Monday, April 12, 2021 / 8:47 PM / by Wole Obayomi / Header Image Credit: KPMG
Since the introduction of the Income Tax (Transfer Pricing) Regulations, 2012, the Transfer Pricing regime in Nigeria has been steadily evolving. The FIRS has published revised regulations and issued guidelines to close the gaps in the tax laws and promote better understanding and compliance with the regulations. The introduction of the Income Tax (Transfer Pricing) Regulations, 2018 (the revised regulations) aligned the TP compliance requirements in Nigeria with the three-tier documentation approach recommended by the Organization for Economic Cooperation and Development (OECD) and introduced stiff penalties for acts of non-compliance. Taxpayers are now required to maintain a master file and local file as well as the Country-by-Country (CbC) report should their annual group consolidated revenue be above the specified threshold
Overview of TP Compliance Requirements
The revised TP Regulations and the Income Tax (Country-by-Country Reporting) Regulations, require taxpayers to prepare the following documents in order to achieve full compliance with the TP requirements in Nigeria.
i. The master file: The master file provides an overview of the global business operations of the Multinational Enterprise (MNE) Group to which a taxpayer belongs including the nature of its global business operations, its overall transfer pricing policies, and its global allocation of income and economic activities.
ii. The local file: The local file is expected to disclose detailed information on the enterprise's related party transactions such as overview of the Company, related party relationship-related parties information, overview of controlled 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 and jurisdictions) and information on changes in related party relationships which occurred during the financial year.
iii. TP returns: The revised TP Regulations also require a connected person to file annual TP returns. The TP returns consist of the declaration and disclosure forms. The declaration form contains general information relating to a company such as the details of the company secretary and tax consultants, shareholding structure, details of company directors and information on all connected parties. The disclosure form, on the other hand, contains information on the nature and the value of controlled transactions for the period, the method used to analyze the controlled transactions, the name and tax jurisdiction of the connected parties involved in the controlled transactions and other general financial information on the Company and the Group.
v. Country-by-Country Reporting (CbCR): The CbCR Regulations require Nigerian headquartered Multinational Enterprise (MNE) Groups with consolidated revenue of N160 billion or above to file the Country-by-Country (CbC) report with the FIRS. Nigerian resident members of MNE Groups, headquartered outside Nigeria, are required to notify the FIRS of the identity and tax jurisdiction of the entity that will be responsible for filing the CbC report where the Group has a consolidated revenue of 750 million EUROS or near equivalent in the domestic currency of the jurisdiction of the ultimate parent entity or surrogate parent entity.
Penalties for Non-Compliance
TP Audit Process
TP audits usually commence with the FIRS sending an Information and Documents Request (IDR) to selected companies based on the outcome of the tax authorities' internal TP risk assessment. The FIRS may also request the taxpayer to make a presentation on the processes, procedures and operations of the company. The aim is to enable the FIRS understand the business. This presentation is usually done at the FIRS' office. The next phase, after the IDR and presentation, is the field visit and interview sessions with key personnel of the company being audited.
The tax authorities seek to validate the facts and declarations presented in the TP compliance documentation during the interview sessions. After the field visit, the FIRS issues an audit report highlighting their key findings. Where tax authorities disagree with a taxpayer on their understanding of relevant facts, the tax authorities may make TP adjustments, resulting in additional tax liabilities. In a situation whereby the taxpayer disagrees with the adjustments by the FIRS, the TP dispute resolution process can be used to resolve the areas of differences.
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