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Review of Transfer Pricing Development in Africa - A Study of Key Sub-Saharan African Countries 1

Review of Transfer Pricing Development in AfricaA Study of Key Sub-Saharan African Countries

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ForewordTransfer Pricing (TP) is a major tax

consideration for Multinational Enterprises (MNEs) across the world, and Africa is no different. Although just a decade ago, only a handful of countries in Sub-Saharan Africa (SSA) had effective TP Regulations (South Africa in 1995 and Kenya in 2006), a number of SSA countries have published and implemented TP Regulations within the past decade. Further, the recent developments in the international TP space, including the release of the Organisation for Economic Co-operation and Development (OECD) Base Erosion and Profit Shifting (BEPS) reports, have significantly increased focus on TP by tax administrators and MNEs across Africa.

Moreover, with the need for African governments to increase tax revenue, tax administrators have identified TP as a source of additional revenue and have begun to aggressively enforce compliance and conduct TP audits.

All the above factors have culminated in making TP a growing concern for many MNEs currently within Africa and those seeking to expand their operations to/out of African countries because of the associated risks. It has therefore become important that MNEs get a proper understanding of the various TP requirements in Africa, how these can affect their business operations, and how to adequately plan and manage their Related Party Transactions (RPTs).

In view of the above, Andersen Tax conducted a country TP profile review by examining the TP compliance requirements, key TP developments, and the TP audit experiences of MNEs operating in selected SSA countries including Ghana, Kenya, Nigeria, South Africa, Tanzania and Uganda. These jurisdictions have been selected because they have relatively more developed TP regimes within the SSA region.

For Nigeria, in addition to the country TP profile review, we conducted a survey to evaluate the awareness of TP among taxpayers and their perception of TP risk to their businesses. The results from this survey have been presented in the maiden edition of our Africa TP Development Review Report.We intend to expand the focused countries in subsequent editions, as TP continues to develop across the SSA region. Nonetheless, the Report provides a summary of the TP requirements for the SSA countries.

We would like to appreciate all respondents for taking out time to make insightful contributions to this project and we look forward to your participation in subsequent surveys. We hope that this report provides taxpayers and investors with the required insight into TP in SSA, particularly Nigeria. You can provide your comments, queries and suggestions with regards to the Report by contacting or sending a mail to [email protected].

Dr. Joshua BamfoPartner & HeadTransfer Pricing ServicesAndersen Tax, Nigeria E: [email protected]

Review of Transfer Pricing Development in Africa- A Study of Key Sub-Saharan African Countries4

GlossaryADR Advance Dispute ResolutionAPA Advance Pricing ArrangementsBEPS Base Erosion and Profit ShiftingCbC Country-by-Country CDT Commissioner for Domestic TaxesCGR Consolidated Group RevenueDRP Decision Review PanelDTAs Double Taxation AgreementsFHC Federal High CourtFIRS Federal Inland Revenue ServiceFMCG Fast Moving Consumer GoodsFY Financial YearGRA Ghana Revenue AuthorityIDR Information and Document RequestIRA Internal Revenue ActITA Income Tax ActITR Income Tax ReturnKRA Kenya Revenue AuthorityMAP Mutual Agreement ProcedureMCAA Multilateral Competent Authority AgreementMNEs Multinational EnterprisesOECD Organisation for Economic Co-operation and DevelopmentRPTs Related Party TransactionsSARS South African Revenue ServiceSSA Sub-Saharan AfricaTAA Tax Administration ActTAT Tax Appeal TribunalTP Transfer PricingTRA Tanzania Revenue AuthorityUKL Unilever Kenya LimitedUPE Ultimate Parent EntityURA Uganda Revenue AuthorityUUL Unilever Uganda Limited


Contents

Highlights

0608

1026

2844

Transfer Pricing Requirements in Sub-Saharan Africa

Challenges of theTransfer Pricing Regime in Sub-Saharan Africa (SSA)

Transfer Pricing Country Review

Transfer Pricing Articles

About the Survey


HighlightsThis section summarizes the TP profiles of the selected SSA countries.

Ghana Kenya Nigeria• TP Regulations introduced in

2012.

• Taxpayers are to maintain contemporaneous TP documentation and file TP returns.

• Ghana is yet to implement BEPS Action Points.

• No APA or safe harbour provisions.

• No decided court cases on TP issues as at October 2018.

• TP Regulations were introduced in 2006.

• Contemporaneous documentation is required for cross border transactions only. No filing requirement for TP, but disclosure requirements included in income tax returns.

• No specific TP penalties.

• BEPS Action Points not implemented.

• No APA or safe harbour provisions.

• Kenya has decided TP cases.

• Not a party to the MCAA but a party to the multilateral convention on mutual administrative assistance in tax matters.

• Kenya is in the process of reviewing its Income Tax Act with a raft of new proposals on transfer pricing.

• Introduced TP Regulations in 2012 and revised the Regulations in 2018.

• Requires companies to have Masterfile, Local file and Country-by-Country (CbC) Reports and file TP returns.

• TP administrative penalties included in Regulations.

• APA provisions are available to taxpayers.

• Signed unto the MCAA for exchange of information.

• Survey carried out indicates that taxpayers in Nigeria generally view TP as a high tax risk area.

• Several TP dispute resolution options available. However, no decided court cases on TP issues as at October 2018.



South Africa Tanzania Uganda• TP was introduced in 1995 by

the inclusion of Section 31 in the Income Tax Act No. 58 of 1962 (ITA).

• Section 31 of the ITA contains the main legislative provisions concerning TP.

• Requires resident companies to have Masterfile, Local file and CbC Reports. No filing requirements. Threshold for preparing TP documentation is ZAR100,000,000 (approximately 7,200,000USD).

• Administrative penalties included in ITA.

• No APA and Safe Harbour provisions.

• Signed to the MCAA for exchange of information.

• Several dispute resolution options available.

• Regulations introduced in 2014 requiring taxpayers to maintain contemporaneous documentation.

• No specific TP returns. However, disclosure requirements included in income tax returns.

• Penalties included in the TP Regulations.

• BEPS Action Points not implemented.

• APA provisions included in the Regulations. No safe harbour provisions.

• Introduced TP Regulations in 2011.

• Taxpayers with controlled transactions exceeding 25,000 currency points (UGX500m) (approximately 134,000 USD) are required to maintain TP documentation.

• Penalties applicable where taxpayers fail to meet the documentation requirement. No filing requirements.

• Uganda is yet to implement BEPS Action Points.

• APA provisions are available but no safe harbour provisions.

• No decided court cases on TP issues as at October 2018.



Transfer Pricing Requirements in Sub-Saharan Africa

We present a summary of the TP regimes of the countries within SSA. The summary examines whether a country has TP Regulations, the TP compliance requirements, whether there are penalties for non-compliance, and whether it has implemented aspects of BEPS Action Points with particular focus on CbC Regulations.

S/N Country TP Regulation Available

Contemporaneous Documentation Required

TP Compliance Documentation Filing Required

TP Returns Filing Required

Penalty for Non-Compliance

BEPS Implementation

Party to the MCAA

CbC Reporting Regulations

1 Angola Yes Yes Yes No Yes No No N/A2 Benin Republic N/A N/A N/A N/A N/A N/A No N/A3 Botswana N/A N/A N/A N/A N/A N/A No N/A4 Burkina Faso N/A N/A N/A N/A N/A N/A No N/A5 Burundi N/A N/A N/A N/A N/A N/A No N/A6 Cameroon Yes Yes Yes Yes Yes N/A No N/A7 Cape Verde Yes Yes No - But should

be made available upon request

No Yes -Failure to submit documentation within the time frame indicated in the request will attract a penalty

No No N/A

8 Central African Republic (CAR)

N/A N/A N/A N/A N/A N/A No N/A

9 Chad No Yes N/A Yes Yes N/A No N/A10 Comoros N/A N/A N/A N/A N/A N/A No N/A11 Congo

BrazzavilleN/A Yes N/A N/A N/A N/A No N/A

12 Cote d'Ivoire Yes Yes Yes Yes Yes Action 13 No Yes13 Democratic

Republic of Congo

Yes Yes Yes Yes Yes N/A No N/A

14 Equatorial Guinea

N/A N/A N/A N/A N/A N/A No N/A

15 Eritrea N/A N/A N/A N/A N/A N/A No N/A16 Ethiopia Yes Yes Yes No Yes N/A No N/A17 Gabon Yes Yes Yes Yes Yes Action 13 Yes Yes18 Gambia N/A N/A N/A N/A N/A N/A No N/A19 Ghana Yes Yes No - But

should be made available upon request

Yes Yes N/A No No

20 Guinea N/A N/A N/A N/A N/A N/A No N/A21 Guinea-Bissau N/A N/A N/A N/A N/A N/A No N/A


S/N Country TP Regulation Available

Contemporaneous Documentation Required

TP Compliance Documentation Filing Required

TP Returns Filing Required

Penalty for Non-Compliance

BEPS Implementation

Party to the MCAA

CbC Reporting Regulations

22 Kenya Yes No No - But should be made available upon request

No Yes N/A No N/A

23 Lesotho N/A N/A N/A N/A N/A N/A No N/A24 Liberia Yes Yes No Yes N/A Action 13 No N/A25 Madagascar Yes There is no

requirement to prepare transfer pricing documentation annually in Madagascar, but documentation has to be available in case of a tax audit

No - But should be made available upon request

No Yes N/A No N/A

26 Malawi Yes Yes No - Taxpayers are however advised to submit upon request

No Yes N/A No N/A

27 Mali No No No No N/A N/A No N/A28 Mauritania No No N/A No N/A N/A No N/A29 Mauritius No No N/A No N/A N/A Yes Yes30 Mozambique Yes Yes No No The

determination of penalties related with transfer pricing matters will be made on a case–by–case basis

N/A No N/A

31 Namibia No No No No N/A N/A No N/A32 Niger N/A N/A N/A N/A N/A N/A No N/A33 Nigeria Yes Yes No - But should

be made available upon request

Yes Yes Action 13 Yes Yes

34 Rwanda No No No No N/A N/A No N/A35 Sao Tome and

PrincipeN/A N/A N/A N/A N/A N/A No N/A

36 Senegal Yes Yes No Yes Yes Action 13 Yes Yes37 Seychelles Yes Yes No - But must be

made available within five working days of a written request

No N/A N/A No No

38 Sierra Leone N/A N/A N/A N/A N/A N/A No N/A39 South Africa Yes Yes No No Yes Action 13 Yes Yes40 South Sudan N/A N/A N/A N/A N/A N/A N/A N/A41 Swaziland N/A N/A N/A N/A N/A N/A N/A N/A42 Tanzania Yes Yes No - But must be

available upon request within 30 days of the request

No Yes N/A N/A N/A

43 Togo N/A N/A N/A N/A N/A N/A N/A N/A44 Uganda Yes Yes No - But must be

in place at the time the income tax return is filed

No Yes Action 13 No N/A

45 Zambia Yes Yes No - But must be made available upon request

No Yes N/A No N/A

46 Zimbabwe Yes Yes No - But should be made available upon request

No No N/A No N/A

Based on our review, about 50% of African countries have some form of local requirements with respect to TP and less than 5% of African Countries have commenced the implementation of BEPS Action Points. Focus has been on the implementation of Action 13 with respect to the preparation and filing of CbC Reports in a bid to achieve more transparency.


NigeriaNigeria first introduced TP Regulations

in 2012 with the release of the Income Tax (Transfer Pricing) Regulations No. 1 2012 (the 2012 Regulations). However, the 2012 Regulations was repealed in 2018 with the release of the Income Tax (Transfer Pricing) Regulations, 2018 (the Regulations). The Regulations covers all transactions carried out between related parties and requires that these transactions must be carried out at arm’s length. One of the key revisions in the Regulations is the introduction of TP specific penalties for various types of non-compliance.

In view of the aggressive drive for government revenue, the Federal Inland Revenue Service (FIRS or the Service) has been conducting TP audits. Various MNEs are currently undergoing audits while other companies have been slated for audits or have received initial information and document requests from the FIRS.

TP Documentation Requirements

Taxpayers are required to prepare and maintain contemporaneous TP documentations which include the Master file and Local file. These documentation should be kept for at least 6 years. The Master file should provide an overview of the global business operations of the MNE Group to which the taxpayer belongs, while the Local file should provide information on the local entity and its RPTs. The Local file should contain sufficient and accurate information about the RPTs carried out and include analysis which support the arm’s length nature of

the RPTs. This documentation should be prepared contemporaneously and should be in place prior to the due date of filing the income tax returns for the Financial Year (FY) of interest. Upon request by the FIRS, taxpayers are expected to submit these documentations within 21 days of receiving the request.

However, the Regulations excludes taxpayers whose total value of RPTs in a year is less than ₦300million from the requirement to maintain contemporaneous documentation. Nevertheless, these taxpayers are still required to ensure that their RPTs are conducted based on the arm’s length principle. Where the Service deems it necessary, it may request that the TP documentation be prepared and submitted not later than 90 days from the date of receipt of a notice from the Service.

