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Transfer pricing in a nutshell: Nigeria

Article by: Udo Udoma & Belo-Osagie


Prior to 2012, there was no comprehensive law regulating transfer pricing in Nigeria. General anti-avoidance rules (GAARs) were included in Nigeria’s income tax laws as a means of curbing tax avoidance. Tax authorities relied on GAARs to assess and regulate the pricing of inter-group transactions where such transactions appeared to be artificial or sham arrangements. In August 2012, the Federal Inland Revenue Service (FIRS), Nigeria’s Federal tax authority, published Nigeria’s first transfer pricing regulations. The Income Tax (Transfer Pricing) Regulations (the 2012 Regulations) were aimed at unifying and implementing the various transfer pricing provisions available in the Nigerian tax laws and providing a more structured regime for assessing related-party transactions. The 2012 Regulations, however, did not provide much certainty in relation to the scope and contents of the reporting requirements or the parameters for the selection of comparables for purposes of benchmarking prices or profits of related-party transactions. The scope of taxes covered did not include capital gains tax (CGT) and value added tax (VAT), and there were uncertainties around the application of safe-harbour rules and penalties for non-compliance.

In 2016, Nigeria joined the Organisation for Economic Co-operation and Development (OECD)/G20 Inclusive Framework on Base Erosion and Profit Shifting (BEPS) and committed to the implementation of the four minimum standards, which included the re-examination of transfer pricing documentation (Action 13). As part of the implementation of the Action 13 minimum standard, the 2012 Regulations were replaced by the Income Tax (Transfer Pricing) Regulations 2018 (the 2018 Regulations), which were published in August 2018 and given retroactive effect from March 2018. Unlike the 2012 Regulations, which only took into consideration the provisions of the OECD and United Nations (UN) Transfer Pricing Guidelines, the 2018 Regulations also adopted some of the provisions of the African Tax Administration Forum’s suggested approach to drafting transfer pricing legislation (the ATAF Approach). The main thrust of the ATAF Approach is to suggest structure and content to African countries seeking to develop transfer pricing rules, based on policy options that aim to address the limitations that African tax administrations often encounter when assessing transfer prices. These limitations include information asymmetries between multinational entities (MNE) and African tax administration and capacity constraints that make it difficult to price complex controlled transactions, especially involving the transfer of rights relating to intangibles. Some of the introductions made by the 2018 Regulations include rules on intra-group services, pricing of intangibles, pricing of commodities, exports and imports, and transfer pricing documentation processes.

The 2018 Regulations cover transactions between individuals, sole corporations, entities, companies, partnerships, joint ventures, trusts or any other body of individuals deemed to be ‘connected’. Persons will be deemed to be 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. The degree of control required is, however, not specifically stated in the 2018 Regulations. Eligible transactions include sale and purchase of goods and services; sales, purchase or lease of tangible assets; transfer, purchase, licence or use of intangible assets; provision of services; lending or borrowing of money; manufacturing arrangements and any transaction that may affect profit or loss or any other matter incidental to, connected with or pertaining to these transactions (eligible transactions).

The scope of application of the 2018 Regulations includes all transactions that have an effect on the taxable profit of connected entities, including distributions of dividend and capital contributions between connected persons. Transactions between connected persons are deemed to be controlled transactions and must be at arm’s length. A transaction is at arm’s length when 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. Where a controlled transaction is considered not to be at arm’s length, the FIRS may make necessary adjustments to bring the taxable profits resulting from the transaction into conformity with the arm’s-length principle.

