New Transfer Pricing Regulations, Guidelines and Circular - Legal Alert


Wednesday, 24 October 2018     16:44PM  / Oserogho & Associates


Introduction, Objectives and Commencement


The Federal Inland Revenue Service (“FIRS”) with the approval of the Federal Minister of Finance, have published the gazetted version of the Income Tax (Transfer Pricing) Regulations 2018 (“TP Regulations 2018”).


Also published by FIRS are the Guidelines on Transfer Pricing Regulations and a Public Notice on amongst other things, the set date for the enforcement of the TP Regulations 2018 Administrative Penalties for non-compliance with the TP Regulations 2018.


The TP Regulations 2018 has therefore now replaced the Income Tax (Transfer Pricing) Regulations 2012. One of the key objectives of the TP Regulations 2018 is to provide a legal framework for the implementation of Transfer Pricing Regulations. This key objective is expected to ultimately reduce tax evasion; and tax evasion commonly occurs through the under-pricing or the over-pricing of transactions between related or connected parties who infringe the arm’s length principle when undertaking their transactions


Other key objectives of the TP Regulations 2018 include the reduction of double taxation and the provision of a level playing field for both national and multi-national enterprises.


The commencement date for the TP Regulations 2018 is retrospectively 12th March 2018; though FIRS has by a October 2018 Public Notice extended the compliance commencement start date for the administrative penalties for non-compliance with the TP Regulations 2018 to now be 31st December 2018.


Arm’s Length Principle 

The TP Regulations 2018 treats a company’s Head or parent office as a separate and connected entity to its subsidiary Permanent Establishment office or entity (“PE”), with regard to any commercial transaction undertaken between the parent/head office and its subsidiary office, being treated as controlled transactions that must comply with the TP Regulations 2018.


Persons are also deemed connected where one of them has the ability to control or influence another or other connected persons in making financial, commercial or operational decisions.


The Arm’s Length Tax Principle simply requires that the conditions of a controlled transaction, between connected persons, whether resident or non-resident, must not differ from the conditions that would have applied where the connected persons are separate, independent and neutral parties, undertaking comparable transactions under comparable circumstances.


Where connected persons fail to adhere to the Arm’s Length Principle in their transactions, FIRS is permitted to make necessary tax adjustments to ensure that the appropriate taxable profits from the connected transactions are collected,


Transfer Pricing Methods 

In determining whether a transaction or a series of transactions are consistent with the arm’s length principle, one of the following Transfer Pricing methods will be applied:-


  • The Comparable Uncontrolled Price (“UP”) Method
  • The Resale Price Method
  • The Costs Plus Method
  • The Transactional Net Margin Method
  • The Transactional Profit Split Method
  • Any other method which FIRS may prescribe.


The preferred TP method to be adopted will depend on various factors including the strength or weakness of such a TP method considered; the appropriateness of such a method; the availability of reliable TP data or information and the degree of comparability between the controlled transaction and uncontrolled transactions.


Advance Pricing Agreements 

A connected person can, as an efficient tax strategic plan, approach FIRS to execute a Advance Pricing Agreement (“APA”) which Agreement will provide some set criteria and certainty for determining the connected person’s future transfer pricing compliance obligations. The duration of a first APA must not however exceed three (3) years.


All APAs must adhere to the provisions of the TP Regulations 2018.


Mandatory TP Declaration 

All connected persons are now required to, within six (6) months of the end of their accounting year, declare any relationship that they might have with any other person or persons, whether or not the connected persons are resident or non-resident.


Failure to file a TP Declaration within the timeframe required attracts an Administrative penalty of Ten Million Naira (N10,000,000). A further administrative penalty of N10,000 (Ten Thousand Naira) for every day that the filing default occurs, will also be applied.


Failure to file TP Declarations for occurrences like mergers, acquisitions, sale or such other corporate structural changes attracts an administrative penalty of N25,000 (Twenty-Five Thousand Naira) for each day that such filing default persists.


Mandatory TP Disclosures 

Connected persons are also now required to, with or without notice from FIRS, file Disclosures of all their controlled transactions not later than six (6) months after the end of each of their accounting year or eighteen (18) months after their incorporation, whichever of the latter two is earlier.


The administrative penalty for failing to file a Mandatory Disclosure with FIRS or for filing such disclosure with inaccurate information is the higher of either Ten Million Naira (N10,000,000) or One per cent (1%) of the value of the controlled transaction that was not disclosed; or where disclosed, was incorrectly disclosed. A further administrative penalty of Ten Thousand Naira (N10,000) for everyday that these breaches persist will also be applied.


Mandatory TP Documentation 

Connected persons are also now required to keep a record of sufficient data or information, with an analysis of such retained data and information, which verifies the pricing of connected transactions as being consistent with the arm’s length principle. This requirement also applies where the connected person undertakes a transaction through a related party with a third person.


All transaction data and records relating to any trade carried on between connected persons are required to be preserved and retained for a period of six (6) years from the date on which any filing return relevant to the last transaction entry was required to be made.


The same administrative penalties that apply to defaults in filing Declarations and Disclosures also apply to failures to file the required Transfer Pricing Documentation with FIRS.


Where FIRS request for any TP information and such information, including contemporaneous documentation, are not furnished within the time specified in any FIRS Notice, with no extension of time granted subsequently, additional administrative penalties will apply. The first administrative penalty is a sum equal to one per cent (1%) of the value of the controlled transaction to which such information relates. The second administrative penalty is the sum of Ten Thousand Naira (N10,000) for each day that the default persists.


General TP Guidelines 

By an Information Circular dated 20th September 2018, FIRS published its Guidelines regarding TP Documentation. A key provision in this Guideline is the advice to Taxpayers not to engage or procure the services of any person who is currently employed by, or who was formerly employed by FIRS to develop, record, correct or submit any TP Documentation on the Tax Payers behalf. This is especially as the latter constitute a conflict of interest malpractice.


Connected Persons are also required to prepare and submit to FIRS their annual Country-by-Country reports not later than twelve (12) months after the end of the connected person’s end of accounting year.


Another new provision in these Guidelines and in the TP Regulations 2018 is FIRS undertaking to keep confidential all information and records disclosed in all TP Documentation filings.


TP Dispute Resolution 

FIRS is required by the TP Regulations 2018 to establish a Decision Review Panel (“TP Review Panel”) to administratively resolve any dispute or controversy that arises from the application of any of the provisions of the TP Regulations 2018.


Any objection to a TP tax assessment is required to be filed within thirty (30) days of the taxpayer’s receipt of such a tax assessment. The decision of the TP Review Panel is deemed to represent the final decision of FIRS without encumbering the taxpayer’s right to further appeal against such a decision to a judicial body.



It will be very interesting to review some data on the efficacy of the old Income Tax (Transfer Pricing) Regulations 2012. Lessons learned from such data will be very helpful in the implementation of the TP Regulations 2018.


Generally, the lack of reliable and verifiable transactional data, with their efficient analysis remains a handicap to an effective tax administration, which includes Transfer Pricing Arm’s Length Comparability Transactions.


Application of reciprocal International Tax Treaties on Transfer Pricing application will only yield the desired results if adequate manpower capacity and funding to aid tax enforcement machinery are made available.


The neutrality and independence of the TP Review Panel, under a very aggressive tax regime, is doubtful if the Review Panel does not adopt Mediation methods, as opposed to the traditional more aggressive adversarial hostile methods, in resolving tax disputes.


Proshare Nigeria Pvt. Ltd.



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