Transfer Pricing

Key Considerations for Transfer Pricing Risk Exposure Assessment in Nigeria

The Federal Inland Revenue Service (FIRS) is paying a lot of attention to revenue generation and collection.  This is due to the decline in revenue accruing to Federal Government of Nigerian (FGN) from sale of crude oil.  The FGN has notified the stakeholders that it will turn to the non-oil sector, through taxation, to finance a part of the 2016 budget.  Expectedly, the FIRS has raised the tempo for revenue drive with a view to ensuring that more companies are brought within the tax net.  Those already within the net are being pressurized to fully discharge their tax obligations.  For instance, The FIRS has invoked the relevant provisions of the Companies Income Tax Act (CITA) that requires companies that declare interim dividends to pay provisional tax on the amount, rather than wait till the end of the relevant financial year.  Similarly, the tax authority has stepped up the audit of companies’ tax and accounting records for compliance with various taxes especially valued added tax (VAT), withholding tax and Transfer Pricing (TP) Regulations.

Given that TP is still at its infancy in Nigeria, it is not unlikely that a large number of companies will be struggling to comply with the provisions of the Income Tax (Transfer Pricing) Regulations No. 1, 2012  (the Regulations).  As the FIRS concludes its plans to conduct more TP audit exercises, this write up highlights some of the key action steps that will enable taxpayers perform a proper current risk exposure analysis and take a more proactive approach in managing TP issues going forward.  This will enable tax payers manage potential exposure to additional tax liabilities that may arise from TP audits.

Some of the key considerations have been highlighted below:

Identify all potential Connected Taxable Persons (CTPs): For the Regulations to be applicable to a taxpayer, the taxpayer should have conducted transactions with a CTP.  The next question will therefore be who is a CTP? Regulation 10 of the Regulations defines CTPs to include persons, individuals, entities, companies, partnerships, joint ventures, trusts or associations and also includes persons referred to in the provisions of other existing laws such as sections 18(2)(b) of and section 15(2)of the Petroleum Profit Tax Act ; Article 9 of the OECD Model Tax Convention; and “associated enterprise” referred to in the OECD Guidelines. Whereas the various acts make reference to CTPs in the provision on artificial transactions, they do not define connected taxable persons. Hence, the only explicit definition of CTPs in the Regulations is the reference to the OECD Guidelines’ definition of “associated enterprise” as a type of connected taxable person as defined in Regulation 19(c):

“…Persons that are business associates in any form and two enterprises are considered to be associated where – one enterprise participates directly or indirectly in the management, control or in the capital of the other; or the same person or persons participates directly or indirectly in the management, control or capital of both enterprises.”

This definition will assist taxpayers to identify CTPs as a first step to compliance with the Regulations.

  • Confirm existence of transactions with CTPs: Once it has been established that the tax payer has CTPs, the next step is to confirm the existence of a controlled transaction with the CTPs.  Where such controlled transactions exist, the taxpayer is charged with the responsibility of ensuring and proving to the revenue authorities they have been priced at arm’s length.
  • Review the value of controlled transactions with CTPs: Controlled transactions, which account for a significant portion of a company’s revenue or cost, are likely to attract the scrutiny of the revenue authorities. For instance, where a single controlled transaction account for a significant part of the total cost incurred by a tax payer, the revenue authority will want to satisfy itself that such transaction have been conducted at arm’s length.  Should this not be the case or the taxpayer is unable to convince the revenue authorities of the arm’s length nature of the transaction, it might be exposed to TP adjustment.  Where the revenue authority is able to sustain its position, it may lead to potential additional tax liability.

Tax payers are therefore encouraged to pay attention to the materiality of their controlled transactions to ensure that proper attention is paid to those one that are high risk.

  • Jurisdiction of the CTPs: Controlled transactions involving CTPs located in jurisdictions with low or no tax rates are also high risk transactions. This is due to the fact that there is a significant incentive for a Group to structure controlled transactions in a way that systematically shifts profit to those jurisdictions thereby reducing the effective tax rate of the Group as a whole.

Tax payers will need to evaluate their related party transactions to ensure that there is substance to such transactions and appropriate TP documentation are put in place in the event of a TP audit.

  • Review the tax profile of the parties to the transaction: Taxpayers that have conducted transactions with CTPs and consistently report tax losses in spite of high revenue or conduct significant transactions with enterprises registered and operating in the Free Trade Zones or obtained pioneers tax reliefs are more likely to attract the scrutiny of the revenue authorities.  Such entities should therefore ensure that the controlled transactions meet the arm’s length principle to avoid TP adjustment during audit.
  • Confirm existence of intercompany agreements for all controlled transaction: Taxpayers should ensure that controlled transactions are backed by agreements that clearly reflect the substance of their transactions. There are a lot of instances where CTPs transact among themselves on the basis of “gentleman agreement” without necessarily documenting the terms of such transaction.  Under TP audit, this may be requested for by the FIRS to confirm the alignment of the form and substance of the controlled transaction.
  • Review TP policy vis-a-vis the TP documentation and intercompany agreements: Often, taxpayers invest a lot of time and financial resources to prepare a TP policy only for them to remain on the shelves. Appropriate implementation and ensuring the accuracy of the facts presented in your TP policy are critical. Having a TP policy and intercompany agreements in place is only the starting point. If a taxpayer’s facts are not consistent with the taxpayer’s TP documentation and intercompany agreements, the documents will provide no protection during an audit.
  • Nature of the transactions: Certain types of transactions will naturally increase the TP risk.  An example of such is intangible property transactions, which include trade intangibles such as technology and know-how as well as marketing intangibles such as trade name and trademarks.  The FIRS has also shown particular interest in procurement arrangements amongst group members.  Tax payers are therefore advised to do a proper review of their related party transactions to ensure that these types of transactions have been properly analysed.
  • Track appropriate support for related party transactions: Tax payers should have appropriate documents and information to justify the pricing of related party transactions.  This may include the annual TP compliance documentation, intercompany agreements, benchmark studies, sample invoices for similar transactions with unrelated parties, evidence of comparable pricing arrangement for similar transactions between independent parties etc. Tax payers should also ensure that they track the financial information for related party transactions.  This includes appropriate tracking of cost of providing services, segmented financial information for all the related party transactions etc. These should be kept in a way that can easily be retrieved in the event that you are required to produce them with a hort time frame.
  • Timely submission of annual TP returns: The Regulations require companies with related party transaction to file TP returns annually. These returns which comprise of TP Declaration and Disclosure forms should be submitted to FIRS alongside the income tax returns.  Failure to file the TP returns as and when due may suggest that the company has not complied with the Regulations and thereby increase its risk profile during the FIRS’ risk assessment exercise.


In summary, while related party transactions create a lot of synergies for companies, paying close attention to transfer pricing requirements will allow companies to maximize their tax-efficiency and mitigate TP risk exposure. Even taxpayers that have a TP policy in place should meet the contemporaneous TP documentation requirement on an annual basis.  This is to ensure that they remain compliant with documentation requirements of the Nigeria TP Regulations.

Suleiman is a Manager and Omojo is a Senior Adviser in the Tax, Regulatory & People Services Division of KPMG in Nigeria.
David Okwara

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