Digest TRANSFER PRICING REGULATIONS IN NIGERIA

Transcription

1 Digest TRANSFER PRICING REGULATIONS IN NIGERIA As Nigeria continues to experience the influx of multinational companies setting up branch offices or operating subsidiaries and the globalization of trade, the need for an effective regime that would ensure the maximization of benefits of business operations in Nigeria and prevent tax avoidance became apparent. Transfer pricing is the general term for the pricing of cross-border, intra-company transactions between related parties. Transfer pricing (TP) is a tool employed by the Government to ensure that prices of intra-company transactions are set at the right prices to avoid mis-pricing and potential loss of tax revenue. TP refers to the price at which divisions within an organization or a group value the cost of goods and services exchanged, or the attributable cost of transactions across the various segments of an enterprise. It represents the value recorded in the books of accounts as the worth of the transacted goods or services by an organization, and it is usually determined by standardized methods i.e. methods adjudged to be at arm s length. The concept of TP is to essentially recognize the value attributable to services rendered and goods supplied within an organization s network. However, events by the Multinational Enterprises (MNEs) and major accounting/legal firms networks revealed that corporations tend to utilize TP as a tool to shift profit to tax havens or jurisdictions with lower tax implication, a term referred to as Base Erosion and Profit Shifting (BEPS). The reason for such manipulation is to increase the overall profitability of the entities. Succinctly, an abuse of TP became a tool of manipulating taxation across several jurisdictions. In view of the above, and the need for tax equity, there arose a need for TP Regulations to avert, or possibly eliminate tax evasion and tax avoidance practices and prevent excessive unethical profiteering by the MNEs. TP Regulations are also aimed at correcting perceived injustice emanating from TP manipulations. these Regulations are principally enacted to statutorily empower tax authorities in host nations (i.e. In Nigeria - Federal Inland Revenue Services- FIRS) to control the TP adopted by related entities for tax purposes, particularly where the TP is perceived not to fairly reflect the principles of arm s length dealing. The Federal Government enacted the Income Tax (Transfer Pricing) Regulations 2012 which adopted the OECD model on Transfer Pricing. The main objectives of the 2012 TP Regulations are: To provide an opportunity for the home country to benefit in sharing of profits generated from the transactions and dealings of related taxable persons. To eliminate artificial transactions and prevent profit flight out of Nigeria by connected taxable persons. To eliminate double taxation with countries with which Nigeria has a double taxation treaty. To prevent unfair trade advantage resulting from transactions by related entities and to allow equity for counterpart business enterprises in Nigeria. To guarantee certainty of transfer pricing treatment for taxable entities in Nigeria. 1The negative list includes arms and ammunition; narcotic drugs and psychotropic substance; para-military and military wears

2 With the apparent inadequacies associated with the 2012 TP Regulations, the Federal Inland Revenue Service (FIRS), in exercise of powers conferred on it by Section 61 of the Federal Inland Revenue Service (Establishment) Act No.13 of 2007, updated the Income Tax (Transfer Pricing) Regulations, 2012 (Old Regulations), with an effective date from March 12, The new TP Regulations incorporate updates from the 2017 OECD s TP Guidelines and the African Tax Administration Forum s (ATAF). The 2018 TP Regulations expanded the scope of the earlier regulation which was enacted to prevent tax avoidance as contained in the existing income tax laws comprising of Companies Income Tax Act (CITA), Petroleum Profits Tax Act (PPTA) and Personal Income Tax Act (PITA) to include Capital Gains Tax Act (CGTA) and Value Added Tax Act (VATA). It empowers the FIRS to adjust the profits resulting from related party entity s transactions to reflect the market price and charge corresponding VAT and CGT elements where applicable. For example: exchange of goods and rendering of services, transfer of intangible items and franchising, leasing of equipment, financial transactions within entities and any other transaction capable of impacting on profit. OBJECTIVE KEY FEATURES OF THE 2018 TP REGULATIONS The objective of the new TP Regulations is hinged on the need to ensure that profit derivable from economic activities relating to connected parties and other parties are appropriately taxed in Nigeria and creating a level playing ground for Multinational Enterprises (MNEs) to transact their business while safeguarding against tax evasion. SCOPE OF APPLICATION The scope of the new Regulations were expanded to give effect to the provisions of the following legislations - Personal Income Tax Act, Companies Income Tax Act, Petroleum Profits Tax Act, Capital Gains Tax Act and Value Added Tax Act. The Regulation was also stated to be applicable to related parties transactions and provides guidelines for their economic activities. CROSS BORDER COMMODITIES The deemed price for import or export of commodities was stated to be the quoted prices for similar commodities listed on an international or domestic commodity exchange on the date of the transaction. Where the transaction involves connected persons and the items are eventually sold to third parties, the deemed transaction price for tax purposes shall be the price at which the commodity is sold to an independent third party if the price is higher than the quoted price of the exchange. An adjustment shall be allowable where there is sufficient evidence to justify the basis for the adjustments. ACCEPTABLE TRANSFER PRICING The Regulations provide that transaction prices that are based on the consistency of the arm s length principle shall be deemed acceptable. For example, price arrived at through any of the standardized principles such as Comparable Uncontrolled Price (CUP) method, Resale Price method, Cost Plus method etc. Quote Taxes, after all, are dues that we pay for the privileges of membership in an organized society." Franklin D. Roosevelt

