The Nigerian Transfer Pricing Regulations: A tool for enhancing tax competitiveness

According to Adam Smith, a good tax system must possess the qualities of equity, certainty, economy and convenience. All tax laws and accompanying tax regulations must be written with the intention of balancing these qualities with meeting the core objective of taxation, which is to enable the collection of all monies due to government.

The Income Tax (Transfer Pricing) Regulations, 2018 ( the TP Regulations) highlights the provision of certainty of transfer pricing treatment in Nigeria (certainty) and a level playing field for both multinational enterprises and independent enterprises carrying on business in Nigeria (equity) as some of its core objectives.

This article seeks to review the potential effectiveness of the current TP Regulations in enabling the accomplishment of the objectives stated above and suggests ways by which the Regulations can enable the realization of these objectives. Certainty

The TP Regulations as a whole is a step in the right direction towards providing corporate taxpayers with certainty of the transfer pricing treatment of transactions conducted with their associated counterparts . Prior to the release of the TP Regulations, taxable persons lacked clarity on the approach to be adopted by

the tax authority in determining compliance with the arm’s length standard. For example, Section 22 of the Companies Income Tax Act empowers the Federal Inland Revenue Service (FIRS) to adjust the pricing of transactions between related entities where in its opinion those transactions have not been made on terms consistent with the arm’s length principle. This section of the principal act exposes taxpayers to the risk of assessments to additional tax liabilities on frivolous basis. The TP Regulations speak to the methods to be adopted by the tax authorities in making a determination of the arm’s length nature of related party transactions, and the documents/ information that taxable persons can show to demonstrate compliance.

Furthermore, the inclusion of safe harbor and advance pricing agreement (APA) provisions in the TP Regulations, have reinforced the intention of the FIRS to provide taxable persons with avenues through which they can obtain the advantage of a greater level of certainty in the area of Transfer Pricing. The demonstration of this intention is quite laudable. However, the TP Regulations still leaves a lot to be desired in this regard, especially because intentions alone are not enough and taking action is more important. The prompt publication of the promised guidelines, which provides greater clarity on how the FIRS intends to go about the application of both the safe harbor and the APA provisions and heralds the commencement of their practical application, is pertinent if this objective is to be achieved in the nearest future.

In addition, the APA provisions in the TP Regulations specify that agreements entered into shall apply to the controlled transactions for a period not exceeding three years. Increasing the duration of time for which a pricing agreement between the tax authority and a taxable person remains valid will go a long way in enhancing certainty. For example, in India, APAS entered into between taxable persons and the Indian tax authority can remain in force for a period of five years. Similarly, in India, bilateral APAS (i.e. APAS entered into between taxable persons and tax authorities in India and other jurisdictions) have a “roll back” provision which allows such APA to be applied retrospectively for up to a maximum period of four years. This essentially means, bilateral APAS in India can effectively be in force for a period of up to nine years.

Also, in addition to enhancing certainty, increasing the validity period of APAS will help to justify the significant investments in time and money made by both the tax authority and the affected taxable persons towards reaching a consensus. Equity

Another laudable feature of the TP Regulations is the relaxation of the requirement to prepare contemporaneous documentation for companies with a total value of related party transactions that is less than NGN 300 million. This will significantly reduce the burden/ cost of compliance especially for smaller companies, and will most likely have a greater positive impact on domestic groups. The TP Regulations, however, still retain the right of the tax authority to request for contemporaneous documentation from such companies. Therefore, the burden is not completely lifted from such companies.

The introduction of a threshold that completely exempts smaller companies and pre-defined categories of domestic companies which fall within the class of low risk entities from complying with the TP Regulations will significantly enhance the accomplishment of the objective of equity.

Conclusion

Businesses thrive on certainty. Therefore, achieving greater levels of certainty in the area of transfer pricing can go a long way in increasing a country’s tax competitiveness and improving the attractiveness of a country as a destination for foreign direct investment.

Furthermore, in a country where, according to the World Bank’s ease of paying taxes rankings, taxpayers spend over 370 hours per year on tax compliance, increasing certainty and reducing the TP compliance burden on smaller businesses will go a long way towards improving the overall tax compliance experience and enabling companies channel their energy towards achieving their core objectives of profit generation.

The opinions expressed in this article are strictly those of the authors who are as follows:

Omojo Okwa (Manager) and Gali Aka (Manager) of Global Transfer Pricing Services of KPMG in Nigeria. They can be contacted at omojo. okwa@ng.kpmg.com and gali.aka @ng.kpmg.com respectively.