INCOME TAX

(TRANSFER PRICING)
REGULATION No 1,
2012 IN NIGERIA

Presented by

CHRISTOPHER ANOZIE
 Abstract

Rapid advances in technology, transportation

and communication have given rise to a large
number of multinational enterprises (MNEs)
which have the flexibility to place their
enterprises and activities anywhere in the
world.

The fact is that a significant volume of global

trade nowadays consists of international
transfers of goods and services, capital (such
as money) and intangibles (such as
intellectual property) within a MNE group;
such transfers are called “intra‐group”
transactions. There is evidence that intra‐
group trade is growing steadily and arguably
accounts for more than 30 per cent of all
international transactions.

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ABSTRACT CONT’D
Furthermore transactions involving intangibles
and multi‐tiered services constitute a rapidly
growing proportion of an MNE’s commercial
transactions and have greatly increased the
complexities involved in analyzing and
understanding such transactions.

The structure of transactions within an MNE

group (the component parts of which, such
as companies, are also called “associated
enterprises” in the language of transfer
pricing) is determined by a combination of
the market and group driven forces which
can differ from the open market conditions
operating between independent entities.
Thus, a large and growing number of
international transactions are no longer
governed entirely by market forces, but by
forces which are driven by the common
interests of the entities of a group.

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 DEFINITION OF TRANSFER PRICING

• Transfer pricing” generally refers to how related

parties price goods and services, assets, intellectual
properties, loans, guarantees and other commercial
transactions between them.

So why does it matter?

• The prices paid for goods or services delivered or

received have a direct impact on the profits of the
seller and buyer and by implication, on tax.
• Where it is cross border, the taxman becomes even
more concerned because effectively any mispricing
would mean a shift of tax base from one jurisdiction to
another or worse still, to a tax haven.

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 Why Transfer Pricing in Nigeria?

• To ensure that Nigeria is able to tax on an appropriate

taxable basis corresponding to the economic activity
deployed by multinational enterprises in Nigeria, including in
their transactions and dealings with associated enterprises;

• To provide the Nigerian authorities the tools to fight tax

evasion through over or under-pricing of controlled
transactions between associated enterprises;

• To reduce the risk of economic double taxation;

• To provide a level playing field between multinational

enterprises and independent enterprises doing business in
Nigeria; and

• To provide multinational enterprises with certainty of

transfer pricing treatment in Nigeria.

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Commencement and Legal Basis

·In October 2012, the FIRS released TP Regulations

to give specific and
•clear guidance on the application of the arm’s
length principle (anti
•avoidance) sections of the tax laws.
·Commencement – the commencement date is 2nd
August 2012 and
•are applicable to basis periods commencing after
this date.
·Legal basis - the TP regulations are based on the
following anti
•avoidance sections:
 Section 15 of the Petroleum Profits Tax Act, 2004.
 Section 22 of the Companies Income Tax Act,
2004 (as amended by the Companies Income
Tax (Amendment) Act 2007.
 Section 17 of the Personal Income Tax Act, 2004.

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 Person Covered

•The Regulations apply to transactions between “Connected Taxable

•persons” (CTPs) which is broadly defined in the regulations to
include
·individuals
·permanent establishments created by head offices
·subsidiaries
·associates
·partnerships
·joint ventures and trusts

•to the extent that they participate directly or indirectly in the

management, control or capital of another; or both of which have
common control, management or shareholders.

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 Applicable transactions

Any transaction which affects the profit or loss of a related company (both
domestic and cross border) including:
·Purchase of raw materials or finished products
·Contract manufacturing
·Sale of goods or procurement of services
·Management/Technical services
·Representative offices
·Intellectual property – royalty. Trademark agreements
·Intercompany loans (receivables/payables), quasi-equity
·Guarantees, indemnities, commitments or other obligations
·Recharges on a cost/cost plus arrangement
·Secondment arrangements, allocation of payroll costs
·Transfer, acquisition or lease of assets

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 Documentations

Documentation requirements

• Taxpayer are to prepare documentation and analysis justifying pricing

of their related party transactions within 21 days of a request from the
FIRS. This would generally include details of related party
transactions, pricing method, reasons for selection of TP method,
information on comparable etc.

