March 30, 2021
The 2020 Financial Year (FY) was an unprecedented year for most taxpayers in Nigeria due to the economic impact of the COVID-19 pandemic. Companies were faced with various unexpected disruptions to business brought about by the pandemic. Nevertheless, towards the end of the year there was an influx of correspondence from the Federal Inland Revenue Service (FIRS) requesting for documents to assess the risk profile of taxpayers, in an attempt to commence Transfer Pricing (TP) audits.
The audit drive at a time when businesses were closing operations for the year can be seen as an attempt to ensure that the FIRS did not miss auditing companies’ records for years about to be statute barred in line with the 6 years statute of limitation provided in the various tax laws. It was observed that the Information Document Requests (IDRs) received by most companies included FY 2014 and in some cases FY 2013, which in line with the law should not be revisited except in case of an investigation. Further, the FIRS stood to benefit from imposing penalties on companies that failed to submit the documentation within the timeframe specified by the Nigerian TP Regulations (the Regulations).
With the increase in IDRs, which typically signal the start of Transfer Pricing audits, it is important that taxpayers are armed with the relevant knowledge on how to effectively manage a TP audit process. This article highlights the different stages of a Transfer Pricing audit in Nigeria, drawing from our wealth of experiences in each phase and suggests strategies taxpayers should adopt to minimize the risks associated with a TP audit.
A TP audit is a detailed review of a taxpayer’s Related Party Transactions (RPTs) to ensure that they have been conducted in a manner consistent with the arm’s length principle. It usually involves the review of the taxpayer’s business operations, documents, records, financial and economic data. The TP audit exercise in Nigeria is typically carried out in four (4) phases:
The robustness of the TP documentation and the quality of information supplied to the tax authorities at this stage may go a long way in determining whether the tax authorities will proceed to the next stage of the audit. Other factors considered by the FIRS in their risk assessment include the type of RPTs entered into, the value of RPTs compared to third party transactions, the tax residence of the related parties among others.
For example, transactions with entities resident in tax friendly jurisdictions, procurement transactions, intangible transactions, financing arrangements etc. are considered high risk and may result in the FIRS proceeding to the next phase of the audit. Where the FIRS deems the taxpayer as low risk, the TP audit will be concluded at this phase.
audit. The FIRS will notify the taxpayer prior to the commencement of the field audit. The objective of this phase is to get an understanding of the RPTs by ascertaining the substance of the RPTs– functions performed, assets utilized and risks borne and the pricing arrangement of each RPT. Where the substance of the transaction cannot be demonstrated, the entire transaction can be disallowed for tax purposes.