [2012 TP Regulations], the 2018 TP Regulations and Income Tax (Common Reporting Standard) Regulations, 2019 (CRS Regulations).
We have highlighted below some potential implications of the judgement on some regulations which guide the TP regime in Nigeria.
The CbCR Regulations
Prior to the introduction of the CbCR Regulations in 2018, Nigeria had no similar or existing framework. The CbCR Regulations came about as a result of the Organisation for Economic Cooperation and Development (OECD) Base Erosion and Profit Shifting (BEPS) Project. Alongside 30 other countries, Nigeria signed the Multilateral Competent Authority Agreement (MCAA) for the automatic exchange of Country-by-Country reports (CbC) reports in January 2016. The objective of the CbCR Regulations is to provide the FIRS with information about Multinational Enterprises' ("MNEs") global activities, profits and taxes with a view to improving transparency of MNEs in their tax practices, preventing tax evasion or avoidance through base erosion and profit shifting.
The CbCR Regulations created compliance obligations for Nigerian constituent entities including the filing of notification forms and the filing of CbC reports by Nigerian headquartered MNEs that have a group consolidated revenue of ₦160 billion in the preceding accounting year. The CbCR Regulations provided for administrative penalties of at least ₦10 million for late filing and incorrect or false CbC report respectively and at least ₦5 million for the failure to file the notification form.
As stated earlier, the CbCR Regulations is the subject matter of the Checkpoint case and it has been ruled that the CbCR Regulations is null and void. On the CbCR penalties, the TAT held that the penalties in the CbCR Regulations are unconstitutional and void and stated that fresh notices of penalties should be raised based on the relevant provisions of the FIRS Establishment Act, 2007 (FIRSEA). However, since the CbCR Regulations itself has been found to be invalid, there will be no offence for which penalties are applicable.
It can therefore be inferred that there is no legal framework for CbCR in Nigeria and companies may not have any CbCR compliance obligations. Any penalties levied by the FIRS based on the CbCR Regulations may be considered invalid and companies that have paid penalties may seek redress based on this judgement. Also, where there is no obligation to file the CbC report, the FIRS will no longer have access to the information it requires to perform risk assessments.
The TP Regulations
While the existing tax laws included general antiavoidance clauses, it can be said that the Nigeria TP regime effectively began with the introduction of the 2012 TP Regulations. The 2012 TP Regulations introduced the arm's length principle, TP compliance obligations including the preparation of the TP documentation and filing of TP returns, the TP methods etc. In 2018, following the outcomes of the BEPS project, the FIRS introduced revised regulations, the 2018 TP Regulations. In the revised Regulations, the FIRS tried to address some of the issues observed in implementing the 2012 Regulations by including clauses that were viewed by tax payers to be aggressive and somewhat punitive.
Based on the judgment, we understand that the FIRS Board tenure expired in 2012 and another board was not constituted until 2020. As such, the legality of the 2012 TP Regulations which was introduced on 21 September 2012 but effective from 2 August 2012 may be queried if the FIRS board was not existing as at the time of the introduction of the Regulations.
Where this is found to be the case, the implication may be that the foundation of TP in Nigeria is invalid and subsequent regulations and other laws that make reference to the 2012 TP Regulations may be queried.
Further, it can also be inferred that the 2018 TP Regulations is in a similar situation as the CbCR Regulations as both regulations were introduced in 2018 when the FIRS Board was not constituted.
It is important to review the potential impact of this judgement on the 2018 TP Regulations, as it introduced some significant changes to the Nigeria TP regime. We have highlighted below some important provisions in the 2018 TP Regulations that may be affected by this judgement.
- Administrative penalties:
One of the most noticeable provisions introduced in the 2018 TP Regulations was the TP specific administrative penalties. While the aim of the penalties was to compel taxpayer compliance, the penalties are perceived to be draconian, harsh and unfriendly to businesses as the minimal penalty for TP offences is ₦10 million.With the Checkpoint case, the validity of the TP administrative penalties is in question and where the judgement stands, the FIRS may be seen to have illegally levied penalties on taxpayers. Where taxpayers are to be levied penalties for TP offences, reference should rather be made to the penalties stipulated in relevant tax statutes.
17 August 2023 may well be a momentous day in Nigeria's ever evolving TP history, as on this day, the Tax Appeal Tribunal sitting in Lagos in the case between Check Point Software Technologies B.V Nig Ltd v FIRS ruled that since the FIRS Board, which is the body legally authorized to make regulations was not in existence between 2012 – 2020, the notices of administrative penalties issued by the FIRS in enforcement of the CbCR Regulations are unconstitutional and void and likewise the CbCR Regulations in itself is also void and unconstitutional.
- Documentation requirements:
The 2018 TP Regulations introduced the master file requirement in addition to the local TP documentation. However, in trying to balance the cost of compliance on taxpayers, the contemporaneous TP documentation obligation was made optional for taxpayers whose Related Party Transactions (RPTs) fall below ₦300million. This provision may now be deemed invalid where the Checkpoint judgement stands and all taxpayers may be required to prepare the TP documentation contemporaneously irrespective of the value of the RPTs.
- Limitation on deduction of royalty payments for
One of the controversial introductions in the 2018 TP Regulations was the limitation for tax purposes of the deduction of royalty payments for intangibles to a maximum of 5% of the Earnings before Interest, Tax, Depreciation, Amortization and the royalty Consideration (EBITDAC). This restriction has been queried as it seems to be against the arm's length principle, increases the risk of double taxation for taxpayers and further impedes the ease of doing business in Nigeria.
Where the 2018 TP Regulations is deemed to be invalid, the FIRS would be unable to enforce this provision and taxpayers will be free to deduct the full royalty fee for tax purposes.
It is clear that the judgement in the Checkpoint case has far reaching implications for the TP regime in Nigeria as it has exposed some defects in the Nigeria TP administration.
While the FIRS can and probably will appeal the Checkpoint case, as it stands, it can be inferred that several TP legislations and provisions may be deemed invalid. Where the FIRS reenacts these affected and exposed regulations, such new regulations will apply going forward and not retrospectively.
Additionally, any penalties, additional tax liabilities and potential audit adjustments based on provisions in regulations that are seen to be illegal may be challenged, leading to potential loss of revenue for the FIRS, and taxpayers who have been charged penalties in the past may seek redress from the FIRS.
It is therefore obvious that there is a pressing need for clarity in the Nigeria TP landscape, as ambiguity can affect the effectiveness of the TP regime which will not be beneficial to taxpayers and the tax authorities alike.
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.