The Federal Inland Revenue Service (FIRS) recently enacted the Income Tax (Transfer Pricing) Regulations 2018 (the ‘2018 Regulations’). The 2018 Regulations, apart from being made in accordance with international best practices, repeal the Income Tax (Transfer Pricing) Regulations 2012 (2012 Regulations).
Whilst the 2018 Regulations have the commencement date as 12 March 2018, it was only made available to the public in August 2018. Though the FIRS has not done much to clear the confusion permeating the effective date of the 2018 Regulations, it will appeal to reason more that the FIRS adopts the date it made the 2018 Regulations public as effective date, to avoid giving the 2018 Regulations a retrospective operation. In addition, though a calm examination of the 2018 Regulations will reveal that the 2018 Regulations trigger legal issues capable of breeding litigation (which we hope to address in subsequent publication), we have taken the liberty to focus this publication on key provisions of the 2018 Regulations.
Hence, we shall, in this publication, consider the following: scope of the 2018 Regulations; ‘connected persons’ under the 2018 Regulations; Disclosure Threshold; Compliance with the arm’s length principle; Pricing Methods; Advance Pricing Agreements; comparability factors; Disclosure of Controlled Transactions; Documentation; Retention of Documents; Declarations; Dispute Resolution and Penalties.
Only transactions between ‘connected persons’ are caught under the 2018 Regulations. Such transactions include: (a) sale and purchase of goods and services; (b) sales, purchase or lease of tangible assets; (c) transfer, purchase, license or use of intangible assets; (d) provision of services; (e) lending or borrowing of money; (f) manufacturing arrangements; and (g) any transaction which may affect profit or loss or any other matter incidental to, connected with or pertaining to the transactions captured in above.
It is worth noting that unlike the 2012 Regulations where the operative words “connected taxable persons” were used, the 2018 Regulations intentionally omitted the word ‘taxable,’ perhaps in an attempt to broaden its applicability and make the 2018 Regulations apply to all ‘connected persons’ not just ‘connected taxable persons, as was the case under the 2012 Regulations.
Definition of ‘Connected Persons’
‘Connected persons’ is defined as persons generally deemed connected where one person has the ability to control or influence the other person in making financial, commercial or operational decisions, or there is a third person who has the ability to control or influence both persons in making financial, commercial, or operational decisions.
Quite instructively, the 2018 Regulations define ‘connected persons’ to include persons who are related, associated, or connected to one another as defined in any of the following instruments: Companies Income Tax Act; Petroleum Profit Tax Act; Personal Income Tax Act; (d) the Capital Gains Tax Act; (e) Article 9 of the OECD and UN Model Tax Conventions and the Agreements for the Avoidance of Double Taxation between Nigeria and other countries; and (f) the OECD TP guidelines and UN Transfer Pricing Manual.
It appears, however, that this seemly ‘innovative’ attempt to broaden the definition of ‘connected persons’ has birthed more confusion than it sought to cure. This is because it is quite unwieldy to make what should have been a definitive definition open to varying interpretations in different sources. This confusion could have been avoided by harmonizing all the definitions and producing a holistic definition in the 2018 Regulations that takes cognizance of the definitions provided in the different instruments alluded in the preceding paragraph.
The threshold for disclosure is for controlled transactions whose total value is not less than three hundred million naira (N300,000,000).
Compliance with the arm’s length principle
The 2018 Regulations (like the 2012 Regulations) mandates a connected person to ensure that the taxable profits resulting from any transaction(s) caught under the 2018 Regulations are ascertained in a manner that is consistent with the arm’s length principle. However, where such connected person fails to do the needful in this wise, the FIRS is empowered to make necessary adjustments, with a view to bringing the taxable profits resulting from the transactions in conformity with the arm’s length principle.
Transfer Pricing Methods
In determining whether the result of a transaction or series of transactions are consistent with the arm’s length principle, one of the following transfer pricing methods is to be applied, to wit: the Comparable Uncontrolled Price method; the Resale Price method; the Cost Plus method; the Transactional Net Margin method; the Transactional Profit Split method; or any other method which may be prescribed by the Regulations to be made by the FIRS from time to time.
