Transfer Pricing: the New Reality
“If you make money, government
shoves you in the creek once a year
with it in your pockets and all that
don’t get wet you can keep.”
Will Rogers
Transfer Pricing: the New Reality
Table of Contents
1. Transfer Pricing: what, how and why?
2. Key Nigerian Tax Underpinnings
3. Pre-TP Regs: Regulatory Regime
4. TP Regs: Objectives & Overview of Provisions
5. TP Regs: Compliance, “Stay Awake” issues
6. Job for the Boys?
7. Questions
Transfer Pricing: the New Reality
1. ‘Transfer Pricing’: what, how and why?
• Inter-company (or divisional) pricing arrangements; rate at
which related companies sell services and products to one
another.
• Being business, pricing will seek to optimize (overall Group)
tax exposure.
• Multinationals particularly adept at this (cross-border shifting
of costs and profits); creating competitive advantage over
other sector players (e.g. thru split contracts and recharges).
• Illustration: MNC’s global procurement arm (inputs); sells to
manufacturing affiliates; in turn sells to global marketing
division (cost +) which sells to respective (resident)
subsidiaries. Charge out of HO/admin costs, etc. (NOTAP)
• Recent Templars example: Sandoz/Novartis (Vivian O)
Transfer Pricing: the New Reality
2. Key Nigerian Tax Underpinnings
– every entity separately taxable; no Group taxation relief. Cf. 2007
opinion: client not happy we shot down carefully thought out scheme
involving assignment of ‘tax loan’ to affiliate that had taxable position;
– illustrated by:
•
FIRS’ refusal to allow related party interest free loan or concessionary
interest rate (cf. with foreign loans – why?);
•
‘uncompetitive’ cost mark-ups, etc;
•
service fee arrangements oversight by NOTAP (albeit generally
applicable);
•
CITA provisions that management fee arrangements between
Nigerian companies be approved by Minister (cf. s. 27(g) and (h).
Note: tax planning (not evasion) still a legitimate exercise: CIR v Duke of
Westminster; Helvering v. Gregory; Gov. of Kogi v. Ahmadu
Transfer Pricing: the New Reality
2. Key Nigerian Tax Underpinnings
– CIR v Duke of Westminster [1936] A.C. 1, per Lord Tomlin : “everyman is
entitled if he can to order his affairs so that the tax attaching under the
appropriate Acts is less than it otherwise would be. If he succeeds in
ordering them so as to secure that result, then, however unappreciative
the Commissioners of Inland Revenue or his fellow taxpayers may be of his
ingenuity, he cannot be compelled to pay an increased tax.”
– Justice Learned Hand in Helvering v. Gregory 69 F. 2D (2nd Cir. 1934), Aff’d
293 US 465 (S. Ct.) stated: “…there is not even a patriotic duty to increase
one’s taxes”, whilst striking down a tax motivated re-organisation as
lacking business purpose.
– Nonetheless, it’s no joke that “the difference between tax avoidance and
tax evasion is the thickness of a prison wall.”
Transfer Pricing: the New Reality
2. Key Nigerian Tax Underpinnings
– Ahmadu v. Governor of Kogi State [2002] 3 NWLR (Pt. 755), 502, at 522, (CA):
“a law which imposes pecuniary burden is under the rule of interpretation
subject to the rule of strict construction. All charges upon the subject must be
imposed by clear and unambiguous language because in some degree they
operate as penalties. Thus, the subject is not to be taxed unless the language
of the statute clearly imposes the obligation. The language of the statute
must not be strained in order to tax as transaction which had the legislature
thought of it, would have been covered by appropriate words. In a taxing
legislation, therefore, one has to look merely at what is clearly said. There is
no room for any intendment. There is not equity about tax, no presumption at
all and nothing is to be implied.
– Tax Planning: taking advantage of tax provisions (loopholes).
Transfer Pricing: the New Reality
3. Pre-TP Regs: Regulatory Regime
- Nigeria’s GAAR (General Anti-Avoidance Rules) embodied in s.22
CITA; replicated in pari materia as ss. 20 CGTA; 15 PPTA & 17 PITA;
- S. 22(1) : “where the Board is of opinion that any disposition is not in fact
given effect to or that any transaction which reduces or would reduce the
amount of any tax payable is artificial or fictitious, it may disregard any
such disposition or direct that such adjustments shall be made as
respects liability to tax as it considers appropriate so as to counteract
the reduction of liability to tax affected, or reduction which would
otherwise be affected, by the transaction and any company concerned
shall be assessable accordingly.”
- S. 22(2)(a): “disposition includes any trust, grant, covenant, agreement or
arrangement” (concept of “sale without disposal”).
- Interesting CGTA provisions: e.g. ss.19, 21 on bargains comprising two or
more transactions and market value respectively. ‘Consolidation’ and
‘splitting’ and of transactions depending on whether or not single
bargain.
