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Nigerian Transfer Pricing Regulations: Any Safe Harbour?

By Victor Adegite – ACA, ACTI


The Nigerian Transfer Pricing (TP) Regulations officially known as Income Tax (Transfer Pricing) Regulations No 1, 2012 regulates transactions between connected taxable persons (controlled transactions). The regulation seeks to ensure that transactions among connected taxable persons are carried on at arm’s length. Applying the arm’s length principle to controlled transactions can be a tedious and time consuming process, hence the need to exempt some transactions or categories of taxpayers from transfer pricing rules. This partial or full exemption is known as safe harbour or safe haven provisions. This post will attempt to review the safe harbour provisions in the Nigerian transfer pricing Regulations with a view to highlighting matters arising.

Global Perspective

The Organisation for Economic Co-operation and Development (OECD) has published the Transfer Pricing Guidelines for Multinational Enterprises and Tax Administrations (OECD TP Guidelines) to assist multinational enterprises and tax authorities in the evaluate transfer pricing transactions as well as provide a level consistency among countries in the application of such the arms length principles. The OECD TP Guidelines has been adopted by most tax authorities, either wholesale or with some level of customization to address local fiscal issues.

According to the OECD TP guidelines, applying the arm’s length principle can be a fact-intensive process and can require proper judgment. It may present uncertainty and may impose a heavy administrative burden on taxpayers and tax administrations that can be exacerbated by both legislative and compliance complexity. These facts have lead OECD member countries to consider whether safe harbour rules would be appropriate in the transfer pricing area. The challenge posed by a strict application of subsisting transfer pricing rules can be circumvented by providing circumstances in which tax payers could elect to follow a simple set of rules under which transfer prices would be automatically accepted by the tax authorities. Safe harbor provisions offer essentially benefits to taxpayers and tax administrators such as compliance relief, administrative simplicity and certainty.

Safe harbours will typically take two forms, exclusion of certain classes of transactions from transfer pricing regulations; and stipulation of margins or thresholds for prescribed classes of transactions. Developed and developing economies alike have adopted safe harbour provisions.

In the United States, there are safe harbour provisions for intra-group services and other non-core services. Similarly, in Brazil, a taxpayer will be deemed to have an appropriate transfer price with respect to export sales when the average export sales price is at least 90% of the average domestic sales price of the same property, services, or intangible rights in the Brazilian market during the same period under similar payment terms. In Mexico, companies engaging in contract manufacturing (Maquiladoras) operations are subject to a flat tax rate under the safe harbour provisions of the Mexican tax authorities. Australia and New Zealand have safe harbour provision with respect to certain categories of non-core intra-group services.

Nigerian Perspective and Matters Arising

According to Paragraph 15 of the Income Tax (Transfer Pricing) Regulations No 1, 2012, “a connected taxable person may be exempted from the requirements of regulation 6 of these Regulations where –(a) the controlled transactions are priced in accordance with the requirement of Nigerian statutory provisions; or

(b) the prices of connected transactions have been approved by other Government regulatory agencies or authorities established under Nigerian law and satisfactory to the Service to be at arm’s length.” (emphasis mine)

While cursory review of the above provisions may lead to the conclusion that Nigeria has safe harbour provisions, a critical analysis of these provisions makes one question the adequacy or perhaps the existence of same. Contrary to what is obtainable in other tax jurisdictions, no specific categories of taxpayers or specific types of transactions have been identified in the Regulations to which the safe harbour provision will apply. This indeed denies taxpayers the benefit of certainty. The phrase “… in accordance with the requirement of Nigerian statutory provision” is rather too generic if not ambiguous. Regulation 15 (b) appears to provide a leeway to taxpayers with respect to connected transactions for which approval has been obtained from other government regulatory agencies or authorities established under the Nigerian law. However, the provision quickly added that such approvals must be satisfactory to the tax authority to have been given at arm’s length. It is important to note that although a government regulatory agency may consider economic and commercial circumstances when reviewing taxpayers’ application for the relevant approval, it may not necessarily apply the arm length principles. For instance, a company that depends on its foreign related entities for management and technical services is required by law to obtain approvals from the National Office for Technology Acquisition and Promotion (NOTAP). In granting the relevant approval, NOTAP has often times adopted rule of the thumb. Approval for licenses such as patent and trademarks is usually set at 0.5 to 5 percent of net sales value or profit before tax when net sales value is not available. Management service fees approval is usually set at a range of 2 to 5 percent of the local company’s profit before tax.

From the foregoing, it is clear that the arm’s length condition attached to the Paragraph 15(b) totally defeats the essence of a safe harbour provision as put forth by the OECD transfer pricing guidelines. Thus, the benefits of compliance relief, administrative simplicity and certainty are therefore unavailable to the taxpayers.

Further, it is also important to note that the Nigeria transfer pricing regulations did not specify the categories of tax payers or the types of transactions to be covered by the safe harbour provisions. This is contrary to the norms as put forth in the OECD transfer pricing guidelines. According to Paragraph 4.95 of the guidelines, “A safe harbour may have two variants regarding the taxpayer’s conditions of controlled transactions: certain transactions are excluded from the scope of application of transfer pricing provisions (in particular by setting thresholds), or the rules applying to them are simplified (for example by designating ranges within which prices or profits must fall)…”

For the safe harbour provisions to be useful to taxpayers, the Federal Inland Revenue Service (FIRS) may need to publish further guidance in this regards. The FIRS may also need to amend Paragraph 15(b) to make it conform to global best practice.


It will be very helpful for the FIRS to provide additional guidance that will guarantee certainty and ensure taxpayers enjoy the benefits of safe harbor provision.

Victor Victor Adegite is a manager with Tax, Regulatory and People Services for KPMG Advisory Services in Nigeria. Email: Victor.Adegite@ng.kpmg.com

David Okwara

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