• Annual declarations on related party transactions must be made on a

standard form at the time of filing the annual tax returns including
specific statements on whether or not documentation exists.

Applicable TP Methods - These are:

 The comparable uncontrolled price method (CUP)
 The resale price minus method (RPM)
 The cost plus method (CPM)
 The profit split method
 The Transaction Net Margin Method
 Any other method prescribed by the FIRS

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 Advance pricing agreement (APA)

·An advance pricing agreement (APA) is an ahead-of-

time agreement between a taxpayer and a tax authority
on an appropriate transfer pricing methodology (TPM) for
a set of transactions at issue over a fixed period of time
(called "Covered Transactions").

·Pricing methods can be agreed in advance for

certainty of tax treatment for a maximum of 3 years.
·No application or processing fee is payable to the
FIRS for APAs Minimum threshold is an annual
transaction value of N250 million (approximately USD 1.6
million).
·APAs are subject to cancellation by either the
taxpayer or the FIRS under certain circumstances.

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 OTHER HIGHLIGHTS

Relevance of OECD and UN guidelines - The regulations state that the TP

provisions will be applied in a manner consistent with the arm’s length principle
in Article 9 of the UN and OECD Model Tax Conventions on Income and Capital;
and the OECD Transfer Pricing Guidelines for Multi-national Enterprises and Tax
Administrations. This has the potential of creating issues in the event of a conflict
between interpretations contained in the UN manual and the OECD guidelines. In
the event of conflicts, the regulations provide that the relevant tax laws shall
prevail.
Historical transactions and retrospective application - The regulations will not
apply retroactively. However, since the requirement to apply the arm’s length
principle has always existed in the tax statute, the FIRS may challenge a taxpayer
to demonstrate that transactions undertaken before the introduction of the
transfer pricing regulations have been carried out at arm’s length. Generally a
back-duty audit can go as far back as 6 years.

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 Other Highlights

Offences and fines - TP documentation must be in place at

the time of filing tax returns. There is no separate penalty
regime for non compliance with the transfer pricing rules.
Penalties and interest as provided in the relevant Acts will
however apply to TP adjustments.

Dispute resolution - The Regulations require FIRS to set up

a Decision Review Panel (DRP) for the purpose of resolving
any dispute or controversy arising from the application of the
TP regulations. A taxpayer who disagrees with the ruling of
the DRP on any TP matter has recourse to the courts and
not the Tax Appeal Tribunal in the first instance.

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 BENCHMARKING AND COMPARABILITY FACTORS

• It is expected that there will be difficulties in

identifying comparable within Africa due to lack of
reliable data.
• Taxpayers may therefore use comparable and arm’s-
length benchmarks from outside Nigeria or Africa
with appropriate adjustments.
• For the purpose of determining whether the pricing
and other conditions of a controlled transaction are
consistent with the arm’s length principle, the
taxpayer, in the first instance, must ensure that the
transaction is comparable with a similar or identical
transaction between two independent persons
carrying on business under sufficiently comparable
conditions.
• Where differences exist, reasonably accurate
adjustments are made in order to eliminate or reduce
the effects of such differences.

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 OTHER HIGHLIGHTS

Official language - The official language for purposes of documentation under the regulations is
English language. Where a document is not in the English language, the FIRS may request for a
translation, prepared and certified by a sworn translator or a person approved by the FIRS, at
the expense of the taxpayer.

Document retention - All records including ledgers, cashbooks, journals, cheque books, bank
statements, deposit slips, paid cheques, invoices, stock list and all other books of account, as
well as data relating to any trade carried out by the taxpayer, inclusive of recorded details from
which the taxpayer’s returns were prepared for assessment of taxes, are to be retained for a
period of 6 years from the date on which the return relevant to the last entry was made.

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POSSIBLE IMPACT OF TRANSFER PRICING

Some of the group’s related party transactions include:

Technical Fee
Product Sales
Operating costs;
Secondee fees;
Interest expense on finance lease; and
Interest expense on shareholder loans

There is a risk that adequate attention may not have

been paid to the pricing and implementation of pricing
policies in respect of these related party transactions.
Consequently it is possible that results may not be in
line with the arm’s length principle .

