The TPP 2018 is focused on ensuring that: (a) that Nigeria is able to tax on an appropriate taxable basis corresponding to the economic activities by taxable persons in Nigeria, including in their transactions and dealings with related persons; (b) provide the Nigerian authorities with tools to fight tax evasion that may arise through over or under pricing of transactions between related persons;

The Federal Inland Revenue Service (FIRS), pursuant to the Federal Inland Revenue Service (Establishment) Act 2007 enacted the Income Tax (Transfer Pricing) Regulations 2018 (the ‘TPP 2018’ or ‘2018 Regulations’). Having its commencement date on 12 March 2018 but made available to the public in August 2018, the TPP 2018 repeals the Income Tax (Transfer Pricing) Regulations 2012 and further provides that anything done under the repealed Regulations shall be treated as if it were made or done under the 2018 Regulations, to the extent that such is not inconsistent with any provision of the TPP 2018.

Careful reading of the provisions of the 2018 Regulations reveals trigger points for legal issues capable of breeding litigation (which we hope to address in our next publication), we are focused on highlighting key provisions of the 2018 Regulations.

We will consider the purpose, objectives and scope of the TPP 2018; definition of ‘connected persons’ under the 2018 regulations; Threshold for Disclosure; Compliance with the arm’s length principle; burden of proof that the conditions of the controlled transactions are consistent with the arm’s length principle; pricing methods; Capital-Rich and Low-Function Companies; Advance Pricing Agreements; Comparability factors; Disclosure of Controlled Transactions; Extension of Time; Documentation; Retention of Documents; Declarations; Penalties; and Dispute Resolution.

It is pertinent to note that the TPP 2018 is largely motivated by: the arm’s length principle in Article 9 of the United Nations (UN) and the Organisation for Economic Co-operation and Development (OECD) Model Tax Conventions on Income and Tax and Capital; the OECD Transfer Pricing Guidelines for Multi-national Enterprises and Tax Administrations, 2017; and the UN Practical Manual on Transfer Pricing for Developing Countries, 2017.

As a preliminary point, the 2018 Regulations seek to give effect to the extant provisions of the Personal Income Tax Act (PITA), Companies Income Tax Act (CITA), Petroleum Profits Tax Act (PPTA), Capital Gains Tax Act (CGTA) and Value Added Tax Act (VATA). As a matter of fact, a cursory reading will reveal that the TPP 2018 is focused on ensuring that: (a) that Nigeria is able to tax on an appropriate taxable basis corresponding to the economic activities by taxable persons in Nigeria, including in their transactions and dealings with related persons; (b) provide the Nigerian authorities with tools to fight tax evasion that may arise through over or under pricing of transactions between related persons; (c) reduce the risk of economic double taxation; (d) provide a level playing field for both multinational enterprises and independent enterprises carrying on business in Nigeria; and (e) provide taxable persons with certainty of transfer pricing treatment in Nigeria.

 

The TPP 2018 applies to transactions between ‘connected persons’ which includes: (a) sale and purchase of goods and services; (b) sales, purchase or lease of tangible assets; (c) transfer, purchase, license or use of intangible assets; (d) provision of services; (e) lending or borrowing of money; (f) manufacturing arrangements; and (g) any transaction which may affect profit or loss or any other matter incidental to, connected with or pertaining to the transactions captured in above.

TPP 2018 defines ‘connected persons’ as persons generally deemed connected where one person has the ability to control or influence the other person in making financial, commercial or operational decisions, or there is a third person who has the ability to control or influence both persons in making financial, commercial, or operational decisions.

It further defines ‘connected persons’ to include persons who are related, associated, or connected to one another as defined in the following: Companies Income Tax Act; Petroleum Profit Tax Act; Personal Income Tax Act; (d) the Capital Gains Tax Act; (e) Article 9 of the OECD and UN Model Tax Conventions and the Agreements for the Avoidance of Double Taxation between Nigeria and other countries; and (f) the OECD TP guidelines and UN Transfer Pricing Manual.

Where a connected person has entered into a transaction or series of transactions to which the TPP 2018 applies, the connected person is obligated to ensure that the taxable profits resulting from the transaction or transactions are ascertained in a manner that is consistent with the arm’s length principle.

