All of these regulatory price control mechanisms may lead to situations in which taxpayers are unduly tasked with providing secondary proof to FIRS
In previous editions of our Inside Tax publications, we identified and reviewed some of the challenges and additional compliance burden being faced by taxpayers in relation to Nigeria’s Transfer Pricing regime which include increased compliance cost (database costs, staff costs, consultant fees, etc.) and the need for additional guidance from FIRS on gray areas of the TP regulatory.
In this edition, we will review the challenges that taxpayers may face in harmonizing the demands and costs of Nigeria’s various regulatory Price Control Mechanisms (PCM) with the obligations and requirement of Nigeria’s Transfer Pricing Regulations (TPR).
Some of the PCMs under consideration include valuation practices of Nigerian Customs Services (NCS), approval of foreign fees for Technical Transfer Agreement (TTAs) by the National Office for Technology Acquisition and Promotion (NOTAP), approval of fees and agreements in the communication sector by Nigeria Communications Commission (NCC), as well as the notional crude oil selling price fixed for exploration and production (EP) companies by the Nigeria National Petroleum Corporation (NNPC).
NCS collects ad-valorem duties on goods imported into Nigeria, based on the value of goods declared by importers for customs purposes.
In ensuring Nigeria is not shortchanged, the NCS is permitted to use any of the various methods recommended by the World Trade Organization (WTO) in re- valuing goods imported to Nigeria.
These methods include: transaction value, transaction value of identical goods, transaction value of similar goods, deductive method, computed method and fallback methods.
As such, NCS would be within its rights in rejecting any declared values which cannot be reasonably justified using any of the WTO permissible methods.
Similarly, NOTAP was set up to ensure Nigeria is not short-changed by foreign counterparties to technology transfer agreements (TTAs).
In striving to achieve this goal, NOTAP regulates the fees payable by Nigerian companies to their foreign transferors.
Fees not approved by NOTAP are not eligible to be sourced through the official Central Bank of Nigeria (CBN) foreign exchange market. Generally, NOTAP approved fees for TTAs range from 0% to 5% of either turnover or profit-before- tax.
NCC is also empowered by the Nigerian Communications Act to review and approve business arrangements between companies in the Nigerian communications sector, including fees payable to service providers in the sector.
Generally, NCC would not approve payment of fees if it deems such fees to as unreasonable.
Presently, NCC has not disclosed guidelines or parameters for its test of reasonableness.
Lastly, NNPC also prescribes the notional crude oil selling price E&P companies use in accounting for petroleum profit tax due to the FIRS, which may be quite different from the actual prices received by the E&P companies.
The Safe Harbor Provision in Regulation 15 of the TPR provides that taxpayers may be exempted from the requirement to show proof that their related party transactions (RPTs) are consistent with the arm’s length principle if those prices are consistent with Nigerian statutory provisions or have been approved by other regulatory agencies and accepted by the Federal Inland Revenue Service (FIRS) to be arm’s length.
All of these regulatory price control mechanisms may lead to situations in which taxpayers are unduly tasked with providing secondary proof to FIRS to show that the prices of their intragroup/ related party transactions comply with the arm’s length requirements of the TP regulations.
The TP regulations empower FIRS to use the methods approved by the Organization for Economic Cooperation and Development OECD in justifying the arm’s length nature of the prices.
As a result, FIRS may be within its rights in rejecting any prices set between connected partieswhich cannot be reasonably justified using any of these permissible OECD TP methods, even though they have been determined as acceptable under some other regulatory price control regimes.
It is therefore only natural that all stakeholders will be expecting FIRS to play the role of a fair umpire when evaluating such taxpayers’ transactions that have been simultaneously..
Considering that a strict application of the OECD methodologies could result in different values for the same transaction(s), there is the possibility that FIRS and any other Nigerian regulatory agencies may adopt a tunnel-visioned approach in their evaluation of intra-group transactions, and this is a source of legitimate concern for tax payers.
It is therefore only natural that all stakeholders will be expecting FIRS to play the role of a fair umpire when evaluating such taxpayers’ transactions that have been simultaneously impacted by Nigeria’s various regulatory price control regimes.