Nigeria’s Federal Inland Revenue Service (FIRS) recently released the revised Income Tax (Transfer Pricing) Regulations, 2018 (the Transfer Pricing Regulations). The Transfer Pricing Regulations are one of the efforts of the FIRS in improving the administration of transfer pricing in the country, increasing revenue collection via taxes, and protecting Nigeria’s tax base.
The Transfer Pricing Regulations, which repeal the Income Tax (Transfer Pricing) Regulations No. 1, 2012 (the 2012 Regulations), has an effective date of March 12, 2018. However, the commencement date is the basis period commencing after the effective date.
The Transfer Pricing Regulations introduce various changes, which have been highlighted as below.
Introduction of transfer pricing specific penalty regime
Unlike the 2012 Regulations, the Transfer Pricing Regulations introduce administrative penalties for transfer pricing-related offences. The penalties increase the burden of compliance on taxpayers with respect to the timely and accurate filing of transfer pricing returns (disclosure and declaration forms) and the preparation of contemporaneous transfer pricing documentation. Also, taxpayers will need to ensure that all necessary supporting documents for their related-party transactions are readily available to furnish such information during transfer pricing audits.
|1||Failure to file transfer pricing declaration within the specified period||NGN10m in the first instance and NGN10,000 for every day the failure continues|
|2||Failure to file updated transfer pricing declaration/notification about changes in directors||NGN25,000 for every day the failure continues|
|3||Failure to file transfer pricing disclosures within the specified period||the higher of: NGN10m or 1 percent of the value of the controlled transaction not disclosed, and NGN10,000 for every day the failure continues|
|4||Incorrect disclosure of transactions||the higher of: NGN10m or 1 percent of the value of the controlled transaction incorrectly disclosed|
|5||Failure to file transfer pricing documentation upon request||the higher of: NGN10m or 1 percent of the value of all controlled transactions and NGN10,000 for every day the failure continues|
|6||Failure to furnish information or document within the specified period||1 percent of the value of each controlled transaction for which the information or documentation was required and NGN10,000 for every day the failure continues|
Guidelines on the filing of updated transfer pricing declaration form
The Transfer Pricing Regulations provide clarification on instances in which a taxpayer is required to update the transfer pricing declaration form. Taxpayers are expected to make updated declarations to the FIRS where there is a merger of the taxpayer or its parent company; an acquisition of up to 20 percent of the taxpayer or its parent company by previously unrelated persons or company, any other change in the structure or arrangement of the taxpayer.
Also, taxpayers are required to make notifications to the FIRS where there is an appointment or retirement of a director.
Threshold for maintaining contemporaneous transfer pricing documentation
One of the issues raised by taxpayers is the administrative costs involved in complying with the contemporaneous transfer pricing documentation requirements of the 2012 Regulations. Thus, the Nigerian Tax Authority have included a threshold for compliance.
Specifically, a connected person whose total value of controlled transactions is less than NGN300m is no longer required to maintain contemporaneous transfer pricing documentation. However, such connected persons will be required to prepare and submit relevant documentation within 90 days upon receipt of a notice from the FIRS. While this exception removes the burden of preparing a contemporaneous transfer pricing documentation, taxpayers who meet this criterion will be expected to file the transfer pricing returns on an annual basis.
Update of the safe harbor provisions
The Transfer Pricing Regulations revised the safe harbor regime. Taxpayers may be exempted from verifying the arm’s length nature of controlled transactions if controlled transactions are priced in accordance with guidelines published by the FIRS as opposed to the adoption of the statutory or regulator prescribed prices as contained in the 2012 Regulations.
Going forward, taxpayers may therefore be unable to rely on prices regulated by Government agencies like the National Office of Technology Acquisition and Promotion (NOTAP) in supporting the arm’s length nature of their related-party transactions.
Specific criteria for determining the arm’s length nature of intra-group transactions
Taxpayers who receive or provide intra-group services are expected to evaluate the substance, benefits, economic value of the activities, and the arm’s length nature of the pricing of the services provided or received. Also, the Transfer Pricing Regulations specifically exclude shareholder activities from intra-group services.
Use of quoted prices in the pricing of commodity transactions
Taxpayers carrying out commodity transactions with related parties are expected to use the quoted prices as at the date of transaction in determining the arm’s length prices. Adjustments to the quoted prices will only be accepted where there is sufficient evidence to show the basis for the adjustments. This means that the FIRS is leaning towards the direct testing of commodity transactions through the use of the comparable uncontrolled price (CUP) method rather than the testing of the entity’s profitability through the use of the other transfer pricing methods.
Limitation of deductions on royalty payments
The Transfer Pricing Regulations restrict the allowable deductions for intangibles to not more than five percent of earnings before interest, tax, depreciation, and amortization (EBITDA). This implies that the pricing for intangibles will no longer be based on the arm’s length principle or NOTAP approved rates, rather a maximum rate of five percent of EBITDA will be applicable for all intangibles transactions entered into by Nigerian taxpayers.
Advance Pricing Agreements (APAs)
The Transfer Pricing Regulations removes the NGN250m threshold for transactions to be covered by APAs and provides procedures and document requirements for the application for APAs. This may be an indication of the tax authorities’ intent to commence the process of granting APAs.
Implication for taxpayers
The revised Transfer Pricing Regulations introduce a stiffer transfer pricing regime in Nigeria. Although the exemption of certain category of companies from contemporaneous transfer pricing documentation requirement will reduce the compliance burden on such companies, the introduction of stiff administrative penalties for transfer pricing offences is a material change that will affect taxpayers.
In light of these revisions, taxpayers will need to review their related-party transactions and relevant associated documents to ensure that they are fully compliant with the arm’s length principle and documentation requirements, to help mitigate the risks associated with the incidence of significant assessment of additional tax liabilities and administrative penalties.