A controlled transaction is at arm’s length if the conditions of the transaction do not differ from the conditions that would have applied between independent persons in comparable transactions carried out under comparable circumstances.

The FIRS is mandated to make adjustments, where necessary, in order to bring the taxable profits resulting from the transactions in conformity with the arm’s length principle, where a connected person fails to comply with the provisions of the TPP 2018.

The burden of proof that the conditions of the controlled transactions are consistent with the arm’s length principle is on the taxable person. The taxable person will be regarded as satisfying this burden of proof where the taxable provides documentation to support compliance with the arm’s length principle in accordance with the TPP 2018.

A connected person whose total value of controlled transactions is less than three hundred million naira (N300,000,000) may choose not to maintain contemporaneous documentation. The foregoing notwithstanding, the FIRS can demand that relevant documentation be prepared and submitted not later than 90 days from the date of receipt of a notice from the FIRS.

In determining whether the result of a transaction or series of transactions are consistent with the arm’s length principle, one of the following transfer pricing methods is to be applied, to wit: the Comparable Uncontrolled Price method; the Resale Price method; the Cost Plus method; the Transactional Net Margin method; the Transactional Profit Split method; or any other method which may be prescribed by the Regulations to be made by the FIRS from time to time.

The FIRS is to base its review on the transfer pricing method used by the taxable person, where such method is appropriate to the transaction, or on a transfer pricing method, it considers most appropriate, when examining whether or not the taxable profit resulting from a taxpayer’s controlled transaction or transactions is consistent with the arm’s length principle.

It should be noted, however, that a connected person is allowed to apply a transfer pricing method other than those listed in the TPP 2018, where the person can establish, to the satisfaction of the FIRS that: (a) none of the listed methods can be reasonably applied to determine whether a controlled transaction is consistent with the arm’s length principle; (b) the method used gives rise to a result that is consistent with that between independent persons engaging in comparable uncontrolled transactions in comparable circumstances; and (c) reliable information needed to apply the chosen transfer pricing method exists.

Under the TPP 2018 and for tax purposes, a capital-rich and/or low-function company that does not control the financial risks associated with its funding activities, is not entitled to be allocated the profits associated with those risks and is entitled to no more than a risk-free return.

Under the 2018 Regulations, a connected person can request that the FIRS enter into an Advance Pricing Agreement (‘APA’) to establish appropriate criteria for determining whether the person has complied with the arm’s length principle for certain future controlled transactions undertaken by the person over a fixed period of time.

For the purpose of determining whether the pricing and other conditions of a controlled transaction are consistent with the arm’s length principle, the taxpayer is under an obligation to ensure that the transaction is comparable with similar or identical transaction between two independent persons carrying on business under sufficiently comparable conditions. The TPP 2018 affirms the power of the FIRS to review such assessment of the taxpayer.

Where an adjustment is made to the taxation of a transaction or transactions of a ‘connected person resident in Nigeria’ by a competent authority of another country with which Nigeria has an Agreement for the Avoidance of Double Taxation, and the adjustment results in taxation in that other county of income or profits that are also taxable in Nigeria, the FIRS is empowered, further to the request of the ‘connected person’, to determine whether the adjustment is consistent with the arm’s length principle and where it is determined to be consistent, the FIRS has the power to make a corresponding adjustment to the amount of tax charged in Nigeria on the income so as to avoid double taxation. However, it should be noted that the TPP 2018 precludes any adjustment being granted by the FIRS, where judicial, administrative or other legal proceedings have resulted in a final ruling that by actions giving rise to an adjustment of profits under the TPP, one of the persons concerned is liable to penalty with respect to fraud, gross negligence or willful default.

A connected person is mandated to keep record of sufficient information (documentation) or data to verify that the pricing of controlled transactions is consistent with the arm’s length principle and is obligated to make such documentation available to the FIRS upon written request from the FIRS. An obligation is imposed on the taxpayer to provide the information required and the FIRS is entitled to request for additional information which, in the course of audit procedures, it deems necessary to effectively carry out its functions.

The 2018 Regulations mandate that the documentation retained by a connected person shall be adequate to enable the FIRS verify that the controlled transaction is consistent with the arm’s length principle.