TP Returns

Taxpayers are expected to prepare and file TP returns annually. The TP returns is comprised of two statutory forms - TP Declaration form and TP Disclosure form. The TP Declaration form requests for information on a taxpayer, its directors and its connected parties (whether resident in Nigeria or not), while the TP Disclosure form requests for information on the RPTs carried out within a FY. The TP Declaration form should be filed once with updated declarations made where there are changes to the composition of the Board of Directors or business restructuring, while the TP Disclosure form should be filed annually.

Transfer Pricing Country Review


The TP statutory forms are to be submitted not later than 6 months after the end of the accounting year. However, in the case of a newly incorporated company, TP statutory forms shall be made and submitted not later than 18 months after the date of incorporation or within 6 months after the end of the accounting year, whichever is earlier.

TP Penalties

The Regulations introduced administrative penalties for TP related offences such as lateness in filing TP returns, lateness in submitting TP documentation when requested for by the Service, and disclosure of inaccurate information. The specific penalties are highlighted below:

TP Offence PenaltyFailure to file TP declaration within the specified period

₦10 million (approximately 27,000 USD) in the first instance and ₦10,000 (approximately 27 USD) for every day the failure continues

Failure to file updated TP declaration/ notification about changes in directors

₦25,000 (approximately 69 USD) for each day in which failure continues

Failure to file TP disclosures within the specified period

The higher of: ₦10 million (approximately 27,000 USD) or 1% of the value of the controlled transaction not disclosed, and ₦10,000 (approximately 27 USD) for every day the failure continues

Incorrect disclosure of transactions

The higher of: ₦10 million (approximately 27,000 USD) or 1% of the value of the controlled transaction incorrectly disclosed

Failure to file TP documentation upon request

The higher of: ₦10 million (approximately 27,000 USD) or 1% of the value of all controlled transactions and ₦10,000 (approximately 27 USD) for every day the failure continues

Failure to furnish information or document within the specified period

1% of the value of each controlled transaction for which the information or documentation was required and ₦10,000 (approximately 27 USD) for every day the failure continues

BEPS ImplementationThe FIRS has implemented Action 13 by including the Master file and Local file

documentation in the revised TP Regulations and introducing a specific regulation for CbC Reporting.

CbC Reporting

Nigeria published the Income Tax (Country by Country Reporting) Regulations, 2018 in June 2018. This gave effect to the MCAA Nigeria signed on 27 January 2016 and ratified on 3 August, 2016. Some of the key provisions of the CbC Regulations include the following:

a. Each Ultimate Parent Entity (UPE) of an MNE Group having Consolidated Group Revenue (CGR) of ₦160 Billion or above is required to file a CbC Report in a specified format with the FIRS on an annual basis, provided that such entity is resident in Nigeria for tax purposes. The CbC Report shall be filed not later than 12 months after the last day of the Reporting Accounting Year of the MNE Group.

b. A Constituent Entity which is not the UPE of an MNE Group that meets the following conditions will also be required to file a CbC Report with the FIRS within the time specified if:

1. the Constituent Entity is resident in Nigeria for tax purposes and

2. one or more of the following conditions apply:

(i) the UPE of the Constituent Entity is not obliged to file CbC Report in its jurisdiction of tax residence;

(ii) the UPE’s tax resident jurisdiction is not part of the MCAA which allows for automatic exchange of information across tax jurisdictions or any similar agreement that Nigeria is a part of;

(iii) the FIRS has been notified of a systematic failure arising from the tax jurisdiction of the UPE.

c. A Constituent Entity will not be required to file a CbC Report if same has been filed through a Surrogate Parent Entity in the format specified in the Regulations.

d. Failure to submit the CbC Report within the time stipulated shall attract a penalty of ₦10,000,000 (approximately 27,000 USD) in the first instance and ₦1,000,000 (approximately 2,700 USD) for every month in which the default continues.

e. Any Constituent Entity that is resident in Nigeria for tax purposes shall notify the FIRS whether it is a UPE or Surrogate Parent Entity. Where it is neither


of the two, it shall notify the FIRS of the identity and tax residence of the Reporting Entity not later than the last day of the Reporting Accounting Year of the MNE Group. Where a Constituent Entity fails to provide such notification, such entity will be liable to a penalty of ₦5,000,000 (approximately 14,000 USD) in the first instance and ₦10,000 (approximately 27 USD) for every day in which the default continues.

APA

Nigeria has APA provisions in its TP Regulations. However, the FIRS is yet to implement the APA provisions. The FIRS is expected to release guidelines on the implementation of APAs.

TP Audit Process

The FIRS commenced TP audits in 2015 and now has over 200 cases at different phases of the audit process. The TP audit process begins by the FIRS conducting a risk assessment by reviewing the TP returns and Audited Financial Statements submitted by the taxpayer. Where additional information is required, an Information and Document Request (IDR) is forwarded to selected companies. The IDR may include information/documents such as the contemporaneous documentation for each of the years they want to audit, intercompany agreements, ledgers etc. For the TP documentation, based on the Regulations, a selected taxpayer has 21 days to submit the document.

Following the review of information received, the FIRS may commence a field audit. This typically includes presentation by the company on its business operations, value chain etc. and interview sessions with relevant personnel, plant site visits. The FIRS will seek to gain a better understanding of the taxpayer’s business as well as the facts and circumstances relating to the RPTs.

Following the review of all information gathered, the FIRS issues a preliminary report of its position based on its understanding of the facts and circumstances relating to the RPTs. At this stage, taxpayers will have the opportunity to rebut the tax authorities’ position while providing additional documentation as required. Where the FIRS and the taxpayer are unable to arrive

at an amicable position, both parties can explore alternative avenues for dispute resolution.

Dispute Resolution Options

Taxpayers have access to a number of TP dispute resolution alternatives. These include:

a. The Decision Review Panel (DRP): This panel is set up by the FIRS and consists of the Head of Transfer Pricing and three other members of the Service not below Director Level. Where the taxpayer disagrees with the position of the DRP, other dispute resolution options may be explored. This is more of an internal review process of the FIRS and the position taken by the DRP is deemed to be the final position of the Service.

b. Tax Appeal Tribunal (TAT): The TAT is an administrative quasi-judicial body established by the Federal Government to adjudicate on tax disputes arising from the operation of the tax laws. In line with Court Judgments, the TAT presently serves as a condition precedent to the institution of tax matters at the Court of Law. Appeals from the decisions of TAT lie with the Federal High Court (FHC). The TAT is set up in Lagos State, the Federal Capital Territory, Abuja and the six geographical zones of the Country. The Tribunal comprises of Tax Appeal Commissioners appointed by the Minister of Finance.

c. Juridical courts: The Constitution of the Federal Republic of Nigeria vests the FHC and the State High Courts with jurisdiction to hear and determine tax disputes. Appeals from the FHC and State High Courts lie to the Court of Appeal, while appeals from the Court of Appeal lie to the Supreme Court, which is the apex and final court in the country.

Safe Harbour

The Regulations provides that a taxpayer may be exempted from the TP documentation requirements, where the controlled transactions are priced in accordance with specific guidelines that may be published by the Service for that purpose from time to time. The FIRS is however yet to publish any guidelines on safe harbours.


TP Administration in Organisations With over six years of TP implementation in Nigeria and the increased focus on TP in recent years, one would expect that companies that have RPTs would have in-house teams dedicated to handling TP matters. However, the results showed that 71% of respondents do not have a dedicated TP team. Rather, 61% of the respondents stated that TP matters are handled by the tax department while 39% have their TP issues handled by the finance department. Studies indicate that most of the large MNEs have a dedicated TP desk outside of Nigeria handling TP specific issues. Thus, the local tax/finance team rely on their Group TP team for support on TP matters or outsource the TP function to third party Tax Advisors.

Figure 2: Does your organization have a dedicated TP team?

Figure 3: If no, which department is responsible for dealing with TP within your organization?

Transfer Pricing Survey of Taxpayers PerspectiveWe conducted a survey of Nigerian Taxpayers to understand their views on the TP environment in Nigeria particularly with respect to their experience and/or views relating to TP compliance, TP risk assessment, TP audit, dispute resolutions and procedures for APAs.

The survey was deployed to Tax Managers/Directors, Chief Finance Officers and Heads of Finance in leading organizations across major industries in Nigeria. Below is the summary of the responses.

Existence of Intercompany TransactionsFrom the survey, 100% of the respondents indicated that they carry out RPTs. This is not surprising, as globally, a larger percentage of MNE Group transactions are with related parties. It therefore stands to reason that compliance with the TP Regulations will be a major consideration for MNE Groups with presence in Nigeria as well as indigenous Group companies with RPTs.

Figure 1: Does your organisation have related party transactions?

100%

0%

Yes No

Figure 5: Does your organization have a dedicated TP team?

70.83%

29.17%

38.89%

61.11%

Finance DepartmentTax Department

Yes No

However, with the increased focus on TP in Nigeria, the need for a dedicated TP team/person as an in-house process owner is becoming more important for taxpayers with significant RPTs. This need has become more imperative with the recently introduced stiff administrative penalties for lateness in filing TP returns, lateness in submission of TP documentation, disclosure of inaccurate information and lateness in submission of other information requested during TP audits.

Apart from complying with TP documentation requirements, it is also important that companies with significant RPTs have dedicated TP personnel within their organizations who will monitor processes geared towards implementing the Group’s TP policies.


Figure 4: Are you aware of the TP compliance requirements in your country?

Figure 5: What is your level of compliance?

Figure 7: Are you aware of the TP compliance requirements in your country

100%

0%

Yes No

20%

38%42%

Low level of compliance Medium level of compliance High level of compliance

Yes No

Awareness of TP Compliance Requirements Following the introduction of TP in Nigeria in 2012, the Nigerian tax authorities underwent a sensitization campaign to educate the public on the requirements with respect to the TP Regulations. Coupled with the introduction of stiff administrative penalties for non-compliance with key requirements of the TP Regulations, it is important to assess if most taxpayers are aware of the various TP compliance requirements.

The survey indicated that all respondents are aware of the TP compliance requirements in Nigeria. This is a positive sign that taxpayers are taking TP seriously and keeping abreast of developments.

However, we observed that the level of compliance with the requirements of the TP Regulations is relatively low, as only 42% of respondents indicated a high level of compliance while 58% indicated a medium to low level of compliance.


Figure 10: Does your organization view TP as a major tax issue facing your industry?

83%

17%

Figure 2: To what extent does the new TP Regulations provide certainty in the treatment of TP issues?

Very High High Medium Low Very Low

44%

46%

6% 4%

1%

This indicates that irrespective of taxpayers’ high awareness of the TP compliance requirements, a sizeable number of them are yet to adopt proactive approaches to ensure full compliance. This survey was prior to the recent introduction of stiff administrative penalties for non-compliance, therefore, we expect the attitude of taxpayers towards compliance to change and become more proactive going forward.

Figure 6: Do you think the current TP laws and practices enhance your company’s ease of compliance?

Yes No

55%

45%

Figure 9: Do you think the current TP laws and practices enhance your company’s ease of compliance?

To help gauge the potential impact of the recently introduced administrative penalties on taxpayers’ perception of the importance of compliance, we conducted another survey of 100 tax managers/finance directors following the revision of the TP Regulations in August 2018. From the survey, majority of respondents (72%) were of the opinion that the revised TP Regulations will ensure greater TP compliance among taxpayers in the country.

Figure 7: The revised TP regulations will ensure greater compliance among taxpayers.

Further, 93% of respondents believe that the revised Regulations provides some level of certainty with respect to the treatment of TP issues.

Figure 1: The revised TP regulations will ensure greater compliance among taxpayers

46%

26%

23%

4%

3%

Strongly Agree Agree Undecided Disagree Strongly Disagree

Figure 8: To what extent does the new TP Regulations provide certainty on the treatment of TP issues?

This implies that the revisions made to the Regulations, especially the inclusion of TP specific penalties will aid in driving compliance among taxpayers.

TP Risk LevelIn an attempt to gauge taxpayers’ perception of TP in Nigeria being a key source of taxation risk, our initial survey prior to the revision of the TP Regulations in August 2018, indicated that 83% of respondents view TP as a major tax issue facing their respective industries.

Figure 9: Does your organization view TP as a major tax issue facing your industry?

Strongly Agree Agree Undecided Disagree Strongly DisagreeYes No

Yes No Very High High Medium Low Very Low


Further, following the revisions in the Regulations, 70% of respondent viewed TP risk as either high or very high with 23% responding that TP risk is medium to very low.

It is no surprise that TP is generally seen to be a high tax risk area. Taxpayers’ perception of riskiness of the discipline has exacerbated with the introduction of administrative penalties in the revised Regulations as evidence by only 3% of respondents viewing TP risk to be either low or very low. The riskiness is likely to be higher for taxpayers with complex transactions and uncertainties in determining the arm’s length prices. Finally, TP risk may be higher for specialized industries where the tax authorities do not have sufficient

Figure 3: How would you rate TP risks (risk of audit, adjustments, penalties) after the release of the revised Regulations?

