FIRS Issues Revised Transfer Pricing (TP) Regulations

Introduction

The Federal Government of Nigeria (FGN) through the Federal Inland Revenue Service (FIRS) recently released the revised TP Regulations 2018. The Regulations, which revokethe Income Tax (Transfer Pricing) Regulations 2012, has an effective date of March 12, 2018.

The TP Regulations incorporate some of the 2017 updates to the Organization for Economic Cooperation and Development (OECD) TP guidelines and provisions contained in the Africa Tax Administration Forum (ATAF) suggested approach to drafting TP legislation.

Changes Introduced by the Regulations

The Regulations introduce the following changes among others –

• Taxpayers are expected to make updated declarations to the FIRS where there is a merger or acquisition of up to 20% of an entity or its parent ; or any other change in the structure or arrangement of the entity. Where there is an appointment or retirement of a director of a connected person, a notification is also required to
  made within 6 months of the financial year end.
• A connected person with total related party transactions of less than N300 million (about USD 1 million) may choose not to maintain the TP documentation. However, such connected person will be required to prepare and submit relevant documentation within 90 days upon receipt of a notice from the FIRS.
• The previous safe harbour provisions relating to statutory or regulator prescribed prices have been erased. The Regulations now provide that the FIRS may publish specific guidelines on safe harbours from time to time.
• Specific criteria for determining the arm’s length nature of intra-group transactions which involves an evaluation of the substance, benefits and shareholder activity test.
• Inclusion of guidelines on the use of “quoted prices” in determining the pricing for the exportation and importation of commodities.
• Tax deductions for any payments for the exploitation rights to intangibles will not be more than 5% of earnings before interest, tax, depreciation and amortization (EBITDA)
• Inclusion of clear procedures and document required for the application for Advance Pricing Agreements (APAs).

The Regulations also ushered in a TP specific penalty regime. The penalties are highlighted below:

a) Failure to file TP declaration within the specified period – N10 million in the first instance and N10,000 for every day the failure continues.

b) Failure to file updated TP declaration/notification about changes in directors – N25,000 for every day in which the default continues.

c) Failure to file TP disclosures within the specified period – the higher of N10 million or 1% of the value of related party transactions not disclosed and N10,000 for every day the failure continues.
d) Incorrect disclosure of transactions – the higher of N10 million or 1% of the value of related party transactions incorrectly disclosed.

e) Failure to file TP documentation upon request – the higher of N10 million or 1% of the value of related party transactions not disclosed and N10,000 for every day the default continues.

f) Failure to furnish information or documentation upon request – 1% of the value of each related party transaction for which information/document relates and N10,000 for every day the failure continues.

Our Comments

The penalties in the revised TP Regulations are material. It is advisable for taxpayers to make TP compliance top priority. Taxpayers need to review their related party transactions and relevant associated documents to ensure they are fully compliant with the arm’s length principle and documentation requirements.
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