By Josh Bamfo (Partner & Head, Transfer Pricing Services, Andersen Tax, Nigeria)
The Federal Government of Nigeria finally published the much anticipated Income Tax (Country-by-Country Reporting) Regulations, 2018 (the CbC Regulations) on June 19, 2018 (with a commencement date of January 1, 2018). This is in line with Nigeria’s signing of the OECD’s Multilateral Competent Authority Agreement on January 27, 2016, providing for automatic exchange of CbC reports.
As a sequel to my earlier publication on the potential implications of the draft CbC reporting Regulations to affected taxpayers, which was published four months ago, this article presents the key highlights of the CbC reporting Regulations and re-assesses the potential implications based on the content of the final, published version.
The following are the key highlights of the CbC reporting Regulations that members of multinational enterprise (MNE) groups that are tax residents in Nigeria should take note of.
Filing Requirement of Nigerian Ultimate Parent Entity
In line with the OECD recommended Action 13 of the base erosion and profit shifting (BEPS) project, MNEs headquartered in Nigeria that meet a threshold of NGN160bn (approximately EUR380m) consolidated global revenue are required to file the CbC report in the specified format with the Federal Inland Revenue Service (FIRS), no later than 12 months after the last day of the reporting accounting year of the MNE Group. Thus, a Nigerian Ultimate Parent of an MNE Group with a December 31 financial year-end (FYE) is required to file its first CbC report not later than December 31, 2019, provided that it meets the above threshold.
Filing Requirement of a Nigerian Constituent Entity
A Constituent Entity is a Nigerian taxpayer that is not the Ultimate Parent of an MNE Group. It will be required to file a CbC report with the FIRS within the time specified if any of the following conditions apply:
(a) the Ultimate Parent Company is not obliged to file CbC report in its jurisdiction either because that country is yet to legislate on CbC reporting, or it does not meet the consolidated global revenue threshold from that country’s perspective (this will be expatiated later in the article, because it is a major source of risk); or
(b) there is a systemic failure in the Ultimate Parent Company’s jurisdiction such as a suspension of the automatic exchange.
However, a Constituent Entity will be exempt from the filing requirement if the MNE Group of which it is a member has filed a CbC report with respect to such accounting year through a Surrogate Parent Entity.
Notifications by Nigerian Constituent Entities
Any Constituent Entity of an MNE Group that is tax resident in Nigeria (including Ultimate and Surrogate Parent Entities) should notify the FIRS of the responsible entity within the MNE Group for the filing obligations by the last day of the reporting accounting year of such MNE Group. This means that for an MNE Group with a December 31 FYE, the Constituent Entity needs to notify the FIRS by December 31, 2018.
Content of the CbC report
The main content of the CbC report is the aggregate information for each jurisdiction that the MNE Group has operations relating to the amount of revenue, profit or loss, income tax paid, income tax accrued, stated capital, accumulated earnings, number of employees, and tangible assets other than cash or cash equivalents.
Non-Compliance and Penalties
Penalties for non-compliance of the CbC reporting Regulations ushers the Nigerian transfer pricing regime into a transfer pricing specific penalties era. The current Nigeria transfer pricing regulations makes reference to the Companies Income Tax Act (and other relevant acts) to apply penalties for non-compliance.
There are three types of administrative penalties associated with non-compliance with the CbC reporting Regulations:
The first relates to late filing of the CbC reports by the Reporting Entity to the FIRS. In this respect, the FIRS shall impose a penalty of NGN10m (approximately USD33,000) in the first instance and NGN1m (approximately USD3,300) every month in which the default continues.
The second relates to filing incorrect or false CbC reports. The FIRS shall impose an administrative penalty of NGN10m (approximately USD33,000).
Finally, where a Constituent Entity fails to notify the FIRS as indicated above, the FIRS shall impose an administrative penalty of NGN5m (approximately USD16,400) in the first instance and NGN10,000 (approximately USD33) for every day in which the default continues.
