Interview: Taiwo Oyedele
How do the recently introduced transfer pricing rules affect investors?
TAIWO OYEDELE: Generally, transfer pricing refers to the structuring and pricing of transactions between members of the same controlled group. The concern is typically with cross-border transactions where income and expenses are allocated among taxpayers in different jurisdictions. However, many countries, including Nigeria, also consider domestic transactions between affiliates. The new regulations were issued on August 2, 2012 and are effective for all tax years beginning on or after that date. As such, calendar-year taxpayers began being subject to the new rules on January 1, 2013.
Which taxpayers do the rules affect?
OYEDELE: The regulations are applicable to a range of taxpayers defined as persons, individuals, entities, firms, partnerships, joint ventures, permanent establishments, trusts and associations described as “connected taxable persons” to the extent that one party participates, directly or indirectly, in the management, control or capital of the other, or where both parties have common control, management or shareholders.
Under the regulations, taxpayers are required to prepare transfer pricing documentation prior to the due date for filing their income tax returns for the year in which the documented transactions occurred. In the event of an audit by the Federal Inland Revenue Service (FIRS), taxpayers are required to present transfer pricing documentation within 21 days of receiving a request. Further, the regulations prescribe the completion and attachment of an annual declaration to the income tax return for transfer pricing, including specific claims about whether or not documentation exists.
Which transactions will be affected?
OYEDELE: Essentially, any transaction that affects income or expense of a connected taxable person is subject to the regulations. These include sale or leasing of tangible goods, loans and financing, licensing and sale of intangible property, and the provision of services. In all likelihood the principles established by the regulations will be applied in other tax-related matters, such as withholding tax, capital gains tax and value-added tax. The regulations are equally applicable, whether the transaction is cross-border or domestic.
What are the specified methods being used for different transactions?
OYEDELE: The regulations provide for the use of five specified methods identical to those promulgated by the OECD Guidelines and the UN Manual. These are: the comparable uncontrolled price method; resale price method; cost plus method; transactions profit split method; and transactional net margin method. Taxpayers may select to use an unspecified method if they can demonstrate that none of the prescribed methods are suitable and that the unspecified method yields an arm’s length result.
To what extent can taxpayers agree pricing with the tax authorities ahead of time?
OYEDELE: The regulations allow taxpayers to enter into advance pricing agreements (APAs) with the FIRS or jointly with the competent authority of the taxpayer’s country of residence if there is an applicable treaty providing for mutual agreement procedures. There is no application or processing fee for an APA, but a minimum annual transaction value of N250m ($1.6m) must be met. Generally, APAs will have a term of three years unless cancelled under certain circumstances by either the FIRS or the taxpayer, or both.
What is your advice for authorities and taxpayers?
OYEDELE: In matters of taxation, there is never a convenient time. While the new regulations represent a step in the right direction for Nigeria, the necessary administrative infrastructure and capacity building processes should be embarked upon as a matter of urgency in order to avoid unnecessary friction with taxpayers.
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