46%

28%23%

2%1%


Figure 10: How would you rate TP risks (risk of audit, adjustments, penalties) after the release of the revised Regulations?

knowledge of the industry practices and the impact of the pricing of RPTs.

TP Audit ExperienceThe Nigerian tax authorities commenced the audit of companies in 2015 with increased focus on the Fast Moving Consumer Goods (FMCG) industry and downstream sector of the oil and gas industry. Feedback obtained from respondents indicated that 46% are either currently undergoing TP audit or had undergone TP audit while 54% are yet to undergo a TP audit.

Figure 11: Has your company had any TP Audit (Ongoing or Completed)?

Figure 11: Has your company had any TP Audit (Ongoing or Completed)?

54%

46%

Yes No

Yes No



Next, we sought to analyze the key areas of challenges that faced taxpayers that have undergone TP audits or are currently going through TP audits. The survey showed that the highest ranked challenge faced by respondents is the lack of proper understanding of their business by the tax authorities. The second major challenge from the perspective of respondents is the re-characterization of controlled transactions and changes in selected TP methods by the tax authorities. Finally, the respondents indicated that they considered the tax authorities as aggressive during the audit process.

Figure 12: If yes, what challenges did you face with the Revenue Authorities during the audit?

Considering the perceived riskiness of TP to the respondents, the survey sought to determine whether taxpayers use independent Tax advisers to support them during a TP audit or they use in-house capabilities. The survey found that 41% of respondents had engaged external tax advisers to assist with their TP audits while 14% handled it in-house. Considering the fact that most taxpayers do not have dedicated TP teams to handle TP audits, it is understandable that this service was outsourced to external advisers with the requisite expertise.

Figure 13: Did you handle the TP audit in house or did you use a tax advisor?

Since TP audits can be cumbersome and require a lot of human resources, tax authorities typically focus on transactions which are deemed to be high risk. Based on their audit experiences, the respondents ranked the controlled transactions with most focus by the Service in the following order: sale and purchase of goods transaction, procurement arrangements, management and technical services, and loan transactions.

Figure 14: What transaction(s) are the tax authorities viewing as high-risk transactions?

The tax authorities disagreed with the taxpayer's characterisation of transactions and methods of testing the arm’s length nature of the transactions

Others

The tax authority was aggressive

The tax authority lacked proper knowledge of the taxpayer's business

62%54%

46%

31%

Sale and purchase of goods Procurement transactionsManagement and technical services Loan transactionsProvision of intangibles

36%

8%

14%

20%22%

Figure 13: Did you handle the TP audit in house or did you use a tax advisor?

Tax advisor was contracted Not applicableHandled in-house

41%

14%

45%

Handled in-house Tax advisor was contracted Not applicable

Sale and purchase of goods Procurement transactionsManagement and technical services Loan transactionsProvision of intangibles

The tax authorities lacked proper knowledge of the taxpayer’s business

The tax authorities was aggressive

The tax authorities disagreed with the taxpayer’s characterisation of transactions and methods of testing the arm’s length nature of the transactions

Others


Figure 16: How does your company view the possibility of considering litigation as a potential TP dispute resolution option – Are they opposed to it?

90%

10%

Figure 17: Does your TP Regulations have provisions for Advance Pricing Arrangements (APAs)?

62% 38%

Dispute ResolutionConsidering that the application of the arm’s length principle is as much of an art as it is a science, there is usually a high probability that there is going to be some form of dispute between the taxpayer and the tax authority. The sources of dispute may range from economic substance of a controlled transaction, characterization of transaction, method used, financial indicator used, and the comparables used in the benchmarking analysis. Thus, it is important that taxpayers proactively analyze their dispute resolution options prior or during a TP audit. The survey showed that, in the event of a dispute during a TP audit, negotiation was selected as the most preferred dispute resolution option followed by litigation and arbitration. This result is not surprising since most taxpayers in Nigeria are averse to litigation because of its high associated cost, lengthy time to get rulings, and perceived lack of fairness especially at the Tax Appeal Tribunal (TAT) level.

Further analysis revealed that majority of taxpayers (90%) are open to settling TP disputes in court where other dispute resolutions fail. There are currently no decided court cases related to TP issues in Nigeria. However, the FIRS has indicated that about 20 TP cases are in the courts. Where more taxpayers are willing to go to court, taxpayers and tax authorities alike can have more clarity on treatment of complex TP issues. These decided cases can help to build precedence for other future cases.

Figure 16: How does your company view the possibility of considering litigation as a potential TP dispute resolution option – Are they opposed to it?

Advance Pricing Arrangements (APA)The Nigeria TP Regulations is one of the few Regulations in Africa that provides for APAs. This provision allows for taxpayers to engage the FIRS to proactively discuss and agree on appropriate pricing of RPTs. This is supposed to give taxpayers some certainty in the pricing of RPTs that are usually complex or potentially contentious. The survey with respect to APAs revealed that majority of respondents (82%) are willing to enter into APAs with the tax authorities. APAs can be useful tools for avoiding TP disputes and reduce the compliance burden of taxpayers as it allows taxpayers and tax authorities to agree the treatment of TP issues beforehand.

However, the Nigerian Tax authorities are yet to implement this provision or provide detailed guidelines on how taxpayers can apply for APAs.

Figure 17: Will your company be willing to enter into an APA or some form of advanced pricing ruling with the tax authorities?

Yes No

Yes No

Figure 15: What dispute resolution option will your company be most receptive to if there is a disagreement with the revenue authority on key issues during a TP audit? Figure 15: What dispute resolution option will your company be most receptive to if there is a

disagreement with the revenue authority on key issues during a TP audit?

Negotiations Litigation MAP Arbitration APA

16%

50%

9%11%

14%

Negotiations Litigation MAP Arbitration APA


Awareness of the Base Erosion & Profit Shifting (BEPS) ProjectWith the Nigerian Government legislating and implementing aspects of the BEPS Action Points such as CbC Reporting Regulations, it was imperative to assess the level of awareness of BEPS amongst taxpayers. The survey showed that 74% of the respondents are aware of the BEPS project. This shows that taxpayers are keeping abreast of the global trends in the tax space. While all BEPS recommendations may not be TP specific, it is important that taxpayers understand the potential implications for their businesses.

Figure 18: Are you aware of the BEPS project?

ConclusionBased on the survey, it is evident that taxpayers in Nigeria view TP as a high tax risk area for which proactive measures are to be taken to minimize potential additional tax liabilities. With the changes in the revised Regulations such as the introduction of stiff administrative penalties for non-compliance, it is expected that taxpayers level of compliance will significantly increase while taxpayers seek more opportunities to reduce the uncertainty associated with determining an arm’s length price.

Further, with the introduction of CbC Regulations, taxpayers may need to reevaluate their RPTs to ensure that TP risks are minimized for the entire Group.

Figure 19: Are you aware of the BEPS project?

74% 26%

Yes No


Other Sub-Saharan Country Review

GhanaGhana enacted the Transfer Pricing

Regulations, 2012 (L.I 2188) in 2012. Prior to this, the main legislative provisions regarding TP in Ghana were contained in Section 114 (1) (d) of the Internal Revenue Act, 2000 (Act 592) (IRA). The Ghanaian TP Regulations generally follow the OECD Guidelines. The Ghana Revenue Authority (GRA) has a separate unit which handles all TP matters.


The TP Regulations requires a person who engages in transactions with another person with whom that person has a controlled relationship to maintain contemporaneous documentation of the transactions for each tax year. Also, a taxpayer is expected to file returns on income in accordance with Section 72 of the IRA. The returns should be filed annually not later than four months after the year-end. However, the TP documentation is only to be submitted upon request from the GRA.

TP Penalties

The tax due and payable resulting from an adjustment performed by the Commissioner-General will be deemed an additional tax. Apart from this, there are no specific TP penalties in Ghana. However, the provisions of the IRA on fraud, failure to file returns, penalty for under-payment of tax and offences, may apply to the TP Regulation.

BEPS Implementation

Ghana is yet to implement the BEPS Action Points.

APA

Ghana has no APA provisions.

Safe Harbour

There are no safe harbour provisions in Ghana.


KenyaSection 18(3) and 18A of the Income

Tax Act (ITA) provides for the application of the arm’s length principle in Kenya. TP Regulations were introduced in Kenya with the introduction of the Income Tax (Transfer Pricing) Rules, 2006 (herein referred to as TP Rules). The TP Rules apply to transactions between taxpayers resident in Kenya and non-residential related parties (i.e. cross-border transactions) and transactions between a permanent establishment and its head office or other related branches. The Kenyan Revenue Authority (KRA) is responsible for handling TP issues.

TP is a significant area of focus for the KRA. The KRA, in a bid to reduce unlawful TP practices, aggressively conducts TP audits on MNEs in Kenya. TP Documentation Requirements

Taxpayers with transactions with non-resident related parties are required to maintain documentation confirming that their transactions were carried out at arm’s length. The ITA specifies that the Commissioner for Domestic Taxes (CDT) may request taxpayers to provide information as it relates to their RPTs. The documentation should be maintained contemporaneously. The documentation is to be provided to the KRA when requested.

Taxpayers are not required to file specific TP returns. However, according to the corporate tax return format, taxpayers are required to declare the names and addresses of related parties outside of Kenya.

TP Penalties

There are no specific TP penalties. However, the CDT can conduct an audit and make adjustments to the taxable profit and demand taxes, where applicable. Any tax due and unpaid in a TP arrangement is deemed to be an additional tax.

BEPS Implementation

Kenya is yet to implement the BEPS Action Points but it is a party to the Multilateral Convention on Mutual Administrative Assistance in Tax Matters.

APA

Kenya has no APA provision in its TP Regulations.

Dispute Resolution

A taxpayer has the option to appeal through a procedural system established under the Tax Procedures Act and Tax Appeals Tribunal Act. The order of appeal for an adjustment proposed by the tax authorities is as follows:

First level: Tax Appeals Tribunal

Second level: High Court of Kenya

Third level: Court of Appeal; and

Fourth level: Supreme Court of Kenya.

There has been a decided TP court case in Kenya in respect of manufacturing contracts between related parties. The case was decided in 2005 before Kenya enacted the TP rules.The KRA was of the opinion that the manufacturing contract was entered into to reduce profits attributable to the Kenyan entity. The KRA also argued that Section 18(3) of the ITA was the relevant legislation in dealing with the transactions rather than relying on the OECD guidelines and other international statutes. The Court held that the ITA provides no guidelines for such transactions; therefore, other guidelines should be considered in determining the arm’s length nature of the transactions. It is important to note that after this ruling, the Income Tax (Transfer Pricing) Rules were published in 2006.

Safe Harbour

There are no safe harbour provisions in Kenya.


South AfricaTP was introduced in 1995 by the

inclusion of Section 31 in the Income Tax Act No. 58 of 1962 (ITA). Section 31 of the ITA contains the main legislative provisions concerning TP in South Africa. In addition to the ITA, the Tax Administration Act No 28 of 2011 (TAA) governs the manner in which the ITA is administered. The South African Revenue Service (SARS) is the South African tax authority and has a separate unit which oversees TP issues. The unit includes auditors, operational specialist, senior specialist, managers and a senior manager.

SARS is generally perceived to be aggressive with respect to implementing TP regulations to ensure tax compliance by MNEs. The mining, exploration and manufacturing (automotive industry, metal and steel) industries are deemed to be high risk industries with respect to TP in South Africa. The RPTs which SARS tends to focus on include management services, tangible good sales involving distribution, functions and intangible property transactions. The level of compliance with TP rules among taxpayers is considered high.


Taxpayers with aggregated RPTs of a value of ZAR100 million (approximately 7.2 million USD) or more are expected to have in place a TP documentation. If the ZAR100 million (approximately 7.2 million USD) threshold is met, an additional documentation for all transactions of ZAR5 million (approximately 358,000 USD) or more should be put in place. This, together with justification for the pricing of transactions, should be maintained contemporaneously and made available to SARS upon request. Taxpayers have to submit the TP documentation within 21 business days once requested by the tax authorities in an audit or inquiry.

There is no requirement within the regulations for taxpayers to make specific TP returns. However, the income tax return 14 (ITR14) requests the disclosure of cross-border transactions with

connected persons. SARS has a standard TP questionnaire which is issued to taxpayers and which requests additional information relating to the taxpayer’s TP practices.

TP Penalties

There are no specific TP penalties in place but adjustments may be based on the general administrative and understatement penalty provisions. Where a request has been made for the TP documentation from a taxpayer, an administrative penalty of up to ZAR16,000 (approximately 1,147 USD) will be paid for every month that the documentation remains outstanding. The administrative penalty is based on the assessed loss or taxable income for the preceding year.

BEPS Implementation

SARS has implemented Action 13 (Transfer Pricing Documentation) of the BEPS inclusive framework.