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 SALES TO RELATED PARTIES

·Are 3rd party and related party sales prices the same?

·What is the justification for the difference in pricing?

·How will the ALP be demonstrated in respect of these transactions?

·How will the transactions be benchmarked?

·Are royalties being charged on these sales?

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 TECHNICAL FEES

·What are the specific services?

·Can the benefit to the company be clearly
demonstrated?
·Is there evidence of the receipt of these
services?
·Is there any duplication?
·Is a percentage of profit or turnover fee
defendable? Should it be a
•cost plus instead?

·What benchmarks can be used?

·Are there written agreements with NOTAP
approval, so what is the
•issue?

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 LOANS

Key issue is the risk that a loan could be re-characterised as equity and all interest
disallowed
For instance, loans considered as not required or arising from un- commercial terms
may be re-characterised as equity and interest becomes non tax deductible.
Considerations:
 Will the loan have been made at all in the absence of the special relationship
between the parties?
 Amount of the loan and interest rate
 Repayment terms of the loan
 Rights of enforcement
 Capitalisation of the borrowing company
 Use financial variables and ratios

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 SHARED COSTS

• Direct allocations preferable though not always practical e.g. R&D

performed by central R&D department for a specific company or client
versus internal payroll costs/ vendor provided
• Reasonable allocation keys should be developed and documented
• The application of a profit mark up will depend on the services provided
• Are the costs incurred in the production of income, or wholly and
exclusively incurred in the production of the income?
• Are the prices paid based on an arm’s length basis?
• Is there supporting documentation to prove this?
• What are you paying - the issue here is characterisation, what services
were rendered
• Absence of payment does not necessarily mean that no services have
been rendered

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 In Conclusion

• Transfer pricing is not, in itself, illegal or abusive. What

is illegal or abusive is transfer mispricing, also known as
transfer pricing manipulation or abusive transfer pricing.
– Tax Justice Network

• Transfer pricing is NOT just an anti-avoidance measure

or a tax planning tool, it is a compliance obligation.

• With increasing pressure on public finance, countries

want to protect their tax base whilst not impeding cross-
border trade and FDI.

• Therefore many countries have introduced or are

introducing TP regulations to address trade mispricing.

• TP awareness is on the increase - tax administrators are

paying close attention to compliance through
documentation requirements, reviews/audit, and TP
specific penalty regime.

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 Table of Contents

4 MEANING AND OBJECTIVES OF CBCR

6 OBJECTIVES OF THE REGULATIONS

7 BACKGROUND

10 FILING OBLIGATION

17 CONTENTS OF CbC Report

18 TIME OF FILING

19 NON COMPLIANT AND PENALTIES.

1) MEANING AND OBJECTIVES OF CBCR

• The disclosure by a company, either publicly or in confidence to

governments, of tax figures and, potentially, other financial data
on a country-by-country basis.
• CbC reporting is part of Action 13 of the Organisation for
Economic Cooperation and Development (OECD) Base Erosion
and Profit Shifting Action Plan, which is intended to promote
greater transparency for tax administrations by providing them
with relevant and reliable information to conduct high-level
transfer pricing risk assessments.
• the term “CbC Reporting” means the country-by-country report
should be filed annually by the Reporting Entity in accordance
with the laws of its jurisdiction, and to include the information
required to be reported under such laws covering the items and
reflecting the format set out in the September 2014 Report, as
may be amended following the 2020 review contemplated
therein.

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a. INCOME TAX (CBC REPORTING) REGULATIONS, 2018 (“THE
REGULATION”)

The CbC Regulations is issued by the

Federal Inland Revenue Service (“the
Service”) in pursuant to Section 61 of the
Federal Inland Revenue Service
(Establishment) Act, 2007 and paragraph 2
of Section 5 of the Multilateral Competent
Authority Agreement on County-by-Country
Reporting (CbC MCAA), and shall be
effective for the Reporting Accounting year
of MNE groups beginning on or after 1st
January, 2018.

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b. OBJECTIVES OF THE REGULATIONS
• This is to provide the Tax Authorities with
information about Multinational Enterprises’
(“MNEs”) global activities, profit and Taxes:
• To provide Tax Authorities with information to
better access international tax avoidance risk.
• Improve transparency of MNEs in their tax
practises.
• Prevent tax evasion or avoidance through base
erosion and profit shifting

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 2) BACKGROUND
a. OECD Base Erosion and Profit Shifting, Action Point 13.

