Transfer Pricing

Tax Inspectors Without Borders and Matters Arising for Nigeria Tax Audit Process

Recently the Organization for Economic Cooperation and Development (OECD) announced that it will commence a new program under the Tax Inspectors without Borders (TIWB) initiative in Botswana, Cameroon, Ethiopia, Liberia, Malawi and Nigeria.

TIWB is a joint initiative of the OECD and United Nations Development Programme (UNDP) designed to support developing countries to build tax audit capacity.  This initiative complements the broader efforts of the international community to strengthen international cooperation on tax matters. The objective of the initiative is to make a significant contribution to the domestic resource mobilization efforts of central governments and tax administrations of developing countries.  The TIWB program becomes important against the backdrop of complexities in global business that has made governments of most developing economies incapable of deriving its fair share of taxes on economic activities carried on within its borders.

According to the OECD, “Tackling complex international tax arrangements which divert profits otherwise liable for corporate tax, calls for skilled tax auditors. A well-trained tax team can identify high risk cases and uncover the arrangements that strip much-needed tax revenue from governments”  Essentially, the TIWB makes a pool of highly skilled and vastly experienced tax audit professionals available to the tax administrations of countries that has signed up to the initiative.

Under the TIWB initiative, tax audit professionals work alongside local officials of developing country tax administrations on real case tax audits and tax audit related issues. TIWB aims to transfer technical know-how and skills to developing countries’ tax auditors, as well as to share knowledge of global best practices. The TIWB initiative may include pre-audit risk assessment and case selection, investigatory techniques, audit cases involving transfer pricing issues, or industry specific issues, relating for example to energy and natural resources, e-commerce, financial services or telecommunications.

While it may be too early to evaluate the level of success the TIWB initiative, it is interesting to note that according to the OECD, to date, TIWB has delivered a conservatively estimated USD185 million in additional revenues from programs across Africa, Asia and Latin America.  A case in point is Colombia, where the TIWB initiative was responsible for a ten-fold increase in tax revenue from USD 3.3 million in 2011 to USD 33.2 million in 2014!  Similarly, Kenya recorded an additional tax revenue of USD23million in 2012 after receiving technical support from the OECD on a single case.

One may argue that the Nigerian tax administrators have significant number of years of experience under their belts when it comes to tax audit process.  Tax audits have been carried out in Nigeria for decades. However, the advent of digital economy, ecommerce and globalization has radically altered the business models hitherto commonplace in Nigeria.  The taxman requires new skills, new thinking and new strategies to keep pace with current realities.  On the strength of this, TIWB will be very helpful to the Federal Inland Revenue Service (FIRS).

In the aspect of transfer pricing, the general perception among taxpayers is that Nigeria is still a neophyte in this business, hence the FIRS will “take it easy” on taxpayers and “learn the ropes” with the passage of time.  This may no longer be the case.  With the TIWB personnel embedded with the FIRS, taxpayers should be ready to face a highly skilled and vastly experienced TP audit team.  From the foregoing, it is imperative that taxpayers ensure that robust documentation are kept with respect to their financial and operational activities.

For the Nigerian Government, the TIWB initiative cannot come at a better time than now when the crude oil, the main source of Government revenue is bedeviled by low prices.

By Victor Adegite, Manager, Tax, Regulatory and People Services, KPMG Advisory Services, Lagos, Nigeria
David Okwara

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