Action 13 (Documentation)

South Africa has adopted the OECD recommendations for the submission of CbC Reports. The CbC Reporting rules are imposed on the UPE of an MNE Group that is resident for tax purposes in South Africa. The first filing obligation for a CbC Report in South Africa commenced in fiscal year beginning on 1 January 2016 or later. The CbC Report must be filed within 12 months from the last day of the fiscal year of the MNE Group. Taxpayers, with CGR of greater than ZAR 10 billion or Euro 750,000,000 are obliged to submit a CbC Report as well as a Master File and Local File. Notification is required within 12 months after the last day of the reporting fiscal year of the Group.

South Africa has processes in place that allow for the monitoring of filing entities. There are also penalties in place in relation to the filing of a CbC Report which include penalties for failure to abide by the reporting standards and also penalties for inaccurate information. These penalties are based on the administrative penalty scheme of the TAA.


APA

South Africa does not have APA provisions. The SARS is currentlyreviewing the possibility of implementing an APA program.

Dispute Resolution

In South Africa, a taxpayer can opt to enter into an Advance Dispute Resolution (ADR), where SARS and taxpayers enter into discussion regarding the dispute without prejudice. If the ADR fails, then the matter will be referred to the Tax Court.

There has been no judicial precedent in South Africa regarding the application of the arm’s length principle. However, in the case of Crookes Brothers Ltd v the SARS where the Court delivered a judgement in favour of the SARS on the treatment of shareholders loan.

Safe Harbour

There are no safe harbour provisions in South Africa.



TanzaniaTanzania’s TP legislation is contained

in the Income Tax (Transfer Pricing) Regulations, 2014. Section 33 of the Income Tax Act (ITA) requires that transactions between related parties be conducted at arm’s length. The Tanzania Revenue Authority (TRA) is responsible for handling TP issues.


The Tanzanian TP legislation covers transactions between entities located and subject to tax in Tanzania and related parties located within or outside Tanzania; i.e. the Regulations covers both domestic and cross-border transactions between related parties.

The Regulations requires that taxpayers maintain TP documentation annually and should be in place at the time of filing the income tax return for the year. Taxpayers are required to disclose the amount of sales, purchases and loans made or received from associates in and outside of Tanzania in its tax return. The tax authority may request for the TP documentation, and upon such request, the documentation should be submitted within 30 days from the date of the request.

TP Penalties

A taxpayer who has not complied with the TP Regulation upon conviction is liable to

imprisonment for a term not exceeding six months or to a fine not less than 50 million shillings (approximately 21,736 USD) or both. Non-compliance with the arm’s length principle incurs a penalty equal to 100% of the tax underpayment.

BEPS Implementation

Tanzania is yet to implement the BEPS Action Points.

APA

Tanzania has APA provisions in its TP Regulations. The Regulations permits a taxpayer to request the tax authority to enter into an APA for certain future controlled transactions undertaken over a fixed period of time. The APA is valid for a period not exceeding five years of income but may be reviewed during said period.

Dispute Resolution

Taxpayers can opt to enter into an ADR in Tanzania.

Safe Harbour

There are no safe harbour provisions in Tanzania.


UgandaUganda’s TP legislation is contained

in the Income Tax (Transfer Pricing) Regulations 2011 and under Sections 90 and 164 of the Income Tax Act, Cap 340. The Ugandan TP Regulations is generally in line with the OECD Guidelines. The Uganda Revenue Authority (URA) has a separate unit which oversees TP issues in the country. As at September 2018, the TP unit was made up of 18 staff.

TP is becoming more important to the Ugandan government. Uganda is therefore looking to amend its Double Taxation Agreements (DTAs) which have not been efficient in enforcing TP rules. The URA is also embarking on TP audits of MNEs with 8% of tax revenue projected to come from TP audits by June 2019.

Transactions of focus to the URA include intercompany financing, shared services, intangibles and sales and purchase transactions while high risk industries include the telecommunications, banking, oil and gas, mining and manufacturing industries. TP compliance among taxpayers in Uganda is considered relatively low


The Ugandan TP Regulations requires taxpayers to maintain TP documentation. Taxpayers engaged in controlled transactions aggregating to or exceeding 25,000 currency points (UGX500 million) (approximately 134,000 USD), and MNEs must comply with the documentation requirements. The taxpayer should maintain documents of sufficient quality so as to accurately and completely describe the transfer pricing analysis conducted and efforts to comply with the arm’s length principle. The documentation should include details on the following:

i. the company e.g. ownership and organizational structure showing linkages between the associated parties;

ii. description of controlled transactions including names of participants, scope, type, value of transactions etc.;

iii. methods used for determining the arm’s length prices.

The TP documentation should be prepared at the time the transfer price is established and should be in place prior to the due date of filing the income tax returns for the relevant year. Taxpayers are to submit the documentation to the URA within 30 days of the tax authority’s request. The URA does not require taxpayers to prepare specific TP returns.

TP Penalties

Where a taxpayer fails to comply with the documentation requirements, the taxpayer is liable, upon conviction, to imprisonment for a term not exceeding six months or to a fine not exceeding 25 currency points (currently, UGX500,000) (approximately 134 USD) or both.

BEPS Implementation

Uganda is yet to implement any of the BEPS Action Points. However, the URA is looking into implementing Action 4 (Interest deductions and other financial payments) and Action 13 (TP Documentation with respect to CbC Reports, Master file and Local file). Matters.

APA

Uganda has APA provisions in its TP Regulations. The tax authority may enter into an APA with the taxpayer either alone or together with the competent authorities of the country or countries of the taxpayer’s associate or associates.

Dispute Resolution

Where a taxpayer is dissatisfied with a decision by the tax authorities, the taxpayer is expected to submit an objection to the commissioner of the URA. To settle such issues, the taxpayer can resort to mediation or appeal to the tax appeal tribunal then the high court. There are no decided court cases on TP issues in Uganda.

Safe Harbour

There are no safe harbour provisions in Uganda.


Challenges of theTransfer Pricing Regime in Sub-Saharan Africa (SSA)



While the tax authorities in SSA have made significant progress in

the development and implementation of TP Regulations in their respective jurisdictions, there are some challenges being faced by tax payers/administrators in the region. Based on our review of comments from respondents, we have highlighted some of these challenges below:

1. Lack of Reliable Comparable Data

One of the major challenges facing TP in SSA is the lack of reliable comparable data to benchmark the pricing of RPTs or the profitability of selected tested parties. As TP relies heavily on the correct application of the arm’s length principle, it therefore becomes imperative that appropriate comparables are identified in establishing the arm’s length nature of the pricing of RPTs. Access to information on independent party transactions in SSA is limited due to lack of publicly available data, database insufficiencies etc. The use of foreign comparables and foreign databases therefore becomes necessary; and this affects the reliability of the results.

2. Resource and Skill Constraints

TP is a relatively new field in SSA, as such some of the tax authorities have not developed the adequate internal resources required to handle TP issues. Effective implementation of TP requires adequate technical know-how and competent personnel. As TP is highly controversial and multi-faceted, the need for a wide range of professionals including auditors, economists, accountants and statisticians becomes necessary. Many tax authorities lack the required technical know-how and resources to effectively and efficiently analyse RPTs, use financial databases, as well as sufficient staff to process TP compliance and disputes.

Also, for specialised industries, tax authorities may not have the requisite knowledge of industry practices and the specific TP considerations. There is therefore a disconnect between the business realities of the taxpayers and the expectations of the tax authorities

3. Inadequate Treaty Networks

Few African countries have comprehensive tax treaty networks with other countries. DTAs are essential as they help facilitate automatic information exchange and reduce the risk of economic double taxation. Where countries have entered in DTAs, a taxpayer that has suffered a TP adjustment can have the competent authority of its jurisdiction enter into Mutual Agreement Procedure (MAP) with the competent authority of the jurisdiction of its foreign related party to obtain a corresponding adjustment to ensure that the Group does not suffer from double tax. However, where the treaty network is not well developed, MNEs located in Africa face the risk of double taxation in the event of a TP adjustment.



Transfer Pricing ArticlesWhy an aggressive Transfer Pricing Audit Regime Requires Taxpayers to Adopt Proactive StrategiesAuthor:Dr. JOSH BAMFO is the Partner & Head of the Transfer Pricing Services of Andersen Tax, Nigeria.

With the Federal Government in dire need of increased tax revenue to

fund its expansionary fiscal policy, it is no surprise that the Federal Inland Revenue Service (FIRS) has been perceived in a recent survey of taxpayers to be aggressive with Transfer Pricing (TP) audits. Some of the TP audits have resulted in assessments of additional tax liabilities for multiple years that run into billions of naira. This article makes a compelling case for proactive strategies to mitigate taxpayers’ TP risk exposure in an aggressive TP audit regime.

Why an Aggressive TP Audit Regime?

The Nigerian economy recently recovered from a year-long recession. However, it is imperative that the Federal Government sustains the positive economic growth rate to ensure that the economy attains a steady state high economic growth path that will help consolidate Nigeria’s status as a full-fledged middle-income economy in the medium to long term. To this end, the Federal Government has employed an expansionary fiscal policy to help develop the much-needed infrastructure to create the enabling environment for businesses to thrive. This policy coupled with the significant decrease in tax revenue from the oil sector means that non-traditional approaches to generating tax revenue have become a paramount fiscal policy strategy.

TP is one of such non-traditional sources of raising additional tax revenue that

has garnered much focus by the FIRS. Although it might not be making the headlines, the FIRS has been auditing taxpayers with both cross-border and domestic transactions with related parties to ascertain whether such taxpayers knowingly or unknowingly mispriced these transactions to leave them with lesser taxable profits. Where the FIRS determines that the prices of these related party transactions are not reasonable compared to what would have occurred in a comparable transaction with an unrelated party under similar circumstances, the taxable profit of the taxpayer is adjusted upward and the corporate income and educational tax rates applied to determine appropriate additional tax liabilities over the years being audited. Depending on the materiality of the volume of related party transactions and the resulting size of adjustments to the profits, the assessed additional tax liabilities for some taxpayers for the multiple years under audit can run into billions of naira.

In light of the significant TP risk exposure faced by taxpayers, this article reviews the FIRS’ aggressive TP audit regime and recommends a number of proactive strategies that taxpayers need to adopt to mitigate their TP risk exposure and protect their businesses in a currently fragile economy.

The Status Quo

Since the inception of the Nigeria TP Regime five years ago, most taxpayers have employed a reactive approach in

complying with the Nigeria TP Regulations. For example, for most taxpayers, filing TP returns and preparing TP documentation reports on an annual basis are viewed merely as compliance obligations rather than their first line of TP audit defence. As such, they do not ensure that their TP documentation are robust, TP policies are effectively implemented and monitored, and thorny TP issues are proactively clarified with the FIRS.

Further, much resources and time are not dedicated upfront in preparing for potential TP audits. This means supporting documentary evidence are not tracked prior to TP audits and TP audit readiness reviews are not conducted. As a result, taxpayers are constantly in a reactive mode during TP audits which usually results in delays in providing information requested by the FIRS, thereby contributing to a potential adversarial TP audit process with the FIRS.

Finally, a reactive approach means taxpayers are likely to be oblivious of their sources of TP risks. This is akin to going into a boxing match blind folded; suffering a knockout becomes inevitable.

Clearly, in an aggressive TP audit regime where up to billions of naira is at stake, taxpayers need to employ proactive strategies to help mitigate their TP risk exposure.


Proactivity as a Strategic Approach

This approach starts from a strategic decision on whether to outsource your TP function or not, through to preparing your TP documentation with your future TP audit defence in mind, to having a clear TP dispute resolution strategy from the onset. To this end, I present five proactive strategies that need to be employed by taxpayers to help mitigate their TP audit risk.

Outsourced vs In-house TP Function

The strategic decision to outsource a TP function or have it in-house depends on factors such as size of the business, volume of related party transactions, consistency in implementation of TP policy across jurisdictions, amongst others. Irrespective of the option adopted by a taxpayer, some cardinal factors must be considered as part of your proactive strategy.

Whether you outsource your TP function or develop an in-house TP function, it is imperative that the TP experts have the requisite skills and experience to not only prepare a robust TP documentation,

but to defend the conclusions of the documentation during a TP audit. Thus, having the end game in mind when making these upfront decisions is critical in executing a proactive approach. A weak TP documentation with inconsistencies in relevant financial information that have been disclosed to the FIRS is pretty much indefensible, and the likelihood of the taxpayer suffering material assessment of additional tax liabilities is high.

Operationalization of TP policy

A number of taxpayers have prepared TP policy reports to guide their related party transactions, but have the reports shelved to accumulate dust. Having your TP advisors assist in a proper operationalization of your TP policy is a key proactive strategy to ensure that policies are adhered to in a timely manner. To this end, some of the very large Multinational Enterprises (MNEs) with material related party transactions across the globe embed their TP policies in their IT systems, whilst others perform quarterly or half yearly reviews and ensure that necessary true-ups are made before financial books are closed. Either approach helps to minimise any unpleasant surprises in the financial statements that are inconsistent with the Group’s TP policy.