It should be noted, however, that a connected person is allowed to apply a transfer pricing method other than those listed in the 2018 Regulations, where the person can establish, to the satisfaction of the FIRS that: (a) none of the listed methods can be reasonably applied to determine whether a controlled transaction is consistent with the arm’s length principle; (b) the method used gives rise to a result that is consistent with that between independent persons engaging in comparable uncontrolled transactions in comparable circumstances; and (c) reliable information needed to apply the chosen transfer pricing method exists.
Advance Pricing Agreements
Under the 2018 Regulations, a ‘connected person’ is permitted to approach the FIRS to enter into an Advance Pricing Agreement (APA) to establish appropriate criteria for determining whether the person has complied with the arm’s length principle for certain future controlled transactions undertaken by the person over a fixed period of time. It is also quite instructive to note that unlike the 2012 Regulations which only makes provision for a ‘connected taxable person’ to approach the FIRS in this wise, the 2018 Regulation, by using instead, the words “connected person,” has widened the net for those eligible to approach the FIRS to enter into an APA.
For the purpose of determining whether the pricing and other conditions of a controlled transaction are consistent with the arm’s length principle, the 2018 Regulations impose a duty on the taxpayer is to ensure that the transaction is comparable with similar or identical transaction between two independent persons carrying on business under sufficiently comparable conditions. It should, however, be noted that the FIRS may choose to review such assessment of the taxpayer.
Where an adjustment is made to the taxation of a transaction or transactions of a ‘connected person resident in Nigeria’ by a competent authority of another country with which Nigeria has an Agreement for the Avoidance of Double Taxation, and the adjustment results in taxation in that other county of income or profits that are also taxable in Nigeria, the FIRS is empowered, to determine whether the adjustment is consistent with the arm’s length principle. Where such adjustment is determined to be consistent, the FIRS is empowered to make a corresponding adjustment to the amount of tax charged in Nigeria on the income so as to avoid double taxation.
Under the 2018 Regulations, a connected person is mandated to keep record of sufficient information (documentation) or data to verify that the pricing of controlled transactions is consistent with the arm’s length principle and is obligated to make such documentation available to the FIRS upon written request from the FIRS. An obligation is imposed on the taxpayer to provide the information required and the FIRS is entitled to request for additional information which, in the course of audit procedures, it deems necessary to effectively carry out its functions.
Interestingly, whilst the 2018 Regulations mandate that the documentation retained by a connected person should be ‘adequate’ enough to enable the FIRS verify that the controlled transaction is consistent with the arm’s length principle, no guidance is provided on what documentation will qualify as ‘adequate.’
Information and Documents to be maintained
A connected person is obligated to maintain contemporaneous documentation consistent with the provisions of the schedule of the 2018 Regulations. In the event of a merger or divestiture, the relevant contemporaneous documentation is to be kept by the surviving enterprise.
Retention of Documents
All records, including ledgers, cashbooks, journals, cheque books, bank statements, deposit slips, paid cheque, invoices, stock list and all other books of account as well as data relating to any trade carried out by the taxpayer, inclusive of recorded details from which the taxpayer’s returns were prepared for assessment of taxes, are mandated to be retained for a period of six years from the date on which the return relevant to the last entry was made.
Transfer Pricing Declarations and Notifications
A connected person is obligated to declare its relationship with all connected persons whether such persons are resident in Nigeria or elsewhere. The Transfer Pricing Declaration is to be made and submitted to the FIRS not later than eighteen months after the date of incorporation or within six months after the end of the accounting year.
It is worth noting that a connected person is mandated to make an updated declaration where there is: (a) merger of the person’s parent company with another company outside the group; (b) acquisition of up to 20% of the person’s parent-company by persons not connected to the group; (c) merger of the person with another company; (d) acquisition of up to 20% of the person by persons not connected to the group; (e) merger or acquisition of the person by another company outside the group; (f) sale or acquisition of a subsidiary by the person; (g) any other change in the structure, arrangement or circumstances of the person not mention in the foregoing paragraphs and which influences whether it will be considered to be connected or not connected to another person. The 2018 Regulations mandate that the updated declaration be made and submitted to the FIRS within six months of the end of the accounting year in which the event occurred. A notification is also to be made to the FIRS where there is an appointment or retirement of a director of the connected person.