3 INTRAGROUP SERVICES TP DECLARATION Considerations for intra group services shall be deemed acceptable if it is identifiable, offered based on need and if it increases the economic value of the recipient entity. INTANGIBLES The Regulations provide that Deemed value involving the exploitation of intangibles shall be subjected to contractual agreements taking cognizance of the functions performed, management and control, risks, benefits derivable and other value enhancing parameters. Tax deductions for any payments for the exploitation rights to intangible assets will be limited to 5% of earnings before interest, tax, depreciation and amortization (EBITDA). CAPITAL-RICH, LOW FUNCTION COMPANIES A connected person shall make a declaration of all its connected persons resident in Nigeria or elsewhere not later than 18 months after incorporation or within 6 months after the end of the accounting year whichever is earlier; and shall provide an update on declaration where there are economic changes resulting from merger or acquisition of up to 20% of an entity or its parent; or any other economic/commercial change in the structure or arrangement of the entity. CHANGE IN DIRECTORS STATUS Where there is an appointment or retirement of a director of a connected person, a notification shall be made to the FIRS as part of the TP declaration and submitted within 6 months of the financial year end. TP DISCLOSURES Capital-rich low function companies that do not control the financial risks associated with their funding activities shall be entitled to no more than a risk-free return. Profits or losses associated with the actual risk assumption will be allocated to the entities that manage those risks and have the capacity to bear them. COMPARABILITY FACTORS AND CONNECTED PERSONS For a price to be deemed acceptable, transaction price shall be comparable to similar or identical transactions relating to two independent parties carrying out business in comparable conditions. A connected person shall be assumed where a party exercises control or influence capable of resulting in an economic gain. For every year of assessment, a connected person shall disclose transactions covered under the Regulations within 6 months after the end of the accounting year or no later than 18 months after incorporation, whichever is earlier. TP DOCUMENTATION A connected person shall prepare a Master File and Local File as part of their TP documentation in addition to a detailed list of information and analysis contained in the schedule to the Regulations.

4 INFORMATION AND DOCUMENTATIONS A connected person shall maintain contemporaneous documentation consistent with the Regulations. Entities whose total value of intra company transactions is less than N300m are exempted from this requirement but, they must render the documentation to the FIRS within 90 days of receipt of a notice to that effect. INFRACTION Failure to file a TP declaration Failure to file an updated TP declaration/provide notification about Directors Failure to file a TP disclosure Making Incorrect disclosure of transactions PENALTY N10million in the first instance and N10,000 for every day the failure continues. N25,000 for every day in which the default continues. The higher of: N10million or 1% of the value of related party transactions not disclosed; and N10,000 for every day in which the default continues. The higher of: N10million or 1% of the value of related party transactions incorrectly disclosed. DUE DATE A connected person may apply in writing to FIRS for an extension of time within which to comply with the provisions of the Regulations. However, documentation is expected to be in place before the due date for filing income tax returns and is to be submitted upon request within 21 days. Failure to file TP documentation upon request Failure to furnish information/documentation upon request DISPUTE RESOLUTION The higher of 10million or 1% of the value of all related party transactions; and 10,000 for every day in which the default continues 1% of the value of each related party transaction for which information/document relates; and N10,000 for every day in which the default continues. The Regulations provide that the FIRS shall set-up a Decision Review PENALTIES FOR NON-COMPLIANCE The exorbitant penalties introduced in the new TP regulation makes it important for entities to be familiar with its provisions so as to prevent any possible sanction(s). These penalties include: Panel (DRP) for the purposes of dispute resolution. The panel shall be headed by the Head of the Transfer Pricing and representative from the legal department and two other people not below the rank of Deputy Director. The decision of the panel on any adjustment shall be final except where a tax payer decided to challenge the stand in a court of law. CONCLUSION Quote "The power of taxing people and their property is essential to the very existence of government." James Madison Whilst the updated TP Regulations would provide the platform for ensuring equity in the administration of taxes in Nigeria, it is important for consulting/advisory firms and entities with related parties to get acquainted with the provisions of this Regulations to avoid any possible sanction. The underlining advantages of the Regulations notwithstanding, regards must be had to the provisions of the Regulations which do not provide the requisite incentives for foreign investments in Nigeria.

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