Collectively Addressing Ambiguous TP Issues Prevalent in the Industry

Often times, there are thorny related party arrangements or transactions that are prevalent in an industry that taxpayers might not be clear on how the FIRS will treat during an audit. Such uncertainty is a potential TP risk, therefore, an effective proactive strategy will be for taxpayers within such industry to collectively, through their industry associations, seek clarification on the thorny issues rather than deal with the uncertainty individually. Examples of such thorny TP issues include procurement arrangements, technical fees and royalties common in the manufacturing industry and cost sharing/contribution arrangements in the upstream oil & gas industry. The probability of successfully getting the FIRS to clarify its treatment of these TP issues is higher if the industry associations take the initiative than if each taxpayer attempts to address them on its own.

TP Audit Readiness Review is a Must

It is absolutely important that the taxpayer proactively prepares for a TP audit by

reviewing all relevant TP documents for consistency, ascertaining TP risk exposure and implementing mitigating actions prior to a TP audit. Some of the relevant TP documents to be reviewed include annual TP returns filed, annual TP documentation reports, financial statements, ledgers of accounts, trial balances, intercompany agreements and invoices.

For taxpayers with in-house TP functions, this is an activity that you may want to consider having an independent TP advisor perform and make necessary recommendations to mitigate the TP risk exposure. Also, for taxpayers that outsource their TP functions, depending on the materiality of the potential TP risk exposure, you may want to consider a different TP advisor to perform an independent review.

If there is a proactive strategy that a taxpayer cannot afford to miss, it is the need for a proactive TP audit readiness review.

Consider all three TP Dispute Resolution Options

Finally, taxpayers should proactively consider all three available TP dispute resolution options: Negotiations, the Decision Review Panel and Litigation, to ensure that there are no surprises throughout the TP controversy process. Even where you have made a decision from the onset to enter into negotiations in the event of a TP dispute, fully implementing all the recommended proactive strategies will most likely put you in a position of strength during such negotiations with the FIRS.

Depending on the nature of the related party transaction and its application in other jurisdictions, a taxpayer may want to consider litigation as an option of last resort to resolve TP disputes to avoid similar scrutiny and positions by tax authorities in the other jurisdictions.

Concluding remarks

TP is a complex discipline with significant areas of contention. Thus, taxpayers cannot afford to be reactive with respect to their dealings with the FIRS. Implementing a coordinated set of proactive strategies from complying with the TP documentation requirements with your audit defence and TP dispute resolution options in mind will go a long way to mitigate your TP risk exposure.

Taxpayers are constantly in a reactive mode

during TP audits which usually

results in delays in providing information

requested by the FIRS, thereby

contributing to a potential adversarial

TP audit process with the FIRS.


One of the all-time bestselling non-fictional books, “The 7 Habits of

Highly Effective People”, identifies two fundamental habits for any individual or firm that seeks to be effective: (i) be proactive; and (ii) begin with the end in mind. Considering that transfer pricing (TP) is arguably the most contentious and litigious area of taxation, one cannot overemphasize the importance of these two effective habits for taxpayers if they want to effectively manage their TP risks.

From a TP perspective, being proactive and beginning with the end in mind means that in addition to other proactive strategies, a taxpayer should assess its TP dispute resolution options from the onset as it complies with the Nigeria TP Regulations. Considering that this approach is often overlooked by taxpayers and their tax advisors, this article seeks to make a compelling case as to why Nigerian taxpayers that seek to significantly mitigate their TP risks should assess their TP dispute resolution options from the onset when they start making disclosures to the Federal Inland Revenue Service (FIRS or the Service).

Why is TP Highly Contentious?

TP is basically the price of transactions between related parties. As a discipline, TP seeks to demonstrate to tax authorities that a taxpayer’s pricing of its related party transactions is reasonable and does not adversely impact its profits and amount of taxes paid. Demonstration of the reasonableness of the TP hinges on the arm’s length principle (ALP) which is usually the main source of contention between taxpayers and tax authorities.

The Arm’s Length Principle

The ALP refers to a situation where a taxpayer prices its related party transactions as if it were dealing with an unrelated party under similar facts and circumstances.

Considering that in reality there are limited cases where taxpayers will transact the same or similar transactions with a related party and an unrelated party under similar facts and circumstance, taxpayers often have to resort to similar transactions between two independent parties or indirect profit-based methods to demonstrate that the ALP has been met. However, the FIRS could disagree with the taxpayer’s presentation of the facts and circumstances relating to the controlled transactions as well as the benchmarking analysis performed to demonstrate the arm’s length nature of the related party transaction.

Economic Substance

Another source of TP dispute is the question of economic substance. This is where a transaction with a related party is

deemed by the FIRS not to have economic substance or commercial basis but entered mainly for tax avoidance reasons. This could result in such expenses disallowed for tax purposes.

These two sources of TP dispute can be exemplified in a number of controlled transactions. One of such is the procurement arrangement where a multinational group (Group) centralizes its procurement function for commercial reasons such as volume discount. Some of the sources of contention include the following: whether there is a clear economic substance associated with the arrangement; the characterization of the procuring entity as an agent or a buy-sell entity; and the appropriateness of the nature of remuneration as it relates to the base and the mark-up.

Having established that TP is a highly contentious discipline, we assess the TP dispute resolution options that highly effective Nigerian taxpayers have to review from the onset as they comply with the TP Regulations.

Assessing TP Dispute Resolution Options

There are a number of TP dispute resolution options that a taxpayer has to review upfront to help effectively mitigate its TP risks.

Negotiations

A taxpayer that disagrees with the FIRS’ assessed additional tax liability resulting from a TP adjustment may enter into further discussions with the Service to hopefully come to a mutually agreeable amount of additional tax liability. This appears to be more of the norm than the exception in the Nigeria TP Regime. Where a taxpayer agrees that its pricing of related party transactions is non-arm’s length or does not have the necessary documentary evidence to support the

Nigeria Transfer Pricing Regime: A Case for Proactive Evaluation of Transfer Pricing Dispute Resolution OptionsAuthor:Dr. JOSH BAMFO is the Partner & Head of the Transfer Pricing Services of Andersen Tax, Nigeria.

Being proactive and beginning with the end in mind means that in addition to other proactive

strategies, a taxpayer should assess its TP

dispute resolution options from the

onset as it complies with the Nigerian TP

Regulations.


arm’s length nature of its related party transactions, then negotiation is the obvious choice.

However, where the taxpayer believes that it has fully complied with the Nigeria TP Regulations and the related party transactions are consistent with the ALP, then this option of negotiation has to be evaluated further. Settling with the FIRS on an amount to be paid without resolving the disputed TP issue can trigger similar TP audits in the future. Moreover, considering the significant level of transparency and exchange of taxpayers’ information amongst tax authorities, where a Group has similar transactions in other jurisdictions, settling with the FIRS can trigger similar TP audits and positions in other jurisdictions. As a result, for some Group companies such as large multinational enterprises (MNEs), negotiations might not always be the preferred approach and other TP dispute resolution options might need to be considered.

Arbitration

An arbitration generally refers to the hearing and determining of a dispute between parties by a person or persons chosen or agreed to by them. With respect to the Nigeria TP Regime, the closest to what will be an arbitration body is the Decision Review Panel (DRP) of the FIRS. Regulation 14(1) of the Nigeria TP Regulations states that, “the Service shall set up a Decision Review Panel (“the Panel”) for the purpose of resolving any dispute or controversy arising from the application of the provisions of these Regulations.”

However, unlike other jurisdictions such as the US where the Arbitration Body of the Internal Revenue Service (IRS) is independent of the TP Department whose assessment is being disputed, the

DRP comprises of the Head of the TP Department of the FIRS and two other employees of the Service who shall be at least of the rank of Deputy Director. This obvious lack of independence of the DRP means that it is likely to be more of a rubber stamp of the position of the TP Department.

Thus, to make the DRP effective as an arbitration body, it should be more independent and should have Key Performance Indicators (KPIs) that include being rewarded for cases closed successfully as done in the US.

Litigation

A taxpayer should proactively evaluate the potential option of going to the court, should negotiations and arbitration fail to yield the desired result in the event of a TP dispute. Such a proactive approach of evaluating all dispute resolution options from the onset will necessitate a robust due diligence in compiling a strong defence file that will enhance the probability of success of litigating.

Considering the significant cost of litigation as well as the uncertainty associated with its outcome, it should definitely be the option of last resort. Moreover, a number of taxpayers are skeptical about the independence and the level of technical knowledge of TP of the judges at the tribunal level in order to have a fair judgement on TP cases.

However, considering that TP as a discipline is more fact-based in demonstrating the reasonableness of the pricing of related party transactions as opposed to the interpretation of tax laws, a well-presented case based on facts with supporting documents should have a high probability of success. It is not surprising that approximately 70% of litigated TP cases in India have been won by taxpayers.

Finally, considering the complexity of TP and the significant number of contentious areas, having complex cases litigated to develop precedence for such transactions is necessary for the success of Nigeria’s TP regime.

Advanced Pricing Arrangement (APA)

An APA is a TP dispute resolution option where a taxpayer proactively engages the FIRS to discuss and agree on the appropriate pricing of highly contentious related party transactions prior to an audit. This helps mitigate the incidence of more costly litigations for both the taxpayer and the Tax Administrators.

Although the Nigeria TP Regulations provides for an APA (Regulation 7), the FIRS has failed to implement this provision six years after gazetting the TP Regulations. In an era of aggressive TP audits, it is imperative that the FIRS starts implementing the APA provision to give taxpayers more options in resolving their TP disputes. This should clearly be part of the Ministry of Finance’s strategic drive for increased voluntary compliance.

Mutual Agreement Procedure (MAP)

A MAP is a procedure which allows the Competent Authorities (CAs) from the governments of the related parties involved in the controlled cross border transactions to interact with the intent to resolve international tax disputes.

However, the MAP is limited to cross border transactions with a foreign related party domiciled in a country that Nigeria has a double tax treaty (DTT) with. For example, where a TP audit results in the local entity’s profitability adjusted upward, the MAP can enable the CAs of the two jurisdictions to negotiate a corresponding adjustment of the profitability of the foreign related party to ensure that the Group does not suffer double taxation.

Concluding remarks

Considering that TP is a highly contentious area of taxation, taxpayers should recognize that there will be a high probability of dispute with the FIRS during a TP audit. Thus, to proactively mitigate a taxpayer’s TP audit risk, taxpayers should have the end in mind by evaluating their TP dispute options upfront and prepare adequately to execute the selected option successfully.


Authors:SULEIMAN YAHAYA is a Senior Manager and EMMANUEL ONASAMI is an Assistant Manager with the Transfer Pricing Services of Andersen Tax, Nigeria.

In September 2012, the Federal Government of Nigeria published in the

Federal Gazette, the Nigerian Transfer Pricing Regulations (NTPR). The Regulations amongst others require tax payers with related party transactions to conduct such transactions at arm’s length. Unlike in some jurisdictions where the scope of Transfer Pricing (TP) is limited to cross border transactions, the NTPR is unique in the sense that domestic related party transactions also fall within its scope. This is to potentially guard against profit shifting among related parties who:

(i) face different corporate tax rates e.g. in the oil and gas industry, companies in the upstream sub-sector pay tax at the rate of 85% or 50% depending on the fiscal arrangement while companies in the downstream and servicing sub-sector pay tax at the rate of 30%;

(ii) enjoy tax holiday e.g. the Pioneer Status Incentive;

(iii) transacts with entities located in/at the Free Trade Zones; and

(iv) are making consistent losses etc.

Thus, where the Federal Inland Revenue Service (FIRS) sustains a TP adjustment during an audit, this may create risks of double taxation for Nigerian Group companies that engage in domestic related party transactions, which is contrary to one of the key objectives of the NTPR that seeks to reduce the risk of economic double taxation risk to taxpayers. Further, unlike cross border transactions where there are explicit guidelines to help mitigate this double taxation risk via a corresponding adjustment, the same can not be said for the domestic transaction. Thus, this article sheds light on this critical problem associated with domestic related party transactions.

Broadly, the types of TP adjustments as a result of a TP audit include the following:

Primary Adjustment

This is an adjustment that a tax administration in a first jurisdiction makes to a company’s taxable profits as a result of applying the arm’s length principle to transactions involving an associated enterprise in a second tax jurisdiction. This type of adjustment is considered to be the usual made by tax authorities in various jurisdictions. For example, where two connected taxable persons conclude either a sale or purchase transaction, and the tax authorities take the view that the income or expense does not reflect the arm’s length principle, then an adjustment can be made to make the transaction consistent with the arm’s length principle.

Primary adjustment can be considered to be the first adjustment made by a tax administration in accordance with the arm’s length principle.

Secondary Adjustment

A secondary adjustment is a consequence of the primary adjustment. It is based on the premise that if the controlled transactions had been undertaken on an arm’s length basis, the situation would have been different from what it is even after making the primary adjustment. Secondary adjustments typically create constructive transactions which may be in the form of dividends, equity contributions or loans.

Corresponding Adjustments

This is an adjustment to the tax liability of the associated enterprise in a second tax jurisdiction made by the tax administration of that jurisdiction, corresponding to a primary adjustment made by the tax administration in a first tax jurisdiction, so that the allocation of profits by the two jurisdictions is consistent.

