Nigeria's transfer pricing (TP) landscape is steadily evolving to keep pace with the local business environment and global dynamics. However, despite previous regulatory revisions aimed at aligning with international standards, there are still some gaps that are possibly creating long-drawn-out TP audit exercises. This possibly highlights the need for further clarity and certainty on the TP treatment of some related party transactions within Nigeria's TP framework.
In this article, we consider the current TP landscape and suggest options to improving it. We cover topics such as the safe harbor provisions, some ambiguous items within Nigeria's TP Regulations, compliance thresholds and the Country-by-Country Reporting (CbCR) Regulations.
TP landscape in Nigeria
It is safe to assume that the vision of Nigeria's tax authority for TP landscape is one where the objectives of the TP Regulations can be achieved. Regulation 2 states some of the objectives of TP Regulations to include the following: fighting tax evasion, reducing the risk of economic double taxation, and providing a level playing field for multinational enterprises and independent businesses carrying on business in Nigeria.
It is also one where taxpayers can reap the benefits of a good tax system centered on certainty, simplicity, transparency, ease, and convenience. Where both the tax authority and taxpayers can obtain clarity on the proper interpretation and application of the arm's length principle in the event of referral of any issue the Tax Appeal Tribunal and possibly, regular courts.
Both the tax authority and taxpayers appear to have been working together since the introduction of TP Regulations in 2012 to make this vision a reality. However, there are still areas which can be improved on to retain the gains achieved thus far. The remaining section of this article includes suggestions that may help to further improve the TP landscape in Nigeria.
Suggested areas for improvement of the current TP framework
- Release of guidelines for implementation of safe
harbour provisions
A safe harbour is one of the approaches suggested in the TP Guidelines issued by the Organization for Economic Cooperation and Development (OECD) that tax authorities can adopt to avoid or resolve transfer pricing disputes. According to the OECD TP Guidelines, a safe harbour "is a provision that applies to a defined category of taxpayers or transactions and that relieves eligible taxpayers from certain obligations otherwise imposed by a jurisdiction's general transfer pricing rules."
Globally, jurisdictions have implemented safe harbour provisions to simplify transfer pricing compliance and ensure certainty in related party transactions. Examples from India, Singapore, and the United States of America illustrate the use of tailored provisions for specific transactions. Ultimately, clear safe harbour provisions can enhance compliance, provide certainty to taxpayers, and ease the administrative burden on the tax authority thereby fostering economic growth.
The 2018 Nigeria TP Regulations include safe harbour provisions which aims to exempt connected persons from certain transfer pricing documentation requirements, subject to the adoption of pricing terms that align with guidelines to be issued by the FIRS from time to time. Unfortunately, the guidelines have not been issued as at the time of drafting this article, more than four years after the revised Regulations were issued. It is critical for the tax authority to issue safe harbour guidelines as soon as possible to enhance the certainty of taxpayers involved in covered transactions. The introduction of safe harbour guidelines would also have the impact of reducing the cost of compliance for taxpayers.
- Clarification of the compliance obligations of specific
categories of taxpayers
Regulation 14(1) seems to place the obligation to submit TP returns on taxpayers only for periods where they have related party transactions. However, the tax authority has expressed the view that taxpayers should file "nil returns" for periods where they do not have any related party transactions and have sought to penalize taxpayers for failure to file. The difference in the understanding of this Regulations and that of FIRS underscores the need for greater clarity. This inconsistency creates confusion, leading cautious taxpayers to file 'nil' returns to avoid creating unnecessary disputes with tax authority, thereby incurring avoidable compliance costs. We suggest that the tax authority clearly defines the filing obligations for this category of taxpayers to address the burden.
A similar issue also arises with respect to the compliance obligations for dormant companies. The tax authority sometimes attempt to impose penalties for failure to file TP returns on dormant entities. A public notice issued by the tax authority on the regularization of the tax status of dormant companies states that a dormant company is:
"a company that has formally informed FIRS that it would be temporarily out of business for at least a period of one financial year due to understandable exigencies e.g., adverse economic circumstances."Exempting taxpayers that have duly notified the FIRS of their dormant status from the obligation to file transfer pricing returns would be a huge relief and minimize the compliance burden on such taxpayers.
- Revision of threshold for compliance with TP
requirements
Regulation 17(3) suspends TP documentation requirement for taxpayers with controlled transactions of under NGN 300 million. However, the tax authority may still choose to request TP documentation from such taxpayers to be submitted within 90 days from the date of receipt of such requests. Given inflation and exchange rate changes, we suggest that the FIRS consider increasing this threshold drastically because the relative value of the current threshold has been eroded over time. Similarly, the impact and significance of this threshold has lessened. Reevaluating this threshold in light of the current economic realities would ease compliance pressures and foster a better business environment. By adopting a pragmatic approach to defining compliance thresholds and penalties, the FIRS can promote greater adherence to TP regulations without overly burdening taxpayers.
- Clarification on the validity of the CbC (Country by
Country) Regulations
In March 2022, Check Point Software Technologies B.V. contested administrative penalties imposed by the FIRS for late filing of CbCR notification forms, arguing against the validity of the CbCR Regulations due to procedural flaws and lack of domestication of the Country-by-Country Multilateral Competent Authority Agreement (CbC MCAA). The Tax Appeal Tribunal (TAT) ruled on 17 August 2023, declaring the penalties unconstitutional and void. However, the TAT's directive for reassessment of penalties contradicts its earlier findings on the Regulations' constitutionality. The case calls into question the validity of not just the CbCR Regulations but also the other FIRS regulations issued during the same period, including the revised TP Regulations issued in 2018.
Although some taxpayers have largely opted to continue to comply with these regulations to mitigate risks pending resolution of legal uncertainties, the need for the matter to be promptly resolved to ensure continued confidence in the FIRS' power to enforce compliance with these Regulations still remains a front burner issue.
Conclusion
In summary, the suggestions in this article underscore important areas where change may be necessary to improve Nigeria's transfer pricing landscape. Issuing safe harbor guidelines, clarifying compliance obligations for dormant entities and taxpayers with no related party transactions, and reviewing the compliance thresholds considering the current exchange rates are crucial for enhancing certainty, transparency, and fairness.
“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”
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.
