Nigeria releases new transfer pricing regulations - EY
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7 September 2018
Global Tax Alert
News from Transfer Pricing
Nigeria releases
new transfer
pricing regulations
Executive summary
NEW! EY Tax News Update: Nigeria’s Federal Inland Revenue Service (FIRS) recently released The Income
Global Edition Tax (Transfer Pricing) Regulations, 2018 (new Regulations), with an effective
EY’s new Tax News Update: Global date of 12 March 2018. The new Regulations replace the Income Tax (Transfer
Edition is a free, personalized email Pricing) Regulations, 2012 (old Regulations) and shall apply to financial years
subscription service that allows beginning after 12 March 2018.
you to receive EY Global Tax Alerts,
newsletters, events, and thought The new Regulations were issued to reflect some of the main transfer pricing (TP)
leadership published across all areas related changes introduced to the 2017 edition of the Organisation for Economic
of tax. Access more information Co-operation and Development Transfer Pricing Guidelines for Multinational
about the tool and registration here. Enterprises and Tax Administrations (OECD TPG) and the United Nations
Practical Manual on Transfer Pricing for Developing Countries (UN TP Manual).
Also available is our EY Global Tax
Alert Library on ey.com. Significant penalties for non-compliance are included in the new Regulations.
This is considered a significant step taken by the FIRS towards ensuring
increased compliance and implementation of the arm’s-length principle in
a manner consistent with the OECD TPG and UN TP Manual.2 Global Tax Alert Transfer Pricing
Detailed discussion Guideline on pricing of commodity transactions
The TP Regulations provide taxpayers with specific guidance
The issuance of the new Regulations is in line with the global
on pricing of commodity transactions with connected
trend whereby various countries are taking legislative steps
persons. While the old Regulations were silent on the ways to
to incorporate the OECD’s Base Erosion and Profit Shifting
price commodity transactions, the new Regulations prescribe
(BEPS) final recommendations in their domestic laws. These
rules that should apply to transactions involving import and
updates are the first to be made to the TP Regulations in
export of commodities.
Nigeria since their introduction in August 2012.
In the case of import or export, the quoted prices for similar
Key highlights of the changes and updates in the new
commodities that are listed on an international or domestic
Regulations are:
commodity exchange market on the dates of the transactions
shall be the transfer prices for tax purposes if the agreed
Purpose
prices with connected persons are higher for import or lower
The new Regulations have expanded the objectives to give for export, unless the taxpayer provides sufficient evidence to
effect to the provisions of the Capital Gains Tax Act and Value justify the reasons why the quoted prices should be adjusted
Added Tax Act in addition to the legislation already covered to reflect the arm’s-length principle.
in the old Regulation namely the Personal Income Tax Act,
Companies Income Tax Act and Petroleum Profits Tax Act. With respect to exports of commodities to related parties
for subsequent resale to third parties, the transfer prices
Covered persons for tax purposes will be the prices at which the commodities
The new Regulations replaced the concept of “connected are sold to third parties (if the resale prices are higher than
taxable persons” with a more extensive definition of the quoted prices), unless sufficient evidence is provided to
“connected persons” to include persons covered in the justify the reasons the resale prices should be adjusted to
old Regulations and considered to be related, associated reflect the arm’s-length principle.
or connected under the Capital Gains Tax Act; the UN and
OECD Model Tax Conventions; the OECD TPG, UN TP Manual
Intragroup services
and the Avoidance of Double Taxation Agreements between The new Regulations provide that in justifying the arm’s-
Nigeria and other countries. length nature of an intragroup service charge, taxpayers
must conduct the benefit test to establish that services
Use of statistical measures for the determination of are actually rendered, as well as ensure costs associated
arm’s-length remuneration with shareholders’ activities are not considered in the
The new Regulations specifically provide for the interquartile determination of the intragroup service charge. Further, it
range to be considered as the arm’s-length range where includes conditions under which allocation criteria will be
the application of the most appropriate method results in a considered reasonable.