Both primary and secondary adjustments lead to double taxation. Corresponding

adjustment is what mitigates or eliminates the impact of double taxation.

For cross border transactions, bilateral treaties between/among nations exist to eliminate or at least reduce the possibility of double taxation. The OECD Guidelines has provided a framework known as the Mutual Agreement Procedure (MAP) under which treaty obligations between nations are expected to be fully implemented. It also allows competent authorities of both states to resolve issues of both economic and juridical double taxation. In the extreme case where the competent authorities of both states are unable to resolve the issues within two years of the initiation of the case, the issues shall be settled through an arbitration and the arbitration decision shall be binding on both states.

In practice, and as part of the MAP, a corresponding adjustment can also be undertaken to manage the risk of double taxation. It can be seen from the above that the OECD Guidelines has provided for an effective mechanism to deal with TP adjustments on cross border transactions. There is however no clear guidance on corresponding adjustments for domestic transactions. Unlike countries such as the United States where local Group entities have consolidated accounts and are audited at the Group level, Nigerian Group companies are audited at the company level; hence, need for guidance on how tax administrators perform corresponding adjustments to eliminate double taxation risk.

From the perspective of two or more related Nigerian companies, a controlled transaction that generates income in company A will create cost in company B. Therefore, any TP adjustment in either company A or B without a corresponding adjustment in the other company will lead to double taxation. Unfortunately, the NTPR only provides for corresponding TP adjustments relating to transactions carried out with a related party who is in

Transfer Pricing Adjustment on Domestic Intercompany Transactions: Matters Arising


another country with which Nigeria has a double taxation treaty. This provision does not provide any form of relief for tax payers who have conducted related party transaction locally.

In line with one of the key objectives of the NTPR as contained in Regulation 2(c) which is to “reduce the risk of economic double taxation” it is imperative for the FIRS to grant an automatic corresponding adjustment where a primary adjustment has been sustained for a domestic transaction. Unlike for cross border transactions where the MAP allows for the competent authorities of two or more jurisdictions to resolve issues of corresponding adjustments, the FIRS in the case of domestic transactions is the competent authority for the tax payers involved in the transaction. It can therefore not ignore the fact that a one-sided

adjustment will lead to double taxation on the same stream of income.

In a TP audit regime that is being perceived by some tax payers to be aggressive, it is important for the FIRS to introduce and implement rules that are clear and business friendly. This will complement the ongoing efforts by the Federal Government of Nigeria to improve the ease of doing business in Nigeria of which ease of paying taxes is one of the indices.

It is also important for tax payers to conduct a holistic review of their TP practices within the Group and continue to monitor their TP outcomes at regular intervals to ensure that they remain compliant with the arm’s length principle. This will minimize the need for the tax authority to make primary

and corresponding adjustments thereby reducing the risk of double taxation.

Conclusion

Corresponding TP adjustments is one of the ways to eliminate economic double taxation for tax payers operating within domestic group structures. The ongoing review of the NTPR provides the FIRS with a very good opportunity to include in the revised Regulations, a corresponding adjustment mechanism to effect relief on the counter side of a domestic transaction for which an adjustment has been assessed.

In line with one of the key objectives

of the NTPR as contained in Regulation 2(c)

which is to “reduce the risk of economic

double taxation” it is imperative for the FIRS to

grant an automatic corresponding

adjustment where a primary adjustment has been sustained

for a domestic transaction.


Authors:AMAKA SAMUEL-ONYEANI and SULEIMAN YAHAYA are Senior Managers with the Transfer Pricing Services of Andersen Tax, Nigeria.

Implications of Country by Country Reporting Regulations for Multinational Enterprises in Nigeria

On 19 June 2018, the Federal Inland Revenue Service (FIRS) released the

much-anticipated Income Tax (Country by Country Reporting) Regulations, 2018 (the Regulations) which was published in the official gazette dated 8 January 2018.

The objectives of the Regulations are to provide tax authorities with information about MNEs’ global activities, profits and taxes; provide the FIRS with information to better assess international tax avoidance risks; improve transparency in the tax practices of the MNEs and prevent tax evasion or avoidance through Base Erosion and Profit Shifting (BEPS).

This article reviews the provisions of the Regulations, highlights the compliance requirements as well as implications to taxpayers who are members of Multinational Enterprises (MNEs). It also reviews some of the implications foreseen in our earlier article published in the Business Day newspaper dated 13 February 20181.

Highlights of the Regulations

Some of the key provisions of the Regulations include:

a. Each Ultimate Parent Entity (UPE) of an MNE Group having Consolidated Group Revenue (CGR) of ₦160 Billion (equivalent of €380 Million) or above is required to file a Country-by-Country (CbyC) Report in a specified format with the FIRS on an annual basis, provided that such UPE is resident in Nigeria for tax purposes. The CbyC Report shall be filed not later than 12 months after the last day of the Reporting Accounting Year of the MNE Group. For example, a Group with a 31 December year end will be required to file its first CbyC Report on or before 31 December 2019 with respect to its economic activities in 2018 Financial Year.

b. A Constituent Entity which is not the UPE of an MNE Group that meets the following conditions will also be required to file a CbyC Report with the FIRS within the time specified:

i. the Constituent Entity is resident in Nigeria for tax purposes and

ii. one or more of the following conditions apply:

• the UPE of the Constituent Entity is not obliged to file CbyC Report in its jurisdiction of tax residence;

• the UPE’s tax resident jurisdiction is not part of the Multilateral Competent Authority Agreement (MCAA) which allows for automatic exchange of information across tax jurisdictions or any similar agreement that Nigeria is a part of;

• the FIRS has been notified of a systematic failure arising from the tax jurisdiction of the UPE.

c. A Constituent Entity will not be required to file a CbyC Report if same has been filed through a Surrogate Parent Entity in the format specified in the Regulations.

d. Failure to submit the CbyC Report within the time stipulated shall attract a penalty of ₦10,000,000 in the first instance and ₦1,000,000 for every month in which the default continues.

e. Any Constituent Entity that is resident in Nigeria for tax purposes shall notify the FIRS whether it is a UPE or Surrogate Parent Entity. Where it is neither of the two, it shall notify the FIRS of the identity and tax residence of the Reporting Entity not later than the last day of the Reporting

Accounting Year of the MNE Group. Where a Constituent Entity fails to provide such notification, such entity will be liable to a penalty of ₦5,000,000 in the first instance and ₦10,000 for every day in which the default continues.

When the Regulations are eventually released, it will

require MNE Groups headquartered in

Nigeria with annual global turnover equal

to or exceeding Euros 750million

(or near equivalent in local currency) to prepare and file a CbyC report (in a stipulated format)

with the relevant tax authorities in Nigeria on an annual basis.


Implications of the Regulations to Tax Payers

1. Backdated Compliance Period: The gazette is dated to take effect from the financial year commencing 1 January 2018. Thus, taxpayers who meet the conditions for filing and have UPEs in jurisdictions that are yet to legislate the CbyC Reporting requirement or in jurisdictions where the CbyC legislation does not take effect from 2018 will be required to act as a Constituent Entity and file the Report with the FIRS.

2. Decrease in the Threshold for Compliance: The Organisation for Economic Co-operation and Development (OECD) recommended a CGR of €750 Million for MNEs to comply with the CbyC Reporting. However, the threshold in the Regulations is ₦160 Billion (equivalent to €380 Million). This is contrary to what is generally being implemented in other jurisdictions such as UK, Switzerland, Germany etc. This implies that where an MNE’s

CGR falls between €380 Million and €750 Million, it will still be required to prepare a CbyC Report for the benefit of its Nigerian subsidiary. This responsibility will most likely be passed to the Nigerian entity which may have significant challenges in obtaining the relevant information required to prepare this Report as other entities may push back on providing such information.

3. Imposition of Penalty for Non-compliance: The Regulations imposes significant administrative penalties for non-compliance. This demonstrates how aggressive the FIRS intends to implement the provisions of the Regulations. Thus, taxpayers need to review the extent of their compliance with the Nigerian Transfer Pricing Regulations as the CbyC Regulations could expose non-compliant taxpayers.

4. Increased Scrutiny of Taxpayers’ Global Operations: As stated in our earlier article, with the issuance of the Regulations, the FIRS will have access to more information

on the global operations of MNEs, which may lead to more aggressive Transfer Pricing (TP) audits and investigations. The tax authorities may query transactions with related parties and in extreme cases make adjustments to the income of the local entities if they observe that there are limited economic activities but high profits recorded in the foreign entities especially where those entities are located in tax friendly jurisdictions. Thus, taxpayers will need to review their global operations to ensure that taxes are aligned to economic activities and/or value creation.

With the release of the gazetted Regulations, Nigeria has entered into the Post-BEPS era which has made TP a significant tax risk area which must be adequately managed. Thus, companies should take proactive steps to address all areas of potential risk exposure.

1 https://andersentax.ng/potential-implications-of-country-by-country-reporting-for-multinational-enterprises-in-nigeria/


Authors:SULEIMAN YAHAYA is a Senior Manager and EMMANUEL ONASAMI is an Assistant Manager with the Transfer Pricing Services of Andersen Tax, Nigeria.

With the increase in what is perceived by most taxpayers as aggressive

Transfer Pricing (TP) audits, the anticipated introduction of TP specific penalty era, increasing TP disputes and the need for the Federal Inland Revenue Service (FIRS) to achieve one of the key objectives of the TP Regulations (the Regulations) of providing certainty in TP treatment in Nigeria, it has become imperative that the FIRS implements the provision for Advance Pricing Arrangements (APA) in the Regulations.

This article provides a general overview of APA, reviews the global trends in APA, highlights the benefits of APA and concludes with a call to the FIRS to consider issuing guidelines for tax payers interested in entering into APA.

What is APA?

According to the OECD Transfer Pricing Guidelines for Multinational Enterprises and Tax Administrations, 2017 (OECD Guidelines), An “APA is an arrangement that determines, in advance of controlled transactions, an appropriate set of criteria (e.g. method, comparables and appropriate adjustments thereto, critical assumptions as to future events) for the determination of the transfer pricing for those transactions over a fixed period of time”.

APA requires negotiations between the taxpayer, one or more associated enterprises, and one or more tax administrations. The primary motive of an APA is to improve the efficiency of tax administration by encouraging taxpayers to engage with the tax authorities on all the facts relevant to a proper transfer pricing analysis and to work towards a mutual agreement. Negotiating an APA may consume a lot of time and resources. While completion times vary by country, the average time to process and complete APAs typically runs for up to two years.

Unilateral, Bilateral and Multilateral APAs

Under the unilateral APA, the agreement is reached between the taxpayer and the competent authority in the country where the taxpayer is resident. This agreement is only binding on this country. For example, where an intercompany transaction occurs between two related parties based in Germany and Nigeria respectively, a unilateral APA would only bind one of the countries and would not bind the other. Assuming the APA is reached with the FIRS, it would not be binding on the German tax authority and vice-versa. Thus, a tax payer may want to enter into a unilateral APA with the FIRS if it determines that the source of TP risk exposure is mainly from a Nigerian perspective and would want to achieve certainty in its treatment going forward.

However, under a bilateral APA, both tax authorities, in a round table, would agree the TP methodology and pricing of the related party transactions with the taxpayers. Upon reaching an agreement, the APA is binding on both tax authorities and the taxpayers. This has the advantage of mitigating any potential double taxation risk. Finally, Multilateral APAs are entered into where the transaction involves parties domiciled in more than two tax jurisdictions.

The administration of bilateral and multilateral APAs may be very bureaucratic because of the involvement of more than one tax authority and the difficulty associated with reaching a common ground. However, the OECD Guidelines recommend that wherever possible, an APA should be concluded on a bilateral or multilateral basis between competent authorities through the mutual agreement procedure of the relevant treaty. A bilateral APA also significantly reduces the chance of any profits either escaping tax altogether or being doubly taxed.

Global trends in APAs

United States (US) – The Internal Revenue Service (IRS) published a Revenue Procedure that authorized APA contracts. A taxpayer is given flexibility to request a pre-filing process during which the US taxpayer and the IRS can explore whether the taxpayer’s TP goals are suitable for resolution through the APA process. As a part of the contract, the tax payer agrees to provide annual reports demonstrating the company’s compliance with the APA, particularly highlighting the acceptable application of the chosen TP methodology. The IRS can revoke an APA in the event of fraud.

United Kingdom (UK) – The APA program has existed within a statutory framework since 1999. Although every APA request is considered, Her Majesty Revenue & Customs (HMRC) is more likely to accept APA where the TP issues are complex (i.e. there is doubt as to how the arm’s length standard should be applied), situations where without an APA, there is a high likelihood of double taxation or where the HMRC considers that it is a good use of taxpayer and Governmental resources.

India – A taxpayer may first undertake pre-filing consultations, which may be done on an anonymous basis, prior to filing a formal APA application. Once approved, the taxpayer is required to file an Annual Compliance Report (ACR) during the lifespan of the APA. The ACR may be subject to further review by the Indian Revenue Authority (IRA). The APA may be cancelled or revised in certain circumstances by the IRA or at the request of the tax payer.

