November 22, 2022
As envisaged at the beginning of the year, 2022 has witnessed a significant increase in Transfer Pricing (TP) audits. In recent months, there has been a significant drive by the Federal Inland Revenue Service (FIRS) to generate more tax revenues to fund government expenditure. The FIRS has continuously selected more clients for audits, issuing correspondence to taxpayers to initiate the audit process or revive old TP audits with the aim of speedily concluding them.
As you may be aware, TP is a highly specialised discipline based on the Arm’s Length Principle (ALP), which can be applied and interpreted in various ways. It therefore comes as no surprise that the TP audit process can be contentious and may result in significant additional tax liabilities for taxpayers. This has led to a lot of controversy between taxpayers and the FIRS during the audit process in a bid to conclude the TP audit. Considering the TP audit process can be contentious, time consuming and very tasking, now more than ever, taxpayers need some certainty in the treatment of their Related Party Transactions (RPTs). One of the ways to achieve this is by implementing Advance Pricing Agreements (APAs).
This article provides an overview of Advance Pricing Agreements, examines the provisions relating to APA in Nigeria and highlights the benefits of entering into APAs to taxpayers and the FIRS.
What is an Advance Pricing Agreements?
According to the OECD Transfer Pricing Guidelines for Multinational Enterprises and Tax Administrations, 2022 (OECD Guidelines), an “Advance Pricing Agreements is an arrangement that determines, in advance of controlled transactions, an appropriate set of criteria (e.g. method, comparables and appropriate adjustments thereto, critical assumptions as to future events) for the determination of the transfer pricing for those transactions over a fixed period of time”.
An APA requires negotiations between the taxpayer, one or more associated enterprises, and one or more tax administrations. The primary motive of an Advance Pricing Agreements is to improve the efficiency of tax administration by encouraging taxpayers to engage with the tax authorities on all the facts relevant to a proper transfer pricing analysis and to work towards a mutual agreement. Negotiating an APA may consume a lot of time and resources. While completion times vary by country, the average time to process and complete This article provides an overview of APAs, examines the provisions relating to APA in Nigeria typically runs for up to two years.
Types of Advance Pricing Agreements
An APA can be unilateral, bilateral or multilateral. In a unilateral APA, the agreement is reached between the taxpayer and the competent authority in the country where the taxpayer is resident. This agreement is only binding on this country. A taxpayer may want to enter into a unilateral Advance Pricing Agreements if it determines that the source of TP exposure is mainly from one country and would want to achieve certainty on its treatment going forward. However, RPTs typically affect taxpayers in multiple jurisdictions, as such, unilateral Advance Pricing Agreements may not be effective. Due to concerns over double taxation, bilateral or multilateral APAs are preferred.
A bilateral/multilateral APA is an agreement between two or more taxpayers and jurisdictions. Under this type of APA, all parties involved would agree to the terms of the Advance Pricing Agreements. Upon reaching an agreement, the APAs is binding on the tax authorities and the taxpayers.