On 19 February 2020, the Tax Appeal Tribunal ("TAT" or "the Tribunal"), Lagos, Nigeria ruled on its first Transfer Pricing (TP) case. The parties involved in the case were Prime Plastichem Nigeria Limited ("PPNL" or "the Company") and the Federal Inland Revenue Service ("FIRS" or "the Service").
PPNL approached the TAT having been dissatisfied with the additional assessment of ₦1,738,481,875.33 issued by the FIRS arising from the TP audit of its Related Party Transaction ("RPT") for the 2013 and 2014 Financial Years ("FYs"). The TAT ruled in favour of the FIRS on all grounds and dismissed PPNL's appeal in its entirety.
In this newsletter, we have examined the case, analysed the conclusions reached by the TAT and provided our comments on the case.
Background to the Case
PPNL is a private limited liability company incorporated in Nigeria, involved in the trading of imported plastics and petrochemicals. The Company, in compliance with the provisions of the Income Tax (Transfer Pricing) Regulations No 1, 2012 ("TPR"), contemporaneously prepared its TP documentation for FY 2013 and 2014 and submitted the same to the FIRS upon request.
PPNL disclosed its only RPT in the years under review as "the purchase of petrochemicals" from its offshore related party, Vinmar Overseas Limited ("VOL"). In the FY 2013 TP documentation, the Company adopted the Comparable Uncontrolled Price Method ("CUPM") in testing the RPT in line with the Arm's Length Principle ("ALP") because of the availability of internal data i.e. VOL sold similar products to third parties in Nigeria ("internal CUPM"). However, for FY 2014, PPNL adopted the Transactional Net Margin Method ("TNMM"). The change in methods was due to the lack of comparable data required to apply the CUPM, as VOL did not transact with third parties in Nigeria in 2014.
The FIRS upon reviewing PPNL's TP Documentation rejected the Company's use of the Internal CUPM in FY 2013 and concluded that the TNMM was the most appropriate method for both years. The FIRS however selected Gross Profit as a percentage of Revenue ("Gross Profit Margin" or "GPM") as the appropriate Profit Level Indicator ("PLI") to apply the TNMM rather than the Net profit or Earnings before Interest and Tax ("EBIT") as a percentage of Operating Revenue ("Operating Margin" or "OM") which was applied by PPNL in its TP documentation.
Based on the above position, the FIRS issued PPNL an additional assessment of ₦1.74 billion inclusive of penalties and interest. Following several objections by PPNL, the FIRS issued a Notice of Refusal to Amend (NORA). Being dissatisfied with the additional assessments and the demand notices, PPNL filed an appeal with the TAT.
The Issues before the Tribunal
We have analysed below the issues brought before the Tribunal and the decision of the Tribunal on each of the issues:
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Selection of TP Methodology for FY 2013 and 2014
PPNL's Position
As stated earlier, PPNL adopted the internal CUPM and the TNMM (using OM as the PLI) to test the reasonableness of the pricing of the purchases from VOL in FY 2013 and 2014, respectively.
For FY 2013, PPNL was of the view that it had discharged its responsibility of proving that the application of the CUPM was appropriate in demonstrating the reasonableness of the pricing of the RPT from an arm's length perspective by providing the FIRS with all relevant documents/information including invoices issued by VOL to third parties in Nigeria for the sale of similar products in 2013. Further, PPNL claimed that the FIRS in previous correspondence had agreed that the selection of the CUPM was appropriate for commodities and as such, there was no basis for the FIRS to change the method for FY 2013.
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Originally published 14 May, 2020
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