Disclosure of Controlled Transactions
A connected person is mandated to make a disclosure of transactions that are caught under the TPP 2018, for each year of assessment. While such disclosure is to be in the form as may be prescribed by the FIRS from time to time, the disclosure is to be made and submitted to the FIRS not later than six months after the end of each accounting year or eighteen months after the date of incorporation.
For the purposes of resolving any dispute or controversy arising from the application of the provisions of the 2018 Regulations, the FIRS is imbued with the power to set up a Decision Review Panel (‘DRP’). The DRP is to be comprised of the following persons, to wit: the Head of the Transfer Pricing of the FIRS; a representative of the FIRS Legal Department (not below the rank of Deputy Director); and three other employees of the FIRS not below the rank of Deputy Director. The quorum for the Panel is the Head of the Transfer Pricing Function and any other two members of the DRP. While the composition of the DRP might leave an aggrieved corporate entity caught in the web of the FIRS question the neutrality and independence of the DRP, it could be argued that such an aggrieved corporate entity, by participating in the DRP process, has not foreclosed its opportunity to approach a court of competent jurisdiction to vent its grievance.
|Failure to submit a declaration or notification to the FIRS||#25,000 per day for as long as the failure continues|
|Failure to make or submit a declaration within the stipulated time||#10,000,000 and #10,000 for each day the failure continues|
|Failure to submit documentation within 21 days of receiving request from the FIRS||#10,000,000) and (#10,000) for every day the failure continues.|
|Failure to make disclosures of relevant transactions within time||(#10,000,000) or 1% of the value of the transaction not disclosed and ten thousand naira (#10,000,000) for every day of failure|
|Making an incorrect disclosure of controlled transactions||(#10,000,000) or one percent of the value of controlled transactions incorrectly disclosed.|
The 2018 Regulations, though laced with some commendable provisions, are not without some shortcomings as earlier identified in this publication. Be that as it may, a careful reading of the provisions of the 2018 Regulations will reveal that the FIRS is committed to ensuring that corporate entities rporate entities gcaught by the 2018 Regulations comply and even ready to make any defaulting entities face the music of such non-compliance as seen from the penalties introduced. Going forward and to avoid stories that touch, it is advisable for corporate bodies likely to be caught by the provisions of the 2018 Regulations to seek appropriate guidance from trusted advisors, who have the requisite expertise to help them navigate this seemly untested water of the 2018 Regulations.
 The 2018 Regulations were issued in exercise of the powers conferred on the FIRS Board further to the FIRS enabling statute – Federal Inland Revenue Service (FIRS) (Establishment) Act 2007
 These international best practices include: the arm’s length principle in Article 9 of the United Nations (UN) and the Organisation for Economic Co-operation and Development (OECD) Model Tax Conventions on Income and Tax and Capital; the OECD Transfer Pricing Guidelines for Multi-national Enterprises and Tax Administrations, 2017; and the UN Practical Manual on Transfer Pricing for Developing Countries, 2017
 It is trite law that a retrospective operation is not to be given to a statute so as to impair existing right or obligation. See for instance, Wright J. in Re: Athlumney  2 QB 547, 551-552; see also Adamu v The State (1991) 4 NWLR 530 at 541 where Nnaemeka-Agu JSC (as he then was), stating the principle of law on retroactive legislation, affirmed thus: “…apart from purely procedural matters, provisions of a statute cannot be taken as applying retrospectively.”
 Cap. C21, Laws of the Federation of Nigeria
 Cap. P13, Laws of the Federation of Nigeria
 Cap. P8, Laws of the Federation of Nigeria
 Cap. C1, Laws of the Federation of Nigeria
 United Nations Practical Manual on Transfer Pricing for Developing Countries 2017 (United Nations, Department of Economic & Social Affairs, New York, 2017) 1-668
 A controlled transaction is at arm’s length where the conditions of the transaction do not differ from the conditions that would have applied between independent persons in comparable transactions carried out under comparable circumstances.
 See Regulation 7(1) of the 2012 Regulations