CbC reporting Regulations: Implications for taxpayers
The Nigerian CbC reporting Regulations has ushered the Nigerian transfer pricing regime into an increased level of transfer pricing compliance as well as an era of unprecedented level of transparency with some anticipated consequences discussed briefly below.
The threshold requirement
First, Constituent Entities should ascertain whether the consolidated global revenue of their MNE Group meets the Nigerian threshold of approximately EUR380m. This is important because the threshold in the Ultimate Parent’s country is likely to be comparable to the OECD recommended threshold of EUR750m, which is higher than the Nigerian threshold.
For example, where an MNE Group has a consolidated global revenue of EUR600m, the Ultimate Parent Entity in another country with CbC reporting requirement might not meet the threshold in that jurisdiction, but from a Nigerian perspective, the Constituent Entity will be required to have the MNE Group compile and file the relevant information to the FIRS. The filing responsibility may be carried out by the Ultimate Parent Entity, a Surrogate Parent Entity, or the Constituent Entity. This is a major source of risk for MNE Groups that have consolidated global revenue that fall within the range of EUR380m to EUR750m.
Definition of ‘Group’
Second, Reporting Entities, especially private MNE Groups, should be mindful of the definition of “Group” in the CbC reporting Regulations. According to the Regulations, “Group” means a collection of enterprises related through ownership or control such that it is required to prepare Consolidated Financial Statements for financial reporting purposes under applicable accounting principles or would be so required if equity interests in any of the enterprises were traded on a public securities exchange. Hence, private MNE Groups should make such assessment to determine their right amount of consolidated global revenue to test against the threshold.
Taxpayers need to be proactive
Third, it is imperative that Nigerian Ultimate Parent Entities that will meet the NGN160bn threshold of consolidated global revenue should start tracking the relevant information for all their global operations and employ the necessary in-house resources or outsource such responsibilities to qualified tax advisers to ensure that they meet the filing deadline. During last year’s TP Minds Conference held in Johannesburg, a number of taxpayers in South Africa shared their experiences about challenges in tracking and compiling such large volume of data locally as well as globally. Thus, the Nigerian counterparts should take cue from their experience and be proactive in employing the necessary resources to help compile the relevant information in a timely manner.
Use of information contained in CbC reports
Fourth, one of the biggest concerns about the FIRS’ access to such large volume of data on the global operations of MNEs in Nigeria is how they use such information. The OECD has recognized the possibility of tax administrators using information of MNEs’ global operations as basis to make transfer pricing adjustments audits, as opposed to the objective of using the information as part of tax administrators’ transfer pricing risk assessment in identifying taxpayers for further investigation or review. This will be an area of major concern and could be highly contentious and litigious.
Mitigating transfer pricing risk exposure
Fifth, considering the high level of transparency in the post-CbC reporting era in Nigeria, MNEs in Nigeria should proactively take steps to mitigate their transfer pricing risk exposures by employing independent tax advisers to perform thorough reviews of their transfer pricing documentation, supporting documents, and transfer pricing practices to ensure consistency in what has been documented and what is going to be disclosed.
Finally, the CbC reporting Regulations is a clear indication that Nigeria is finally entering into a post-BEPS era, which will impact the treatment of a wide range of transactions or arrangements going forward. The CbC reporting Regulations is the implementation of only one of the 15 BEPS Action Items. Although not all 15 are relevant to Nigeria, a BEPS readiness diagnostic review is a prudent approach for taxpayers to proactively mitigate their risk exposure going forward.
With the Federal Government of Nigeria publishing the CbC reporting Regulations and the introduction of transfer pricing specific penalties, taxpayers can no longer afford to sit on the fence and play the waiting game. A proactive approach that seeks to review all relevant documents and practices to help mitigate taxpayers’ transfer pricing risk exposure going forward has become a necessity.