Following the maiden decision (Newsletter #1.2021) on Transfer Pricing of the Nigerian Tax Appeal Tribunal in the case of Prime Plastichem Nigeria Limited v. Nigerian Federal Inland Revenue Service (2020), awareness and compliance with Nigeria’s Income Tax (Transfer Pricing) Regulations 2018 has gained increased momentum and attention among associated taxable persons and tax professionals. In the case in question, the Nigerian Tax Appeal Tribunal’s judgement affirmed the Nigerian Federal Inland Revenue Service’s imposition of penalties and its revision of the tax liability of Prime Plastichem Nigeria Limited (a connected taxable person) to pay N1.7 billion (EUR 4,282,439.48 at January 2020).
Accordingly, associated taxable persons have sought to comply with the requirements of the regulations, including the CbCR Regulations of qualified associated taxable persons. Compliance with the regulations has been with particular emphasis on the correctness of returns and applicable Transfer Pricing method and also the accuracy and completeness of Transfer Pricing disclosure, documentation and filings to forestall penalties or trigger a Transfer Pricing audit by the Nigerian Federal Inland Revenue Service (which is the relevant taxation authority for Transfer Pricing in Nigeria). It will be recalled that in a bid to propel the compliance of taxpayers to Transfer Pricing regulations, the Federal Inland Revenue Service made steep penalties for non-compliance with the regulations, some of them running into tens of millions of Naira for default in filing TP documentation or making incorrect disclosures. The penalties contained in the regulations remain contentious as questions abound about the power of the Nigerian Federal Inland Revenue Service to impose such penalties and the proportionality of such penalties.
Notwithstanding the above, research shows that the Nigerian Federal Inland Revenue Service maintains an aggressive policy to ensure that transactions between related parties comply with Transfer Pricing regulations. This aggressive policy of the Nigerian Federal Inland Revenue Service has led to further Transfer Pricing audit exercises among associated taxable persons in Nigeria in this year 2021. For instance, the prevailing trend is for the Nigerian Federal Inland Revenue Service to demand further TP documentation, conduct interviews and investigate TP transactions with a view to disallow royalty payments for trade and marketing intangibles. It has been observed that the Nigerian Federal Inland Revenue Service is wont to query the payment of royalties to related entities with DEMPE functions especially where the substance of such intangible is not established by the associated taxable person. Associated taxable persons are often forced into a situation where they defend their positions on intangible transactions with related entities and end up compromising their position because they face an uncertain and likely unfavourable fate in litigation before the Tax Appeal Tribunal. The new procedure for the Nigerian Tax Appeal Tribunal requires an appellant (taxpayer) to pay 50% of the disputed tax liability into a designated account before an appeal can be commenced.
Associated taxable persons are therefore advised to determine by critical examination the value of any transaction with a related entity to its corporate endeavours. It is also essential for tax professionals to be engaged by associated taxable persons at the origination of transactions with related entities and through to their conclusion in Nigeria.
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