There is no doubt that the last few years, 2018 in particular, witnessed significant developments in the Nigerian Transfer Pricing (TP) space including the introduction of various TP Regulations and Guidelines. Going into 2020, TP compliance was expected to be a major focus area for taxpayers, with TP being one of the high-risk tax areas facing Group companies in Nigeria.

However, 2020 has witnessed significant developments such as the Coronavirus (COVID-19) pandemic, which has affected the global economy, individual businesses and ultimately Related Party Transactions (RPTs).

While Nigerian companies have been managing the effects of these global developments, alongside the various TP obligations, there have been some significant TP developments in Nigeria. This article reviews the developments in the Nigerian TP space in 2020 and the potential implications for taxpayers.

Review of the Nigerian TP space in 2020

Some of the major developments in TP during the year are highlighted below:

1. Ruling on the first TP Case in Nigeria: The first TP judgment in Nigeria finally arrived in February 2020 when the Tax Appeal Tribunal (TAT) ruled on the case between Prime Plastichem Nigeria Limited (PPNL) and the Federal Inland Revenue Service (FIRS). The case resulted in an additional tax liability of approximately ?7 billion for the taxpayer for the 2013 and 2014 Financial Years (FY). This judgment was a landmark event in the TP space in Nigeria as it marked the first ever TP court case in the country, setting a precedence which can be referred to by the taxpayers, tax authorities and tax advisers. The resulting significant additional tax liability also buttressed the fact that TP is one of the riskiest areas in taxation. The case emphasized the importance of having a robust TP documentation capable of defending your RPTs during TP audits and the importance of having competent TP advisers providing technical support during a litigation process.

2. TP Implications of the Finance Act 2019: The Finance Act 2019 (FA) introduced various amendments to key provisions of various tax laws with some amendments having TP implications for taxpayers.

The FA introduced a new provision, which stipulates that for any related party expense to be tax deductible, it has to be consistent with the TP Regulations. The introduction of this section means that the provisions of the TP Regulations will trump other considerations for tax deductibility of RPTs. In addition, this provision implies that taxpayers can no longer rely on the approvals of other government regulatory agencies to demonstrate the arm's length nature of RPTs and will be required to perform detailed TP analyses to justify the pricing of RPTs.

The FA also introduced a restriction of the deductibility of foreign related party interest expense to 30% of Earnings before Interest, Tax, Depreciation and Amortization (EBITDA). This provision aims to limit erosion of the nation's tax base via interest on intercompany loans. Any excess interest expense can be carried over to subsequent years subject to a maximum period of five years.

3. Introduction of the Significant Economic Presence (SEP) Order, 2020: The SEP Order was introduced in 2020 to provide clarity on the concept of SEP, which was introduced in the FA. The SEP Order describes 2 broad categories of companies that will be deemed to have an SEP in Nigeria; companies involved in digital transactions and companies providing Technical, Professional, Management or Consultancy (TPMC) services.

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