Transfer Pricing: the New Reality
3. Pre-TP Regs: Regulatory Regime
- Nigeria’s GAAR (General Anti-Avoidance Rules) (cont’d):
- S.22(2)(b) seeks to catch related party transactions: “transactions
between persons one of whom either has control over the other or, in the
case of individuals, who are related to each other or between persons
both of whom are controlled by some other person, shall be deemed to be
artificial or fictitious if in the opinion of the Board those transactions have
not been made on terms which might have been expected to have been
made by persons engaged in the same or similar activities dealing with
one another at arm’s length.”
-
-
Taxspectives’ Artificial Transactions article (Feb 2012, reiterated 2007
view): Nigerian GAAR ‘basic’ vis a vis increasing sophistication of
transactions; risk of ‘equity varying according to the size of Chancellor’s
foot’.
TP Regs 2012 a welcome attempt to provide clarity, play ‘catch up’ with
the market.
Transfer Pricing: the New Reality
4. TP Regs: Objectives & Overview of Provisions
-
Issue date 2nd August 2012 but enforcement date 1st Jan 2013 (no provision
to latter effect in the Regs);
-
Purpose (Reg 1): to give effect to s.22 CITA and equivalents in PITA, PPTA (no
reference to CGTA, SDA, VATA - “other relevant tax laws” per Reg.19(s). Is
it because CGTA already ‘watertight’? Focus on the big picture: income
taxes? Not much room for TP in VAT (TP Regs cant change rule that
reimbursements not VATable, only mark-up is).
-
Objectives (Reg 2): taxation on appropriate basis corresponding to
economic activity undertaken in Nigeria; checking ‘evasion’ through
under/overpricing; provision of tax regulatory enforcement (‘fighting’)
tools; level playing field with MNCs; ensure certainty of Nigerian TP
treatment; obviate double taxation.
-
Scope (Reg 3): covers transactions between CTPs (connected taxable
persons) carried out in a manner not consistent with arm’s length principle.
“Arm’s length” is a picture: tax law wants businesses to keep their distance!
Transfer Pricing: the New Reality
4. TP Regs: Objectives & Overview of Provisions
-
Scope (Reg 3): businesses to keep their ‘transactional’ distance in:
-
sale/purchase of goods and services;
sale, lease, purchase of tangible assets;
transfer, purchase, license or use of intangible assets;
provision of services;
lending or borrowing of money;
manufacturing arrangement;
any transaction that may affect profit and loss or any other matter
incidental to or connected with listed transactions above.
-
Transactions between PEs and HQ/other CTP is regarded as controlled
transaction (caught by the Regs).
-
Reg 4. prescribes compliance with arm’s length principle (ALP) in
transactions between CTPs: “taxable profits resulting from the
transaction(s) must be in a manner consistent with the [ALP].” Failure
entitles FIRS to make adjustments.
Transfer Pricing: the New Reality
4. TP Regs: Objectives & Overview of Provisions
-
TP Methods & Evaluation of Transactions (Reg 5): in determining consistency
with ALP applicable TP methods shall be utilised:
-
Comparable Uncontrolled Price (CUP);
Resale Price;
Cost Plus;
Transactional Net Margin;
Transactional Profit Split; and
Any other method as may be prescribed by FIRS from time to time.
Most appropriate method to be a question of circumstances of the relevant
transaction: strengths and weaknesses; analysis of functions performed, assets
employed and risks assumed; availability of reliable information; degree of
comparability between controlled and uncontrolled transactions, etc.
Starting point for FIRS’ review is to use the TP method used by the taxpayer.
Taxpayer can use different method if listed ones cant be reasonably applied and
the different method gives rise to result that is consistent with ALP.
Transfer Pricing: the New Reality
4. TP Regs: Objectives & Overview of Provisions
-
TP Methods & Evaluation of Transactions (Reg 5) (cont’d):
-
-
Combination of transactions where closely linked or forms a continuum to
perform comparability analysis or apply any of the listed TP methods.
Advance Pricing Agreements (APA, Reg 7):
-
APA between CTP and FIRS to establish appropriate criteria for determining
whether CTP has complied with ALP for certain future controlled
transactions over a fixed period, provided such APA is consistent with TP
Regs.
-
Request for APA to be accompanied by comprehensive information/
documentation on activities subject to the APA (Reg. 10(2) - not an avenue
to “blindside” the Revenue): detailed descriptions, analysis of functions,
risks and assets, proposed duration, proposal for determination of TP for
covered transactions, etc.
- Cumulative amounts not less than N250 million of deductible costs or
taxable revenues in any YoA.
-
APA may have cross-border coverage (IRS of other Countries, Reg. 7(2)(c).
Transfer Pricing: the New Reality
4. TP Regs: Objectives & Overview of Provisions
-
Advance Pricing Agreements (APA, Reg 7):
-
FIRS may specify basis for acceptance, modification or rejection of request.
Will the last two ground the tax objection process under 5th Schedule FIRS
Act? Yes, subject to Decision Review Panel (DRP) potentially reviewing the
objection (Reg. 14) but DRP’s decision will be subject to appeal to TAT/FHC.
