Monday, April 12, 2021 / 8:47 PM / by Wole Obayomi / Header Image Credit: KPMG

Background

Since the introduction of the Income Tax (TransferPricing) Regulations, 2012, the Transfer Pricing regime in Nigeria has beensteadily evolving. The FIRS has published revised regulations and issuedguidelines to close the gaps in the tax laws and promote better understandingand compliance with the regulations. The introduction of the Income Tax(Transfer Pricing) Regulations, 2018 (the revised regulations) aligned the TPcompliance requirements in Nigeria with the three-tier documentation approachrecommended by the Organization for Economic Cooperation and Development (OECD)and introduced stiff penalties for acts of non-compliance. Taxpayers are nowrequired to maintain a master file and local file as well as theCountry-by-Country (CbC) report should their annual group consolidated revenuebe above the specified threshold

Overview of TP Compliance Requirements

Therevised TP Regulations and the Income Tax (Country-by-Country Reporting)Regulations, require taxpayers to prepare the following documents in order toachieve full compliance with the TP requirements in Nigeria.

i. Themaster file: The master file provides an overview of the global businessoperations of the Multinational Enterprise (MNE) Group to which a taxpayerbelongs including the nature of its global business operations, its overalltransfer pricing policies, and its global allocation of income and economicactivities.

ii. Thelocal file: The local file is expected to disclose detailed information onthe enterprise's related party transactions such as overview of the Company,related party relationship-related parties information, overview ofcontrolled transaction, contracts or agreements, controlled transactions flow,functional asset and risk analysis, intangibles involved, financial data,segmented data, details of tax information (tax rates, treatments andjurisdictions) and information on changes in related party relationships whichoccurred during the financial year.

iii. TPreturns: The revised TP Regulations also require a connected person to fileannual TP returns. The TP returns consist of the declaration and disclosureforms. The declaration form contains general information relating to a companysuch as the details of the company secretary and tax consultants, shareholdingstructure, details of company directors and information on all connectedparties. The disclosure form, on the other hand, contains information on thenature and the value of controlled transactions for the period, the method usedto analyze the controlled transactions, the name and tax jurisdiction of theconnected parties involved in the controlled transactions and other generalfinancial information on the Company and the Group.

v. Country-by-CountryReporting (CbCR): The CbCR Regulations require Nigerian headquarteredMultinational Enterprise (MNE) Groups with consolidated revenue of N160 billionor above to file the Country-by-Country (CbC) report with the FIRS. Nigerianresident members of MNE Groups, headquartered outside Nigeria, are required to notifythe FIRS of the identity and tax jurisdiction of the entity that will beresponsible for filing the CbC report where the Group has a consolidatedrevenue of 750 million EUROS or near equivalent in the domestic currency of thejurisdiction of the ultimate parent entity or surrogate parent entity.

Penalties for Non-Compliance

TP Audit Process

TPaudits usually commence with the FIRS sending an Information and DocumentsRequest (IDR) to selected companies based on the outcome of the taxauthorities' internal TP risk assessment. The FIRS may also request thetaxpayer to make a presentation on the processes, procedures and operations ofthe company. The aim is to enable the FIRS understand the business. Thispresentation is usually done at the FIRS' office. The next phase, after the IDRand presentation, is the field visit and interview sessions with key personnelof the company being audited.

The taxauthorities seek to validate the facts and declarations presented in the TPcompliance documentation during the interview sessions. After the field visit,the FIRS issues an audit report highlighting their key findings. Where taxauthorities disagree with a taxpayer on their understanding of relevant facts,the tax authorities may make TP adjustments, resulting in additional taxliabilities. In a situation whereby the taxpayer disagrees with the adjustmentsby the FIRS, the TP dispute resolution process can be used to resolve the areasof differences.

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Credits

* Thisstatement was first published in the Issue 4.4/ April 2021 Newsletter of KPMGof Monday, April 12, 2021. For further enquiries, please contact the author, Wole Obayomi via [email protected]

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