Part 2 of the Income Tax (transfer pricing) Regulations 2018 (TP Regulations) focuses on compliance with the arm’s-length principle, Advanced Pricing Agreements and corresponding adjustments. Section 5 of the TP regulations clearly cites that in determining whether a transaction is compliant with the arm’s-length principle, such a transaction must be guided by the available TP methods as listed thereunder.
The determination of the appropriate TP method is key to averting penalties on TP-related transactions, as once a method for a specific transaction has been chosen, the parties are expected to maintain the use of this appropriate TP method until such a time as the available variables are no longer in alignment and would therefore prompt a change to the applicable method. Both the OECD guidelines and the UN manual on TP emphasise the need for consistency in the applicable method. The Tax Appeal Tribunal (“TAT”) in the case of Prime Plastichem Nigeria Limited (PPNL) v. FIRS ruled in favour of the tax authorities by affirming the additional assessment, penalties and interest raised against the appellant. The Appellant in the above-mentioned case (PPNL) was inconsistent in the TP method adopted for its transactions and may have triggered an assessment on its transaction. In effect, parties involved in TP-related transactions are expected to carry out diligent TP comparability analysis and benchmarking studies to ensure that the TP method adopted conforms with the regulations, OECD Guidelines and UN Manual. Specifically, the OECD and UN comprehensively provide a framework position on how parties may determine an appropriate method for TP transactions. The frameworks suggest which TP method is most suited for which transactions. The choice of TP method is to be decided after a proper comparability analysis on each TP method and its effect on the transaction given all available and reliable information.
Alternatively, the TP regulations of 2018 make provisions for parties to enter into Advanced Pricing Agreements (“APA” or “Agreement”). This entails connected parties entering into an agreement with tax authorities to establish a set of criteria for which arm’s-length may be determined on a certain future transaction. The regulation provides that the request for such agreement must be accompanied by a document showing the scope of the transaction, its functional analysis, the assets and risk involved and duration of the agreement.
A significant advantage to such agreements is that the parties involved and the tax authorities already have an understanding on the appropriate TP method and so there can be no further assessment due to the use of an inappropriate TP method as in the case of PPNL v. FIRS.
Conclusion
With the decision of the TAT in the case in question, Nigeria’s TP regime can be said to be in full motion; the laws regulating TP-related transactions have now been widened by the companies’ income tax (Significant Economic Presence) order of 2020. Admittedly, TP compliance and obligations are rigorous and shrouded with considerable uncertainty. Averting TP penalties requires diligent compliance with TP obligations. This summarily entails proper TP planning and prompt preparation. At the core of a connected party‘s business operation it is expected that its tax consultants have a well-founded understanding of the complexities of TP and that their operation is in compliance with Nigeria’s TP regulations.
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