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Transfer Pricing Compliance in Nigeria: What Next - Part 1

Many companies in the past one and half year have sought to put in place all that is required to be compliant with the new Regulations amidst scant understanding of how FIRS would apply the Regulations, lack of technical capability, most appropriate method, comparability databases, formats of Transfer Pricing (TP) documentations and policy documents and extra costs associated with engaging the services of TP advisors

With the filing of the first set of transfer pricing returns by companies in respect of their 2013 financial year transactions, there is no longer any doubt that Nigeria is serious both about the Income Tax (Transfer Pricing) Regulations No 1, 2012 (the Regulations) and its implementation.

This seriousness has also been underscored by the recent directive by Federal Inland Revenue Service (FIRS) that requires non-resident companies (NRCs) to file their tax returns on actual results basis.  This dispenses with the hitherto deemed profit basis on which such returns had been filed.
 
Many companies in the past one and half year have sought to put in place all that is required to be compliant with the new Regulations amidst scant understanding of how FIRS would apply the Regulations, lack of technical capability, most appropriate method, comparability databases, formats of Transfer Pricing (TP) documentations and policy documents and extra costs associated with engaging the services of TP advisors.

FIRS has also established a TP division equipped with dynamic and technically versatile professionals who have been given the mandate to drive TP compliance in Nigeria.  Early this year, FIRS sent out letters in batches to many companies operating within thier group structures demanding that they submit their TP policy documents. This further reinforced the fact that FIRS was determined to ensure significant compliance with the new Regulations.

FIRS has organized directly and continued to participate in awareness seminars, workshops etc for taxpayers, issued guidelines on filing of TP returns and enlisted the help of external professional bodies in conducting research and developing new strategies for TP implementation in Nigeria.  Only a few months ago, FIRS hosted a TP sensitization workshop where it made the following further clarifications on positioning for TP compliance in Nigeria:

  • Income Tax Returns, without the TP Returns do not constitute 'complete' compliance with the tax returns filing provisions of Section 54 of Companies Income Tax Act (as amended)
  • PEs and non-resident companies are expected to file complete tax returns as indicated above for their Nigerian operations. The existing practice whereby PE entities file tax returns based only on schedules of income earned from Nigerian operations is a breach of the provisions of the tax laws and would no longer be accepted by FIRS
  • FIRS would soon commence issuing demand letters to all companies that failed to file their TP returns with the 2014 year of assessment income tax returns
  • NOTAP and any other regulatory approvals obtained by taxpayers for pricing of related party transactions may not operate as an automatic safe harbor (i.e. exemption from arm's length analysis). It is advised that such regulatory approvals be presented to FIRS' TP Division for confirmation
  • The individual taxpayers responses to requests for TP policies sent out earlier in the year by FIRS would be very crucial criteria in risk-profiling of taxpayers for TP audit purposes
  • TP regulations/ requirements have come to stay in Nigeria. Going forward, FIRS would create more awareness on TP issues by conducting frequent sensitization programs and activities for taxpayers

So now, many taxpayers had completed filing of their first sets of TP returns amidst challenging circumstances and they ask: what next? Would there be TP audits and when? What does a typical TP audit entail? How does FIRS intend to co- ordinate this audit process?

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