number of financial indicators under uncertain circumstances
in the degree of comparability between the controlled Pricing of controlled transactions involving
transactions and uncontrolled transactions. intangibles
The new Regulations include detailed guidance on the
Arm’s-length nature of customs valuations determination of arm’s-length conditions for controlled
The FIRS will independently review prices of imported goods transactions involving the exploitation of intangibles.
as prices applied for customs valuation purposes will not It focuses on the contractual arrangements as well as
automatically be accepted by the FIRS as arm’s-length prices performance or control of functions performed, assets
for TP purposes. Although this has been the FIRS practice employed and risks assumed in relation to the development,
during the years of applying the old Regulations, introducing enhancement, maintenance, protection and exploitation of
this provision to the new Regulations will essentially give the intangibles in determining the arm’s-length reward from
effect to the established practice in this regard. the exploitation of the intangibles.Global Tax Alert Transfer Pricing 3
With this provision, the tax deductible payments for the The TP documentation is still expected to be contemporaneous
transfer of rights for an intangible is capped at 5% of earnings (be in place before the due date for filing income tax returns)
before interest, tax, depreciation and amortization (EBITDA). and submitted upon request within 21 days.
The “Capital-rich, low function companies” concept Materiality threshold
Capital-rich low function companies that do not control a. TP documentation
the financial risks associated with their funding activities The new Regulations stipulate that connected persons
will only be entitled to a risk-free return. Profits or losses with total intercompany transactions of less than
associated with the actual risk assumption will be allocated NGN300 million may choose not to maintain the
to the entities that manage those risks and have the capacity contemporaneous TP documentation. However, they
to bear them. must prepare and submit the TP documentation within
90 days from the date of receipt of a notice from FIRS.
Annual TP forms
The new Regulations set out specific provisions for the filing b. Advance Pricing Agreement (APA)
of the TP Declaration and Disclosure forms. While the old Regulations provided a threshold set at
NGN250,000,000, the new Regulations did not set out
A connected person is expected to complete and file a TP
any threshold. Also, the new Regulations incorporate
Declaration form providing details of all its connected persons
a section to clarify that the provision on APA will be
resident in Nigeria or elsewhere no later than 18 months
effective upon the publication of relevant notices and
after incorporation or within 6 months after the end of the
guidelines by the FIRS.
accounting year, whichever is earlier.
An updated declaration form is also required to be completed Non-compliance and penalties
and filed with the FIRS where there is a merger or acquisition In the old Regulations, penalties were imposed based
of up to 20% of an entity or its parent; or any other change in on the respective tax laws affected. However, the new
the structure or arrangement of the entity. Regulations have introduced several material penalties for
non-compliance with some provisions and for incorrect
Where there is an appointment or retirement of a director
disclosures. These penalties include:
of a connected person, a notification is to be made to the
FIRS as part of the TP declaration and submitted within • Failure to file TP declaration: NGN10 million1 in the first
six months of the financial year end. instance and NGN10,000 for every day in which the default
continues.
TP documentation • Failure to file updated TP declaration/provide notification
Prior to the release of the new Regulations, there was a about directors: NGN25,000 for every day in which the
contemporaneous TP documentation requirement and default continues.
the FIRS through an appendix to letters sent to taxpayers • Failure to file TP disclosure: the higher of NGN10 million
requesting TP documentation prescribed guidance on or 1% of the value of related-party transactions not
information to be contained in the documentation. The disclosed and NGN10,000 for every day in which the
new Regulations incorporate the Master File and Local File default continues.
Concept as recommended under BEPS Action 13 on TP • Incorrect disclosure of transactions: the higher
documentation. of NGN10 million or 1% of the value of related-party
It includes a schedule on information and documents to be transactions incorrectly disclosed.
maintained in the TP documentation. It reserves the right of • Failure to file TP documentation upon request: the
the FIRS to request additional information and documents, higher of NGN10 million or 1% of the value of related-party
which are deemed necessary in the course of an audit transactions not disclosed and NGN10,000 for every day
exercise. in which the default continues.4 Global Tax Alert Transfer Pricing
• Failure to furnish information/documentation upon Implications
request: 1% of the value of each related-party transaction
for which information/document relates and NGN10,000 The updates and changes to the new Regulations are
for every day in which the default continues. far reaching and could have significant impacts on the
TP affairs of affected taxpayers. While the exemption of
Note that the FIRS has the power to grant extensions for some taxpayers (based on materiality threshold) from the
filing deadlines under certain conditions, but full penalties contemporaneous TP documentation requirement is a
will apply, as if no extension was granted, where a taxpayer positive development, there will be increased burden of proof
is unable to meet up with the extended timelines. for taxpayers who are part of “large multinational groups”
and with significant values of related-party transactions.
