Article

Transfer Pricing Compliance in Nigeria: What Next?

Part 2

Transfer pricing (TP) audit is a bit different from normal tax audits. It primarily focuses on reviewing transfer pricing returns and supporting TP documentation submitted by taxpayers who had engaged in related party transactions in the preceding year of assessment. This approach is necessary in order for the tax authority to independently confirm the arm's length nature of the related party transactions as documented in the TP reports, and to arrive at an appropriate TP adjustment, if any or necessary.

Transfer pricing (TP) audit is a bit different from normal tax audits. It primarily focuses on reviewing transfer pricing returns and supporting TP documentation submitted by taxpayers who had engaged in related party transactions in the preceding year of assessment. This approach is necessary in order for the tax authority to independently confirm the arm's length nature of the related party transactions as documented in the TP reports, and to arrive at an appropriate TP adjustment, if any or necessary.

Basically, a transfer pricing audit would involve FIRS (TP auditor) carrying out an independent investigation on the taxpayer's TP documentations. Afterwards, an audit report is prepared showing compliance, or otherwise with the arm's length principle. In a situation where the related party transactions do not comply with the arm's length principle, the TP regulations empower the tax authority to make necessary adjustments to the arm's length price and this may result in additional tax liability to the affected taxpayer.

Any dispute or controversy arising from adjustments made to a taxpayer's taxable profit, as a result of the TP audit is resolved by a Decision Review Panel (as provided in the TP Regulations). The members of this Panel are the Head of the TP division of FIRS and two other deputy directors. However, an aggrieved taxpayer, who is not satisfied with the additional assessment, is entitled to seek further judicial review.

In preparation for a tax audit, the taxpayer is advised to:

  • Manage its TP risks proactively
  • Ensure contemporaneous TP documentation  and policy is in place
  • Proper disclosure of related party transactions and pricing arrangements
  • Develop controversy strategy
  • Consider industry and other relevant developments
  • Generally comply with the provisions of the TP Regulations
  • Consider obtaining FIRS rulings and/or APA if possible

    During TP audits, the taxpayer is advised to:
  • Prepare well in advance
  • Engage the services of a TP advisor as early as possible
  • Make ready the required documentations for review.
  • Establish structured communication with tax auditor
  • Manage presentations, negotiations and settlement with the TP auditor

The documents which the TP auditor may request during TP audits include:

  • Country specific TP documentation report
  • TP policy papers and country risk assessment
  • Legal agreements related to inter- company transactions, and employment agreements
  • Intercompany billings, invoices and debit notes
  • Minutes of (annual) general shareholder's meeting and minutes of the meetings of board of directors
  • Intellectual property right registrations and policy statements
  • Description of key personnel functions and structure
  • Corporate income tax returns
  • Financial statements
  • Other documents such as Withholding Tax (WHT) and Value Added Tax (VAT) returns on intercompany settlements, depreciation/ amortization schedules, shareholder register, bank account statements and intercompany correspondences.
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