Nigeria: Navigating a Tax Dispute Resolution

Transfer Pricing (TP) is a relatively new concept in Nigeria, as it was introduced in 2012. TP is regulated by the Income Tax (Transfer Pricing) Regulations, 2018 (TP Regulations) created pursuant to the Federal Inland Revenue Service (Establishment) Act, 2007. The 2018 TP Regulations revoke the TP Regulations of 2012. They incorporate some of the revisions to the OECD Guidelines as well as provisions contained in the African Tax Administration Forum’s Suggested Approach (ATAFSA) to drafting TP legislation. The 2018 TP Regulations introduced significant changes that impact the conduct of intercom­pany transactions involving people operating in Nigeria and reduces the TP compliance burden for certain categories of taxpayer. Some of the changes to the TP Regulations include:

• introduction of significant penalties for non-compliance,
• restriction of tax deductions for IP royalty payments,
• guidelines for filing updated TP returns form,
• threshold for maintaining contemporaneous documentation,
• new Safe Harbour regime,
• specific criteria for determining the arm’s-length nature of intra-group transactions,
• rules on commodity transactions,
• inclusion of procedures and documents required for the application of APAs etc.

While the TP Regulations allow the Federal Inland Revenue Service (FIRS) to grant exten­sions to filing deadlines under certain conditions, the full penalties will apply if a taxpayer is unable to meet the extended timelines.

Dispute Resolution

The FIRS commenced TP audits about three years ago, and they consistently demand TP documentation and other documents from taxpayers with respect to their related party transactions. These actions are in line with its powers under the 2018 TP Regulations, No. 10 and Federal Inland Revenue Service (Establishment) Act. TP audits occasionally result in long drawn-out disputes between taxpayers and the tax authorities. These disputes could arise from adjustments in taxable profits resulting in increased tax liabilities; double taxation where adjusted profits have been taxed in other jurisdictions; different interpretation of provisions of the Regulations etc. Potential areas of dispute between the taxpayer and tax authority are not exhaustive. However, under Nigerian law a taxpayer has dispute resolution mechanisms available , each with its own implications. These are:

• Administrative/Internal procedures: The FIRS are allowed to set up a Decision Review Panel for the purpose of resolving any disputes or controversies which may arise;
• Litigation:Taxpayers are allowed to seek redress in court where there are disputes between the taxpayer and tax authority, starting from the tax appeal tribunal up to the Supreme court;
• MAPs under Double Taxation Treaties (DTTs): MAP is a procedure for resolving disputes between Treaty Partners/governments of two jurisdictions that are party to a double tax agreement. The aim of these double tax agreements is to eliminate the occurrence of double taxation with respect to taxes on income and on capital, without creating tax evasion or avoidance in the form of non-taxation and reduced taxation;
• APAs: APA is an agreement between a taxpayer and a tax authority of the State in which the tax authority determines, in advance, an appropriate set of criteria for the purpose of determining the taxpayer’s transfer prices for a fixed period of time. An APA could be unilateral (involving a taxpayer and one tax authority, usually the tax authority of the State in which the taxpayer is resident), bilateral (involving a taxpayer and two tax authorities) or multilateral (involving more than two tax authorities).

APA is not majorly a dispute resolution mechanism, but more of a dispute preventive measure as parties can agree beforehand on an appropriate set of criteria, which pro­vides some certainty regarding the tax liability.

Administrative/Internal

Nigerian tax environment is evolving rapidly, and the continuous implementation of tax reforms is laudable, one example of which would be the proposed Finance Bill which includes changes to 7 existing tax laws in Nigeria. However, the successful and prompt closure of tax disputes will make dispute resolution more effective. Taxpayers and their consultants are encouraged to familiarise themselves with existing dispute resolution mechanisms in all areas of taxation, including TP, as this will minimise the risks of uncertain­ty and unintended double taxation.