Safe harbor
The new Regulations incorporate updates on safe harbor,
The safe harbor provisions in the old Regulations relating
penalties for non-compliance, and the materiality threshold,
to statutory or regulatory prescribed prices have been
among others, to clarify some gray areas under the old
removed. The new Regulations provide that the FIRS may
Regulations. However, the limit introduced on tax deductible
publish specific guidelines on safe harbors from time to time
payments for royalties is one of the potential areas of
and only prices of controlled transactions in line with such
concerns considering its impact for taxpayers (beneficiaries
published guidelines will qualify as a safe harbor.
of rights in an intangible) which are loss making or low profit
Dispute resolution margin due to valid commercial reasons.
The new Regulations give the head of the FIRS TP Division Finally, companies are encouraged to take the necessary
the right to refer a transfer pricing matter to the Dispute steps to proactively examine the potential gaps that may
Resolution Panel (the Panel), upon receiving a taxpayer’s arise from full implementation of the new Regulations, as
objection to an assessment. This stands in contrast to the well as perform an in-house review to help mitigate the
provision in the old Regulations which delegates the right related tax risk exposures. In addition, considering the
to refer an assessment from the FIRS to the Panel to the magnitude of the penalties that could arise in the event of
taxpayer. default in filing after the due date or incorrect disclosures,
it is important that companies ensure they not only prepare
The membership of the Panel has been increased from three
and file the required documents, but also do so accurately
to five members, including a representative of the legal
to avoid imposition of penalties.
department of the FIRS with no member below the rank
of a Deputy Director.
Endnote
1. NGN refers to Nigerian Naira. Based on data from Morningstar on 3 September 2018, NGN1 is equivalent to US$0.0028.Global Tax Alert Transfer Pricing 5 For additional information with respect to this Alert, please contact the following: Ernst & Young Nigeria, Lagos • Akinbiyi Abudu akinbiyi.abudu@ng.ey.com • Temitope A Samagbeyi temitope.samagbeyi@ng.ey.com • Chinyere Ike chinyere.ike@ng.ey.com • Temitope Oni temitope.oni@ng.ey.com • Oluwatumininu Familusi oluwatumininu.familusi@ng.ey.com • Adefemi Olaore adefemi.olaore@ng.ey.com Ernst & Young Advisory Services (Pty) Ltd., Africa ITS Leader, Johannesburg • Marius Leivestad marius.leivestad@za.ey.com Ernst & Young LLP (United Kingdom), Pan African Tax Desk, London • Rendani Neluvhalani rendani.mabel.neluvhalani@uk.ey.com • Byron Thomas bthomas4@uk.ey.com Ernst & Young LLP, Pan African Tax Desk, New York • Dele A. Olaogun dele.olaogun@ey.com
EY | Assurance | Tax | Transactions | Advisory About EY EY is a global leader in assurance, tax, transaction and advisory services. The insights and quality services we deliver help build trust and confidence in the capital markets and in economies the world over. We develop outstanding leaders who team to deliver on our promises to all of our stakeholders. In so doing, we play a critical role in building a better working world for our people, for our clients and for our communities. EY refers to the global organization, and may refer to one or more, of the member firms of Ernst & Young Global Limited, each of which is a separate legal entity. Ernst & Young Global Limited, a UK company limited by guarantee, does not provide services to clients. For more information about our organization, please visit ey.com. Transfer Pricing Group © 2018 EYGM Limited. All Rights Reserved. EYG no. 011029-18Gbl 1508-1600216 NY ED None This material has been prepared for general informational purposes only and is not intended to be relied upon as accounting, tax, or other professional advice. Please refer to your advisors for specific advice. ey.com
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