• Base Erosion and profit Shifting is most times referred to as BEPS.

• Base erosion and profit shifting (BEPS) refers to tax avoidance
strategies that exploit gaps and mismatches in tax rules to artificially
shift profits to low or no-tax locations. Under the inclusive
framework, over 100 countries and jurisdictions are collaborating to
implement the BEPS measures and tackle BEPS.
• The BEPS Action 13 report (Transfer Pricing Documentation and
Country-by-Country Reporting) provides a template for multinational
enterprises (MNEs) to report annually and for each tax jurisdiction in
which they do business the information set out therein. This report is
called the Country-by-Country (CbC) Report.

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BACKGROUND CONTD
b. Multilateral Competent Authority Agreement (MCAA)

The purpose of the CbC MCAA is to set

forth rules and procedures as may be
necessary for Competent Authorities of
jurisdictions implementing BEPS Action
13 to automatically exchange CbC
Reports prepared by the Reporting Entity
of an MNE Group and filed on an annual
basis with the tax authorities of the
jurisdiction of tax residence of that entity
with the tax authorities of all jurisdictions
in which the MNE Group operates.

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 BACKGROUND CONT’D
c. This Regulation give effect to the provision of
• The Country by Country Multilateral Competent
Authority Agreement (CbC MCAA) signed by
Nigeria on the 27th January, 2016 and ratified by the
by the Federal Executive Council on the 3rd August
2016.

• Section 8(1)I, Section 8(1)t, 8(2), 26 and 27(i) of the

Federal Inland Revenue Service Establishment Act
2007.

• Section 58 and 60 of the Company Income Tax Act,

CAP C21 Law of Federation of Nigeria, 2004 (as
amended)

• Section 31 and 32 of the Petroleum Profit Tax Act,

CAP P13, Law of Federation of Nigeria, 2004 (as
amended).

• Regulation 6, of the income Tax (Transfer Pricing)

Regulation No 1, 2012.

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3) FILING OBLIGATION - who is affected?

The Entities that should file CbCr in Nigeria.

a) Ultimate Parent Entity
Definition
The term “Ultimate Parent Entity” means a
Constituent Entity of an MNE Group that meets the
following criteria:
• it owns directly or indirectly a sufficient interest in
one or more other Constituent Entities of such
MNE Group such that it is required to prepare
Consolidated Financial Statements under
accounting principles generally applied in its
jurisdiction of tax residence.
• there is no other Constituent Entity of such MNE
Group that owns directly or indirectly an interest
described in subsection (i) above in the first
mentioned Constituent Entity.

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 Who is affected? Cont’d

Criteria for filing a CbCr in Nigeria.

• The Ultimate Parent Company must be resident in Nigeria

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 REPORTING ENTITIES FOR NIGERIA CbCr cont’d

b) CONSTITUENT ENTITY
Definition
• any separate business unit of an MNE Group that is
included in the Consolidated Financial Statements for
financial reporting purposes, or would be so included if
equity interests in such business unit of an MNE Group
were traded on a public securities exchange
• any separate business unit that is excluded from the
MNE Group’s consolidated financial statements solely on
size or materiality grounds and
• any permanent establishment of any separate business
unit of the MNE Group included in (i) or (ii) above
provided the business unit prepares a separate financial
statement for such permanent establishment for financial
reporting, regulatory, tax reporting or internal
management control purposes;

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 WHO IS AFFECTED? CONT’D

Criteria for filing a CbCr in Nigeria.

• The Constituent Entity must be resident in Nigeria.
• The Ultimate Parent Entity of the MNE Group is not
obligated to file a Country-by-Country Report in its
jurisdiction of tax residence.
• The jurisdiction in which the Ultimate Parent Entity is
resident for tax purposes has a current International
Agreement to which Nigeria is a party but does not
have a Qualifying Competent Authority Agreement in
effect to which Nigeria is a party by the time specified
in regulation 9 of these Regulations for filing the
Country-by-Country Report for the Reporting
Accounting Year, or
• There has been a Systemic Failure of the jurisdiction
of tax residence of the Ultimate Parent Entity which
has been notified by the Service to the Constituent
Entity resident for tax purposes in Nigeria.