Broader taxation issuesi Diverted profits tax and other supplementary measures

There is no diverted profits tax regime in Nigeria. However, where a transaction between related parties results in the reduction of tax liability that may have occurred from a diversion of profits, the transaction may be deemed artificial or fictitious and the FIRS may make adjustments as it considers appropriate.ii Double taxation

Nigeria has, as at the date of this review, negotiated over 20 double-tax agreements (Nigerian DTAs) with other countries, 13 of which have been ratified and are currently in force. The Nigerian DTAs are a modified version of the OECD Model Tax Convention (OECD MC) and the UN Model Double Taxation Convention (UNMC). The 2018 Regulations are applied in a manner consistent with the arm’s-length principle in Articles 9 of the OECD MC and of the UNMC in force at the given time. Thus, the adjustments made under the 2018 Regulations are similar to what is provided in Article 9(2) of the OECD MC.

The interpretation of a connected person under the 2018 Regulations is based on the provisions of Articles 9 of the OECD MC and of the UNMC. The 2018 Regulations empower the FIRS, upon request by a connected person, to make corresponding adjustments to the amount of tax charged in Nigeria in respect of income earned in a contracting state by a connected person resident in Nigeria. This will apply where an adjustment is made to the taxation of the transactions of a connected person resident in Nigeria by a competent authority in a treaty country that results in taxation in the other country of income and profits that are also taxable in Nigeria.

The Nigerian DTAs provide for the application of a mutual agreement procedure (MAP), which gives a taxpayer the right to present its case to the competent authority of the state of which it is a resident where the taxpayer considers that the action of one or both of the contracting states has resulted or will result in taxation that is not in accordance with the provisions of the DTA.

The Nigerian DTAs contain variations of the MAP provision stated in Article 25 of the OECD MC. Some of the provisions gives a taxpayer the right to present its case to the competent authority of the contracting state of which it is a national where the procedure for the application of Paragraph 1 of Article 24 (Non-Discrimination) had previously been set in motion by the taxpayer. The time limit set for presenting an objection to the relevant competent authority also varies from two to five years and, in some cases, no limit is set. Nigeria has indicated its intention to amend its MAP provisions in all its treaties to conform with the wording prescribed in Article 16 of the Multilateral Convention to Implement Tax Treaty Related Measures to Prevent Base Erosion and Profit Shifting (MLI). This would eliminate the non-discrimination exception and establish a three-year time limit for filing an objection. Although Nigeria has submitted its MLI position to the OECD, as at the date of this review Nigeria and some of its treaty partners have yet to ratify the MLI.

A MAP can be invoked where a transfer pricing adjustment or corresponding adjustment results in double taxation. Other circumstances that may be resolved by a MAP include an incidence of double taxation due to dual residence status or characterisation or classification of income. In the latter case, a MAP may be invoked to seek clarification from the competent authorities. Other instances for a MAP are where a withholding tax is levied beyond what is allowed within an applicable tax treaty, or where a Nigerian resident taxpayer that is subject to tax in Nigeria on income is taxed by the tax authority of the treaty partner on the business income earned in that country, despite not having a permanent establishment in that country under the tax treaty.

A taxpayer that has invoked a MAP process still has a right of appeal under domestic law and is entitled to the legal remedies available. Nevertheless, where the taxpayer’s MAP request has been accepted, the taxpayer is required to suspend all the legal remedies available to it. Upon the conclusion of a MAP, if the taxpayer is not satisfied with the ruling of the FIRS, it can approach the TAT and courts for legal redress and the available remedies will apply. Where a court has determined a tax matter, it becomes final and binding, and the taxpayer can no longer invoke a MAP. Nigerian law does not allow arbitration of tax disputes.iii Consequential impact for other taxes

Although the scope of taxes covered by the 2018 Regulations includes CGT and VAT, the Regulations make no explicit provisions on how they will apply to these taxes. However, depending on the nature of the transaction, where a transaction is considered not to have been at arm’s length and adjustments are made to arrive at the income tax due, corresponding adjustments will also be made in respect of the aspect of the transaction that is liable to VAT. The same process will also apply in relation to a disposal of capital assets on terms not otherwise at arm’s length. In that case, adjustments will be made to the value of the transaction to determine the gains realised from the disposal and the applicable CGT.