TP Compliance in Nigeria and Common Pitfalls for Businesses to Avoid
May 18, 2021
Transfer Pricing (TP) in Nigeria is governed by the Income Tax (Transfer Pricing) Regulations, 2018 (TPR). The TPR provides that Related Party Transactions (RPTs) should be conducted in line with the arm’s length principle and provides compliance obligations for taxpayers. The annual compliance obligations include the filing of TP returns and the preparation of contemporaneous TP documentation.
The TP documentation is a report articulating the approach and methodology undertaken by taxpayers to ensure that the RPTs carried out in that specific Financial Year (FY) satisfy the arm’s length requirements. The report is expected to be prepared in line with the guidance provided in the TPR and other guidance documents.
Where the RPTs do not meet the arm’s length requirements, taxpayers may be faced with additional tax assessments, penalties and interest, which can be material and affect the going-concern of the business. In addition, where the compliance requirements are unmet, taxpayers are exposed to a minimum administrative penalty of ₦10 million based on the TPR. This has resulted in TP ranking as a high-risk area for businesses in Nigeria.
In this article, we have summarized the TP compliance requirements in Nigeria and highlighted some common TP pitfalls businesses typically encounter and suggested mitigating measures.
TP Compliance Obligations
- Arm’s length requirement – Regulation (4) of the TPR provides that where taxpayers enter into transactions with their related parties, they must ensure that such transactions are conducted in a manner consistent with the arm’s length principle. This implies that the terms of a RPT should be comparable to the terms applicable between independent parties conducting comparable transactions under comparable circumstances. Taxpayers are therefore advised to proactively prepare a guidance document, typically referred to as TP Policy. This serves as an internal guide for the company’s RPTs and ensures they are carried out in accordance with the arm’s length principle.
- Filing of annual TP returns – Regulations (13) and (14) of the TPR require taxpayers to file annual TP returns with the Federal Inland Revenue Service (FIRS). This filing involves the submission of a declaration form, a disclosure form and other financial/tax information relating to the year of filing. The declaration form contains details of the ownership, management and nature of relationship of a company and its related parties. The disclosure form discloses details of the RPTs carried out by the taxpayer in the FY. It also indicates the value and TP methodology adopted in analyzing the RPTs. The TPR stipulates administrative penalties for not filing TP returns and/or inadequate returns.
- Contemporaneous TP documentation – Regulations (16) of the TPR requires taxpayers to have in place a TP documentation at most six (6) months after the end of the FY. The documentation gives an in-depth analysis of the RPTs disclosed in the TP returns, showing the functions performed, assets utilized and risks assumed by the parties. It also includes the economic analysis, which demonstrates that the RPTs were carried out in a manner similar to comparable independent companies operating under comparable circumstances. Where a taxpayer’s total value of RPTs in a FY is less than three hundred million naira ₦300mn), they may choose not to prepare a documentation contemporaneously. However, upon receipt of a request by the FIRS, the taxpayer has ninety (90) days to prepare and submit it to the FIRS. Due to the nature of the TP documentation and the information contained therein, it is the first line of defence for the taxpayer during a TP audit exercise.
- Record keeping – The TPR requires taxpayers to keep the TP documentation and supporting documents which should be sufficient to demonstrate compliance of the RPTs with the TPR. These documents should be kept for a minimum of six (6) fiscal years.
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