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c. Who is affected? Cont’d – other highlights

Surrogate Parent Entity” means one Constituent Entity of the MNE

Group that has been appointed by such MNE Group, as a sole
substitute for the Ultimate Parent Entity, to file the country-by-country
report in that Constituent Entity’s jurisdiction of tax residence, on
behalf of such MNE Group.

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d) EXEMPTION FROM FILING OF CbCr

• If any member of the MNE group has made available a Country-by-

Country Report conforming to the requirements of regulation with respect
to such Accounting year.
• If Surrogate Parent Entity files the Country-by-Country Report described in
this Regulation with the tax authority of its jurisdiction of tax residence on
or before the date specified in Regulation.
• If the jurisdiction of tax residence of the Surrogate Parent Entity has a
Qualifying Competent Authority Agreement in effect to which Nigeria is a
party by the time specified in Regulation for filing the Country-by Country
Report for the Reporting Accounting Year;
• the jurisdiction of tax residence of the Surrogate Parent Entity has not
notified the Service of a Systemic Failure;
• The MNE Group is excluded from filing CbCr if the total Consolidated
Revenue is less than =N=160,000,000,000

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 - Notification Obligation
• Any constituent of MNE Group that is
resident for the tax purpose in Nigeria
shall notify the service whether it is
Ultimate parent or Surrogate parent
entity, not later than the last date of the
reporting accounting year of such MNE
group.
• Where a Constituent Entity of an MNE
group that is resident for Tax purpose in
Nigeria is neither a Ultimate Parent entity
or surrogate Parent, It shall notify the
Service the tax residence of the reporting
entity, no later than the last date of the
reporting Accounting year of such MNE
group.

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4) CONTENTS OF CbC REPORT
(Guidelines for Country by Country Reporting in Nigeria No
2018/01 Date Issued 3rd July 2018)
Tangible fixed
Accumulated assets excluding
Tax Jurisdiction
earnings cash and cash
equivalents

Current year
corporate
Revenue from
income tax Employees
related parties
accrued 8. Stated
capital

Corporate
Revenue from income tax paid
third parties (including
withholding tax)

Total revenue Profit before tax

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5) USES AND CONFIDENTIALITY OF CbC INFORMATION

• Assessing high-level transfer pricing risks and other base erosion

and profit shifting related risks in Nigeria.
• Assessing the risk of non-compliance by members of the MNE
Group with applicable transfer pricing rules, and
• Economic and statistical analysis, where appropriate.
• The Service shall preserve the confidentiality of the information
contained in the Country-by-Country Report at least to the same
extent that would apply if such information were provided to it
under the provisions of the Multilateral Convention on Mutual
Administrative Assistance in Tax Matters.

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6) TIME FOR FILING

The CbC report required by these

regulation shall be filed not later
than 12 months after the last day of
the Reporting Accounting year of the
MNE group.

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6) NON COMPLIANT AND PENALTIES.
Late filing of CbC report.
• Where a reporting entity fails to file
CbC report to the Service on or
before the date specified in
regulation 9 of these regulations,
the ‘Service’ shall impose shall
impose an administration penalty of
=N=10,000,000 in the first instance
and =N=1, 000,000 for every month
in which the default continues.
Filing an incorrect an false CbC report.
• Where the reporting entity files an
incorrect or false CbC report, the
company shall impose
administration penalty of
=N=10,000,000

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NON COMPLIANT AND PENALTIES CONT’D
Failure to provide Notification
• Where a constituent Entity of an MNE
group that is resident for tax purposes
in Nigeria fails to provide the
notification specified under
regulations 6 of these regulations. The
Service shall impose an administrative
penalty =N=5, 000, 000 in the first
instance and =N=10, 000 for every
day in which the default continues.

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References.

• Nigerian Tax law

• Federal Inland Revenue Service Establishment Act (FIRSEA) 2007
• http://www.firs.gov.ng/Tax-Management/Pages/Country-by-Country-Repo
rting.aspx
• http://www.oecd.org/tax/beps/country-by-country-reporting.htm

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