China – The method of executing APA in China is similar to what obtains in the US. The stages in the process include preparation, formal application, evaluation and negotiation, and conclusion.

A Case for Urgent Implementation of Advance Pricing Arrangements in Nigeria


Benefits of Implementing APA in Nigeria

APAs generally have become well established tools for risk management, advanced compliance, and an alternative TP dispute resolution. An APA should be a win-win for all the parties involved. Companies that enter in APAs obtain certainty in the treatment of their related party transactions, thereby resulting in voluntary compliance with the arm’s length principle. Similarly, tax authorities can better understand the tax-related issues within the taxpayer’s industry and the concluded agreement ensures dependable future tax revenues. The certainty that APAs offer for both sides is valuable. Some of the specific benefits of APA include:

Certainty for complex, high risk transactions - Perhaps the biggest benefit is the certainty gained for all of the years covered by the APA. It eliminates TP disputes to a large extent, saves the tax administrators the cost of conducting TP audits, appeals and litigation, loss of immediate tax revenue and associated time value of money. Broadly, it also

creates certainty in the country’s tax regime and eventually increases the ease of doing business in an economy.

Avoids double taxation – Whenever a revenue authority in a particular jurisdiction challenges and disputes a pricing policy for an MNE and raises a consequential demand, it leads to double taxation for the Group. The process of APA, especially bilateral/multilateral, seek to do away with this tax risk.

Reduces compliance cost - An APA reduces costs of compliance, audit and appeals over the APA term by eliminating the risk of TP audit and resolving long drawn and time-consuming litigations.

Timely tax revenue - Under an APA, the FIRS agrees the arm’s length pricing for the related party transaction. This ensures that the right taxable amounts are recorded by businesses and taxed timely as opposed to the delayed additional tax revenue resulting from TP audits.

Reduces the burden of record keeping – An APA reduces the burden of record

keeping, as the taxpayer knows in advance the required documents to be maintained to substantiate the agreed terms and conditions of the agreement.

Conclusion

In a recent global survey, MNEs have indicated that TP risks are the second biggest forms of risk apart from changes in legislations. This is due to the high level of subjectivity and uncertainty surrounding the treatment of TP issues. APA is an effective way of managing such uncertainties to help reduce incidence of TP disputes and costly litigations to both parties. It is therefore imperative for the FIRS to fast track the implementation of APA in Nigeria to enable both MNEs and the FIRS reap the associated benefits. The ongoing review of the Regulations presents the FIRS with an excellent opportunity to include a detailed guideline on the process for applying for an APA in the revised Regulations. This will go a long way in improving the business environment in Nigeria and potentially attract the much-needed Foreign Direct Investment (FDI).

The primary motive of an APA is to improve the efficiency of tax administration

by encouraging taxpayers to

engage with the tax authorities on all the facts relevant

to a proper transfer pricing analysis and to work towards a mutual agreement.


Author:Dr. JOSH BAMFO is the Partner & Head of the Transfer Pricing Services of Andersen Tax, Nigeria.

Revised Nigeria Transfer Pricing Regulations - the Good, the Bad & the Ugly

Arguably, the greatest Western movie of all time is Clint Eastwood’s 1966

epic, “The Good, the Bad and the Ugly”. The Good was simply a good and likeable cowboy; the Bad was a bad and mean cowboy; while the Ugly was cunning and mischievous. This movie can be used as an analogy of the three broad categories of the implications of the Revised Nigeria Transfer Pricing (TP) Regulations (the Regulations) for businesses, strictly, from the perspective of the taxpayer.

Regulation 2 stipulates the five objectives of the Regulations. Amongst other objectives, the Regulations seek to protect the taxpayer by mitigating the incidence of double taxation and ensuring certainty in the treatment of TP. Thus, for purpose of this review of the Regulations, where a revised regulation achieves any objective that is beneficial to the taxpayer, it will be deemed to be “good”. Where a provision is expected to have an adverse effect on a taxpayer’s business, it will be perceived as “bad”. Finally, where a revised provision is perceived to be ambiguous in its interpretation/application or could result in double taxation risk contrary to the objectives of the Regulations, it will be deemed to be “ugly”.

With the rules of the review set, the article analyses the “good”, the “bad” and the “ugly” provisions of the Regulations strictly from a taxpayer’s perspective with respect to the implications for its business.

The “Good” Provisions

The revised documentation requirementsThe Regulations provides a more detailed and clearer distinction between the different types of documents that the taxpayer must submit or keep. The documents discussed in detail are: (i) the declaration form that provides the FIRS with general information about the taxpayer’s directors and group entities; (ii) the disclosure form that generally provides the FIRS with information about the value of related party transactions (RPTs) and the methods used to determine

the arm’s length nature of the controlled transactions; and (iii) the contemporaneous documentation that the taxpayer has to prepare on an annual basis with detailed analysis to demonstrate the arm’s length nature of each of its controlled transactions.

The Regulations also introduce the word “contemporaneous” to clearly indicate that the TP documentation should be prepared annually and be in place before the deadline for the submission of tax returns for the financial year that the controlled transaction(s) occurred. Thus, for a company that has a Financial Year End (FYE) of 31 December, its contemporaneous documentation for 2017 FYE should have been prepared before 30 June, 2018.

Finally, the Regulations attempts to balance the cost of compliance on taxpayers and the need for the FIRS to get access to relevant documents. Where the total value of RPT falls below ₦300 Million, taxpayers would not be required to prepare contemporaneous documentation. However, where the FIRS deems it necessary to get access to the documentation, a 90-day timeline will be granted. This has the potential of making this apparently “good” provision a bit “ugly” where a taxpayer enjoying this exemption fails to ensure that its RPTs were still conducted at arm’s length. This could lead to significant adjustments to the taxpayer’s profits during an audit and ultimately result in additional tax liabilities.

Services transaction

Considering that provision of services is one of the most common and complex RPTs in Nigeria, it is welcoming that the Regulations introduce and provide detailed guidance on how it will be analysed by the FIRS. Unlike a tangible good transaction, the taxpayer will need to demonstrate that: (i) the service was actually provided; (ii) the service was beneficial to the recipient; (iii) the recipient would have paid an independent party to provide the service

or would have provided it in-house; and (iv) the fee is reasonable from an arm’s length perspective. It also gives a number of examples of exempt services such as shareholders’ activities that cannot be passed on from a parent or holding company to its subsidiaries.

The “Bad” Provisions

The draconian administrative penalties

The administrative penalties for late filing of TP forms and submission of contemporaneous documentation are not ambiguous, but punitive, thus they can be deemed “bad” to taxpayers. For example, a company that imports finished products from its offshore related party for distribution in Nigeria and fails to file its returns on time will suffer an initial penalty of the higher of ₦10 Million or 1% of the value of the RPT. Where the value of the RPT runs into tens of billions, the minimum penalty will not be less than a ₦100 Million. If that same company fails to submit its contemporaneous documentation within 21 days after the FIRS’ request, the penalty will automatically double. No wonder taxpayers perceive these penalties to be draconian, because they can actually stifle businesses.

The “Ugly” Provisions

Penalties for incorrect disclosures & failure to furnish requested information

Unlike the penalties discussed above, the penalties for incorrect disclosures and failure to submit Information Document Requests (IDRs) timely, have the potential of being applied arbitrarily. For example, where a Financial Statement (FS) has been restated, should the penalty apply to the returns filed based on the prior FS? Further, the FIRS may request documents that are not under the control of the taxpayer, such as documents they need to obtain from foreign related parties. Where the foreign related party refuses to make such documents available to the taxpayer,


should the taxpayer be penalized for failure to furnish such documents?These are obvious concerns about the application of these penalties that appear contrary to the objectives of the Regulations. Limitation of deduction of royalty payments for intangibles

One of the key pillars to ensure the success in the global fight against Base Erosion & Profit Shifting (BEPS) is the coherence in international taxation rules. That is the main reason why the arm’s length principle is globally accepted to help reduce the incidence of double taxation risks. With the Regulations limiting the deduction of royalty payments to a maximum of 5% of EBITDA, there is a strong likelihood of a resultant increase in

the incidence of double taxation. This is not only contrary to the Regulations’ objective, but could impede the country’s focus on ease of doing business. There are a lot of tough lessons we can learn from Brazil with respect to implementing TP rules that are contrary to the globally accepted arm’s length principle.

Custom prices versus Arm’s Length Price

Finally, Regulation 5(8) indicates that the FIRS is not obliged to accept related party import prices reported for customs duty when considering the income tax implications. This may potentially create another risk of double taxation where the FIRS’ valuation is lower. Further guidance is required on how taxpayers can seek redress.

Conclusion

Although the revised Regulations contains a significant number of “good” provisions that provide clarity, there are some “bad” provisions that may be deemed to be punitive and could deter investments. Also, there are provisions that are “ugly” because they may increase double taxation risks or are ambiguous in their interpretation/application. A more consultative approach to the revision of the Regulations would have helped reduce the number of “ugly” and “bad” provisions in the Regulations. Finally, with the government’s focus on ease of doing business, some of these “bad” and “ugly” provisions should be further reviewed to ensure consistency with the government’s macroeconomic objectives.

The Regulations also introduces

the word “contemporaneous” to clearly indicate

that the TP documentation

should be prepared annually and be in place before the deadline for the submission

of tax returns for the financial year that the controlled

transaction(s) occurred.


Transfer Pricing (TP) is anchored on the arm’s length principle. Companies

with Related Party Transactions (RPTs) are required to conduct them in a manner comparable to what would have been obtainable between independent parties carrying out similar transactions under similar circumstances. More importantly, taxpayers have to demonstrate that their transactions have been conducted at arm’s length by carrying out various analysis and documenting such analysis in a report. This is also applicable in Nigeria.

The Nigeria TP Regulations require that taxpayers prepare a contemporaneous documentation which should contain relevant and sufficient information to verify that the pricing of RPTs is consistent with the arm’s length principle. This contemporaneous document, which is to be prepared annually and should be in place prior to the due date of filing of the income tax return for the financial year of interest, is not supposed to be submitted to the Federal Inland Revenue Authority (FIRS) until it is requested for, typically during an audit.

Over the years, taxpayers have faced various challenges with respect to the preparation of the TP documentation, which include the high cost of compliance, difficulties in conducting the analysis required to support the arm’s length nature of RPTs, and timely preparation of the documentation. The FIRS has recognized these challenges and have provided in the revised TP Regulations, situations in which a taxpayer will be exempted from preparing contemporaneous TP documentation.

This article examines such circumstances and explains some salient issues that taxpayers need to be aware of when taking advantage of such provisions.

Companies with total value of RPTs less than ₦300 Million in a financial year

The Nigeria TP Regulations state that where a taxpayer’s total value of RPTs is less than ₦300 Million, the taxpayer can choose not to prepare the contemporaneous TP documentation. This exemption is a welcome development for taxpayers because it will ease their compliance burden, especially for Small and Medium Scale Enterprises (SMEs) who carry out limited RPTs and are seeking to reduce their costs.

It is however important to note that this exemption does not preclude a taxpayer from the requirement to comply with the arm’s length principle in their dealings with related parties. While the TP documentation may not be prepared contemporaneously, the taxpayer is expected to ensure that its RPTs are conducted in a manner consistent with the arm’s length principle. In instances where the FIRS considers it necessary to request for the TP documentation, the tax payer will have up to 90 days to provide the TP documentation demonstrating compliance with the arm’s length requirement. In addition, the exemption does not waive the requirement for taxpayers to prepare and file TP statutory returns annually.

As such, the taxpayer should have available the necessary supporting documents like invoices, contracts and analysis to support the arm’s length nature of its RPTs. This is especially important where the FIRS requests for the TP documentation. While 90 days can be viewed to be a suitable amount of time to prepare the TP documentation, this might prove to be a difficult process where the taxpayer has failed to maintain relevant documents required to carry out the analysis, especially if a long period has

elapsed since the RPT was carried out. In the event that the taxpayer is unable to provide the TP documentation within the specified timeline, the FIRS may impose the applicable administrative penalties

Similarly, there is also the potential risk that where the taxpayer has not kept sufficient information, the taxpayer may be unable to demonstrate compliance with the arm’s length principle. As RPTs are expected to be conducted at arm’s length, the inability to provide the documentation may lead to the FIRS classifying the company as high-risk during their risk assessment process. This could trigger TP audit and lead to potential TP adjustments, which will result in additional tax liabilities.

Another potential risk is the possibility of discrepancies in the disclosures on the TP form and the TP documentation. This may arise in situations where the disclosures in the TP forms at the time of filing do not align with what is included in the TP documentation prepared after the fact.

To manage the potential risks identified, it is important that taxpayers have an internal TP policy at all times to guide the conduct of the RPTs. Also, internal processes should be in place to ensure that the relevant information and documents required to support the arm’s length nature of RPTs are collated contemporaneously in order to aid the preparation of the TP documentation upon request by the FIRS.

