Applicable TP Methods in Nigeria – Analysing prime plastichem Nigeria limited V federal inland revenue services

Introduction

Nigeria’s Tax Appeal Tribunal (“TAT”) recently adjudged its first Transfer Pricing (“TP”) case, Prime Plastichem Nigeria Limited v. Federal Inland Revenue Service (Appeal No: TAT/LZ/ CIT/015/2017). TAT had to determine the appropriate TP method and Profit level indicator (“PLI”) best applied in the TP documentation for 2013 and 2014 of Prime Plastichem Nigeria Limited (“PPNL’s”/Appellant). The Federal Inland Revenue Service (“FIRS”/Respondent) assessed PPNL‘s TP returns using the TNMM with a Gross Product Margin (“GPM”) PLI for the 2013 and 2014 TP returns. TAT ruled in favour of the FIRS.

Examining TP methods in line with decision of the TAT

In the above case, the PPNL applied the CUP method in 2013 and then applied a different method in 2014 (Transnational Net Margin Method – “TNMM”) with an earnings before interest and taxes (“EBIT”). A guiding precept for TP transactions as recommended by both the UN and OECD is that TP methods in transactions involving same parties (which was the case here) should maintain a uniformity except where there is a compelling reason to change the TP method.

In this case, the change to the TNMM questioned the validity of both methods applied in 2013 and 2014. This inconsistency is likely the trigger for the tax authority’s assessment on the TP returns for PPNL in both years.

Furthermore, the FIRS adopted the GPM as the applicable PLI for the use of the TNMM method. This position is considered inconsistent with the relevant TP Guidelines. The GPM does not compare net profitability. It should be noted that the GPM is best suited when parties to a transaction are adopting the Resale Price Method (“RPM”). Thus, the FIRS erred in its use of the GPM as the appropriate PLI for the TNMM. Also of importance is why neither of the parties adopted the RPM which is suitable where the purchasing party involved is buying with intention to resell to third parties and, as in this case, PPNL was buying to resell to the Nigerian market.

The decision leaves a lot to be desired and requires an appeal.

Conclusion

The case reveals the need for taxpayers to ensure that the benchmarking study reveals which TP method is most suitable to be applied, bearing in mind the availability of reliable and sufficient information to support a choice.