A connected person is obligated to maintain contemporaneous documentation consistent with the provisions of the schedule of the TPP. In the event of a merger or divestiture, the relevant contemporaneous documentation is to be kept by the surviving enterprise.

All records, including ledgers, cashbooks, journals, cheque books,bank statements, deposit slips, paid cheque, invoices, stock list and all other books of account as well as data relating to any trade carried out by the taxpayer, inclusive of recorded details from which the taxpayer’s returns were prepared for assessment of taxes, are mandated to be retained for a period of six years from the date on which the return relevant to the last entry was made.

A connected person is obligated to declare its relationship with all connected persons whether such persons are resident in Nigeria or elsewhere. The Transfer Pricing Declaration is to be made and submitted to the FIRS not later than eighteen months after the date of incorporation or within six months after the end of the Accounting year, whichever is earlier.

It is worth noting that a connected person is mandated to make an updated declaration where there is: (a) merger of the person’s parent company with another company outside the group; (b) acquisition of up to 20% of the person’s parent-company by persons not connected to the group; (c) merger of the person with another company; (d) acquisition of up to 20% of the person by persons not connected to the group; (e) merger or acquisition of the person by another company outside the group; (f) sale or acquisition of a subsidiary by the person; (g) any other change in the structure, arrangement or circumstances of the person not mention in the foregoing paragraphs and which influences whether it will be considered to be connected or not connected to another person.

The TPP 2018 mandates that the updated declaration be made and submitted to the FIRS within six months of the end of the accounting year in which the event occurred. A notification is also to be made to the FIRS where there is an appointment or retirement of a director of the connected person.

A connected person is mandated to make a disclosure of transactions that are caught under the TPP 2018, for each year of assessment. While such disclosure is to be in the form as may be prescribed by the FIRS from time to time, the disclosure is to be made and submitted to the FIRS not later than six months after the end of each accounting year or eighteen months after the date of incorporation, whichever is earlier.

A connected person may apply in writing to the FIRS for an extension of the time within which to comply with the provisions of the 2018 Regulations. Such application must, however, be submitted before the expiration of the stipulated time and the applicant is to show good cause for its inability to comply with stipulated submission dates. Where the FIRS is satisfied with the reasons stated in the application made pursuant to the TPP, it may grant the extension sought. However, where the taxable person fails to meet the extended submission date granted, the administrative penalty will apply as if no extension of period was granted.

A connected person who fails to submit a declaration or notification to the FIRS is liable to an administrative penalty of twenty-five thousand naira (#25,000) for each day in which the failure continues (except where an extension of time is sought in accordance and has been granted). By the same breath, a connected person who fails to make or submit a declaration within the required time, an administrative penalty in the sum of ten million naira (#10,000,000) in addition to ten thousand naira (#10,000) for every day in which the failure continues.

Failure of a reporting entity which is mandated to submit documentation to the FIRS to do so within 21 days of receiving a request from the FIRS, attracts an administrative penalty of a sum equal to ten million naira (N10,000,000) or one percent of the total value of all controlled transactions, whichever is higher; and ten thousand naira (#10,000) for every day in which the failure continues. Additionally, failure of any person to make disclosures of transactions caught by the 2018 Regulations within the period specified also attracts an administrative penalty of ten million naira (#10,000,000) or one percent of the value of controlled transaction not disclosed, whichever is higher and ten thousand naira (#10,000,000) for every day in which the failure continues.

Meanwhile, making an incorrect disclosure of transactions mandated by the 2018 Regulations by a connected person is liable to an administrative penalty of ten million naira (#10,000,000) or one percent of the value of controlled transactions incorrectly disclosed, whichever is higher.

The 2018 Regulations empower the FIRS to set up a Decision Review Panel (‘DRP’) for the purposes of resolving any dispute or controversy arising from the application of the provisions of the 2018 Regulations. The DRP is to be comprised of the following persons: the Head of the Transfer Pricing of the FIRS; a representative of the FIRS Legal Department (not below the rank of Deputy Director); and three other employees of the FIRs not below the rank of Deputy Director. The quorum for the Panel is the Head of the Transfer Pricing Function and any other two members of the DRP.

This publication is only intended for information purpose and does not constitute legal advice. For clarification or guidance or opinion on any aspect of the issue discussed in this publication,  Please contact us at admin@worrington.com for further details.