Ovie Ukiri, Managing Partner, Ajumogobia & Okeke, on transfer pricing regulations

The Federal Inland Revenue Service (FIRS) has recently introduced a new set of transfer pricing regulations (hereafter known as “the Regulations”) which have an impact on the income tax assessment of related or associated taxable persons in Nigeria. The focus of the Regulations is to standardise, as clearly as possible, the transfer pricing between related parties, particularly multinational companies. The Regulations specifically give effect to the statutory provisions on anti-tax avoidance contained in the Personal Income Tax Act, the Companies Income Tax Act and the Petroleum Profit Tax Act.

In summary, the anti-tax avoidance provisions in Nigeria deem transactions between related persons to be artificial or fictitious if, in the opinion of the FIRS, the transactions have not been made on terms under which persons dealing at arm’s length would be expected to have made them. The single largest challenge with the broad nature of the anti-tax avoidance provisions was the dearth of clear regulatory or judicial interpretation of these anti-tax avoidance provisions. It is therefore a laudable decision by the FIRS to introduce the Regulations in order to both clarify and standardise the applicable rules governing related party transactions.

Transfer pricing is the price at which different divisions of a company (or related companies of a multinational) conduct transactions with each other, whether it be for goods, services or intellectual property rights, both within a country and across international borders. The fundamental question in these situations will always be whether the pricing is similar to that paid between unrelated companies acting at arm’s length. Therefore the ultimate thrust of any transfer pricing regulation must be to put in place the basis for the determination of the appropriate pricing of goods, services and intellectual property rights, in applicable circumstances.

As indicated above, the Regulations provide effect to the existing anti-tax avoidance legislation and give clarity to the tax treatment of related party transactions. Other highlights include the applicability of the UN and OECD Model Tax Conventions to the legislation, as well as the introduction of OECD transfer pricing guidelines. The Regulations include corresponding adjustments to help avoid unnecessary taxation for persons in countries that have double taxation treaties with Nigeria.

The Regulations also require the taxpayer to keep record of sufficient information to verify that the pricing of related party transactions is consistent with the arm’s length principle and imposes an obligation to file a Transfer Pricing Declaration Form along with the taxpayer’s annual tax returns.

Furthermore, and in addition to this, the Regulations introduce advance pricing arrangements and a safe harbour – in other words, a possible exemption from the transfer pricing provisions where the prices are established in accordance with statutory provisions or have been approved by another government regulatory agency. The Regulations also impose penalties for non-compliance with any of its provisions and provide for the creation of a decision review panel, which will be tasked with resolving any disputes arising from the application of any provisions included within the Regulations.

The impact of the Regulations on the appropriate taxpayers commenced on January 1, 2013 without prejudice to the right of the FIRS to apply the old rules for the six years prior to the issuance of the Regulations. It is expected that the FIRS will very quickly put in place the requisite administrative structures and subsequently develop the required manpower to properly and effectively administer the Regulations. The new Regulations are being introduced at the same time that the FIRS is stepping up tax enforcement efforts. It is therefore critical that both existing taxpayers, as well as new entrants who are otherwise affected by the Regulations, engage a specialist local advisor in light of the new rules.