Transactions covered by an Advance Pricing Agreement (APA)

APA is an arrangement that determines, in advance of controlled transactions, an appropriate set of criteria (e.g. methods, comparables and appropriate adjustments thereto, critical assumptions as to future events) for the determination of the transfer price for those transactions over a fixed period. The Guidelines on TP

Key Points to Note on the Exemption to the Requirement to Prepare Contemporaneous Transfer Pricing DocumentationAuthors:SULEIMAN YAHAYA is a Senior Manager and ABISOLA AGBOOLA is an Assistant Manager with the Transfer Pricing Services of Andersen Tax, Nigeria.


Documentation published by the FIRS state that where a taxpayer’s RPT is covered by an APA, the taxpayer is exempted from preparing TP documentation to support the arm’s length nature of the transaction. However, the FIRS is yet to provide guidance on the commencement and implementation of APAs in Nigeria.

The process of getting an APA requires the taxpayer and the tax authorities to negotiate based on the facts and circumstances of the controlled transaction and determine the appropriate method and pricing for the transaction in advance. This means that typically the arm’s length treatment of the RTP should be determined and agreed before the transaction is carried out. This provides taxpayers with various benefits including certainty of the treatment of RPTs, reduced compliance costs, and reduced risk of double taxation if it is a bilateral or multilateral APA.

While there are benefits to APA, it is important to note that there may be some associated drawbacks. First, the process of agreeing an APA may be time and resource consuming. Typically, the process of negotiating and agreeing to an APA runs up to two years. Thus, some RPTs are likely to have been concluded during the negotiations period thereby making their pricing uncertain from an arm’s length perspective. Also, there is no assurance that the APA will be approved by the tax authorities. Sensitive information on the conduct of RPTs are disclosed during negotiations; the taxpayer may therefore be unsure of how this information will be used by the tax authorities where negotiations break down.

Transactions Priced in Accordance with the Requirements of Nigerian Statutory Provisions

The FIRS Guidelines on TP Documentation provide for an exemption from preparing contemporaneous documentation for transactions priced in accordance with the requirement of Nigerian statutory provisions. Similar to what applies to transactions covered by APAs, a taxpayer will not be required to carry out analysis to support the arm’s length nature of the RPT.

However, it should be noted that transactions which are not governed by Nigerian statutes but are approved by government regulatory agencies like the National Office for Technology Acquisition and Promotion (NOTAP), Central Bank of Nigeria (CBN), Nigerian National Petroleum Corporation (NNPC) etc. are not covered by this exemption. Taxpayers cannot rely on such approvals to support the arm’s length nature of their RPTs. Such transactions will need to be documented and analyzed in the TP documentation.

Conclusion

The exemptions to the TP documentation requirement analyzed above provide the taxpayer with avenues to reduce compliance costs and also provides certainty in the treatment of RPTs. Taxpayers should take note of these exemptions and the implications for their business. Tax payers should also ensure that they continue to monitor developments in the TP space and take appropriate action in the event new changes are introduced.

It is important that taxpayers have an internal TP policy

at all times to guide the conduct of the RPTs. Also, internal processes

should be in place to ensure that the relevant information and

documents required to support the arm’s

length nature of RPTs are collated

contemporaneously in order to aid the preparation of the TP documentation

upon request by the FIRS.


The Federal Inland Revenue Service (FIRS), in a bid to implement some of the

key recommendations of the Organisation for Economic Co-operation and Development’s (OECD) Base Erosion and Profit Shifting (BEPS) Project, published the Income Tax (Transfer Pricing) Regulations, 2018 (Revised TP Regulations ) in August 2018. The Revised TP Regulations also incorporated major recommendations from the African Tax Administration Forum (ATAF)1.

Among the key revisions introduced is the provision on transactions involving the transfer of rights, technology, know-how amongst other forms of intangibles, under a licensing arrangement (referred to as intangible transactions).

Regulation 7 of the Revised TP Regulations provides guidance on the procedures to adopt in determining the arm’s length remuneration for intangible transactions. However, Sub-regulation (5) provides that for intangible transactions, the allowable deductions for tax purposes shall be limited to 5% of Earnings Before Interest, Tax, Depreciation and Amortization (EBITDA). This provision is inconsistent with the arm’s length principle, the international standard that both OECD member countries and non-member countries (including Nigeria) have agreed to be used for TP purposes by tax administrations and taxpayers.

This article reviews the implications of this provision for businesses in Nigeria and the reasonableness of the restrictions in line with the arm’s length principle, international best practices and the principal Acts governing the Revised TP Regulations.

Inconsistency with the arm’s length principle

Chapter 6 of the OECD Guidelines defines Intangible Asset as something, which is not a physical asset, or a financial asset, which

is capable of being owned or controlled for use in commercial activities, and whose use or transfer, would be compensated had it occurred in a transaction between independent parties in comparable circumstances.

Typically, these assets include both trade intangibles (know-how, trade secrets, technology among others) and marketing intangibles (trademarks, tradenames, customer lists among others).

Intangibles are recognized as revenue drivers because they directly affect the premium a product commands in the market and the product’s market share. For example, marketing intangibles such as brand awareness is a critical value driver in the FMCG industry. Hence, in accordance with arm’s length conditions relating to the exploitation of intangibles as stipulated in Regulation 7 of the Revised TP Regulations and Chapter 6 of the OECD Guidelines, an arm’s length remuneration commensurate with valuable functions such as the development, enhancement, maintenance, protection and exploitation of the intangibles should be determined to compensate the relevant entities. Typically, the remuneration for the license of comparable intangibles in transactions between independent parties is based on a percentage of the revenue generated by the user (Licensee) of such intangible (i.e. percentage (%) of revenue). This connotes that owners of the intangible are rewarded based on a percentage of the variable that the intangibles drive, typically revenue generated from the sale of products or services.

Thus, the restriction introduced in the Revised TP Regulation is inconsistent with the arm’s length principle requirement of Regulation 4 the Revised TP Regulations as well as Regulation 7(1). Further, it is contrary to international best practice and does not align with the arm’s length principle as defined within the OECD guidelines.

Contravention of the Principal Acts

In Nigeria, Regulations are instruments used by government agencies and parastatals to provide administrative guidance/clarifications on specific provisions of a principal Act. Such Regulations are required to be in complete alignment with the provisions of the principal Act.

Additionally, Regulation 19 of the Revised TP Regulations provides that “Where any inconsistency exists between the provisions of any applicable Law, Rules, Regulations, the UN Practical Manual on Transfer Pricing and the OECD documents referred to in Regulation 18 of these Regulations, the provisions of the relevant domestic tax laws shall prevail.”

It is important to mention that the Revised TP Regulations is only an instrument to provide administrative guidance/clarifications on the specific anti-avoidance provisions of the Companies Income Tax Act (CITA), Personal Income Tax Act (PITA), Petroleum Profits Tax Act (PPTA), Value Added Tax Act (VAT) and Capital Gains Tax Act (CGTA). Hence, any provision of the Revised TP Regulations that is inconsistent with the provisions of these Acts may be considered non-applicable.

Section 22 (2b) of CITA provides that “transactions between persons one of whom either has control over the other or, in the case of individuals, who are related to each other or between persons, shall be deemed to be artificial or fictitious if in the opinion of the Board those transactions have not been made on terms which might fairly have been expected to have made by persons engaged in the same or similar activities dealing with one another at ARM’S LENGTH.”

The CITA provides that transactions between related parties should be based on the arm’s length principle and does not provide for a limitation of the tax-deductible amount. Thus, it may be argued that Regulation 7(5) of the

Revised Transfer Pricing Regulations: Analysing the Impact of Limiting Tax Deductibility of Expenses Relating to Intangible Transactions Authors:AMAKA SAMUEL-ONYEANI is a Senior Manager and EMMANUEL ONASAMI is an Assistant Manager with the Transfer Pricing Services of Andersen Tax, Nigeria.


Revised TP Regulations is inconsistent with the Principal Acts and as such taxpayers should focus on applying the arm’s length principle for intangible transactions.

Potential Adverse Impact on Taxpayers, MNE Groups and the Nigerian Economy

Many businesses in Nigeria rely significantly on intangibles in the day-to-day running of their business and such restrictions could significantly affect them. One of such impacts is the increased risk of double taxation.

MNEs typically operate in other jurisdictions that adopt international best practices. As such, the tax authority in the jurisdiction of the licensor, may insist on the application of the arm’s length principle in determining the appropriate remuneration for the license of a valuable intangible to its related party in Nigeria. Where the Nigerian entity has paid the full amount for the intangible transaction

but has restricted its expense deduction to 5% of EBITDA, this will result in double taxation where the arm’s length remuneration is higher in absolute value than 5% of EBITDA. This clearly defeats the objective of the Revised TP Regulations, which is to reduce the risk of double-taxation for taxpayers.

Secondly, it is interesting to note that the Revised TP Regulations did not restrict the royalty income attributable to Nigerian taxpayers. This implies that the arm’s length principle will be applicable when determining the royalty income for intangibles, but will not be applicable if it is a royalty expense.

Thirdly, as MNEs seek to operate in an environment where the tax system is fair and consistent with international standards, the restrictions may impact how investors view the ease of doing business in Nigeria.

Brazil had adopted similar TP provisions that were inconsistent with the arm’s length principle in its TP laws passed in 1997. The laws restricted the expense deductible on various related party transactions including imports, exports, services, loans etc. This has led to some MNEs doing business in Brazil suffering significant double taxation on their related party transactions with some of these cases resulting in TP litigation. Although the Rules were revised in 2014 to provide clarity to the taxpayers, the tax uncertainty has adversely affected an already ailing Brazilian

economy. It is not surprising that there has been significant push from MNEs for Brazil’s TP laws to align with the OECD arm’s length principle.

Taking cue from the Brazilian experience, it is fair to assert that this provision is inconsistent with the current government’s key policy of improving the ease of doing business in Nigeria and thereby help attract the much- needed Foreign Direct Investment (FDI) in spurring higher economic growth.

Concluding remarks

In FIRS’ bid to ensure that it has the appropriate tools to protect the tax base of Nigeria and increase internally generated revenue via TP, it must ensure that its periodic revisions to the regulations are consistent with the key objectives, align with the principal Acts, consistent with international standards, and are in line with the macroeconomic policy of stimulating high economic growth.

Thus, it is important that the FIRS re-assesses the impact of Regulation 7(5) vis-a-vis the objectives of the Revised TP Regulations and hopefully make the necessary change to make it consistent with the arm’s length principle.

In Nigeria, Regulations are

instruments used by government agencies and parastatals to provide

administrative guidance/

clarifications on specific provisions of a principal Act. Such Regulations

are required to be in complete alignment with the provisions of the principal Act.

1. ATAF is an international organization which provides a platform for cooperation among African tax authorities


About the Survey This report presents our findings from our survey of Nigerian taxpayers. The survey was administered to persons in various positions including Tax Managers/ Directors, Chief Finance Officers and Heads of Finance in leading organisations across major industry sectors.

Prior to the release of the revised TP Regulations, the survey was administered on 24 participants while after the release of the Regulations, 100 people participated in the survey.

The survey elicited responses in respect of TP compliance, TP risk assessment, TP audit, dispute resolution as well as APA.


ContactsDr. Joshua BamfoPartner & HeadTransfer Pricing Services (+234) 818 175 [email protected]

Amaka Samuel-Onyeani Senior ManagerTransfer Pricing Services (+234) 802 281 [email protected]

Suleiman YahayaSenior ManagerTransfer Pricing Services (+234) 708 323 [email protected]

Emmanuel OnasamiManagerTransfer Pricing Services (+234) 803 843 [email protected]

This document is made by Andersen Tax LP, a Nigerian member firm of Andersen Global. This document contains confidential material proprietary to Andersen Tax LP. The materials, ideas, and concepts contained herein are to be used exclusively to assist the Client with services discussed in the document.

© 2019 Andersen Tax LLC and Andersen Tax LP. All Rights Reserved. Andersen Tax LP, is a Nigerian member firm of Andersen Global, a Swiss verein comprised of legally separate, independent member firms located throughout the world providing services under their own name or the brand “Andersen Tax” or “Andersen Tax & Legal.”

Printed in Nigeria.

Publication name: Review of Transfer Pricing Development in Africa- A Study of Key Sub-Saharan African Countries

Publication date: March 2019

Abisola AgboolaManagerTransfer Pricing Services (+234) 805 942 [email protected]

Nigeria

Kenya

Noreen WanyoikePartner(+254) 722 607 [email protected]

Tanzania

Angola

Formosa OliveiraManaging Partner(+244) 932 156 [email protected] and Associates

Mozambique

Isalcio MahanjaneManaging Partner(+258) 843 012 [email protected] Isalcio Mahanjane Lawyer & Associates

Cote d’ Ivoire

Pancome MondonManaging Partner(+225) 059 996 [email protected] Mondon Conseil International

Joseph ThogoPartner(+255) 767 377 [email protected] African Law Chambers

Ethiopia

Dr Dadimos Haile Senior Research Advisor and Business Development Head (+251) 969 959 [email protected] Kiros Law Office

Uganda

Steven MugishaDirector(+256) 772 494 [email protected]


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