-
Quaere: Any benefit in having APA, why not proceed on a PAYG basis
(within context of TP Regs)?
-
Quaere: how binding are APAs, given the FHC decision in Halliburton WA v.
FBIR? Should be binding, subject to underlying assumptions for future
event holding true (Reg 7(b)(iii)).
-
Termination of APAs by:
-
-
FIRS: (a) Max duration is 3 years (effluxion of time); (b) Material non-compliance
with APA by taxpayer; (c) Material change/breach of critical underlying
assumptions; (d) Change in tax laws; and (e) APA vitiated by fraud, omission or
misrepresentation;
Taxpayer (on notice to FIRS): (a) material change in premise of APR; (b) change
structure (business model) renders APA irrelevant; and (c) legislative change.
Transfer Pricing: the New Reality
4. TP Regs: Objectives & Overview of Provisions
-
-
Miscellaneous:
-
FIRS to treat trade secrets/commercially sensitive information/
documentation provided by taxpayer for purposes of negotiating APA
confidential (Reg 7(10)). Quaere: no explicit damages for breach; damages
may not even suffice if material is sufficiently sensitive/access by
competitors could spell negative consequences for taxpayer. Safeguards to
ensure non-accidental or unauthorized disclosure necessary.
-
Corresponding adjustment by FIRS (to avoid double taxation) where
Revenue of another country having DTT with Nigeria adjusts the taxation of
transaction involving a CTP (and that adjustment is consistent with ALP).
Comparability Factors (Reg 9):
- presumptive benchmark is similar/identical transaction between two
independent parties carrying on business in sufficiently comparable
conditions;
- uncontrolled transaction is comparable to controlled transaction where no
significant differences between both under comparable circumstances that
could impact conditions being examined under relevant TP method.
Transfer Pricing: the New Reality
4. TP Regs: Objectives & Overview of Provisions
-
Comparability Factors (Reg 9) (cont’d): relevant factors in determining whether
two or more transactions are comparable (economic relevance to
circumstances of the transaction):
- Characteristics of subject matter goods, property or services;
-
Functions undertaken party (CTP) to transaction vis a vis assets used and
risks assumed;
-
Contractual terms of the transaction;
-
Economic circumstances/context for the transaction; and
-
Business strategies pursued by the CTP
-
Applicability of UN & OECD Tax Documents (Reg 11): helpful for interpretative
views from other jurisdictions, capacity leverage for compliance/enforcement
by CTPs and FIRS. Note that provisions of tax laws prevail in event of
inconsistency (Reg 12).
-
TP Regs superior to other regulatory authorities approvals
(e.g.
NOTAP/DPR/NNPC (NAPIMS), Reg. 12(2)). Quaere – is this not open to challenge?
Transfer Pricing: the New Reality
5. TP Regs: Compliance, “Stay Awake” issues
-
Comprehensive documentation and disclosure requirements (Reg 6). Q:
whether TP Regs didn’t take too long in coming – given TP’s reported
jostling with corruption as capital flight leader out of emerging economies;
-
CTP to record sufficient info/data with analysis to verify that pricing of
controlled transactions consistent with ALP.
-
Obligation established without prejudice to FIRS’ entitlement to request
additional information pursuant to audit/review functions.
- Documentation to be in place prior to filing income tax returns for relevant
YoA.
-
TP Declaration Form (11 pages) must be completed and appended to the tax
returns for the YoA. Impact on Nigeria’s Ease of Paying Taxes rating?
-
FIRS’ request for information must be complied with by taxpayer within 21
days, extension may be granted upon reasonable request.
-
Documentation retained by taxpayer must be adequate to enable FIRS
verify that CTs consistent with ALP.
Transfer Pricing: the New Reality
5. TP Regs: Compliance, “Stay Awake” issues
-
Burden of proof that conditions of CT are consistent with ALP is on the
taxpayer: pressure to provide documentation (Reg. 6(10).
- Generally, increased compliance burden but arguably ‘worth the trouble’.
-
Offences and penalties as in applicable tax laws (Reg.13, superfluous
provision?)
- Dispute Resolution (Reg. 14)
-
3 person Decision Review Panel (DRP) to resolve disputes/controversy
arising from implementation of the TP Regs. DRP ‘internal’ to FIRS.
-
Taxpayer to refer assessment on adjustment to DRP within 30 days of
receipt (risk of final and conclusive assessment for default – doctrine of
exhaustion)
-
Decision of DRP ‘final and conclusive’ without prejudice to taxpayer’s right
of appeal to TAT or FHC, effectively making decision equivalent to a NORA
(Notice of Refusal to Amend).
Transfer Pricing: the New Reality
5. TP Regs: Compliance, “Stay Awake” issues
- Definitions (Reg. 19)
-
“CTPs”, “CTs”, “UCTs”, “ALP” (name it!) are all defined there. Technical
terms necessary to interprete and apply the TP Regs would make constant
resort to the definition provision inevitable.
Transfer Pricing: the New Reality
6. Job for the Boys?
- Compliance means lots of work for professional advisors including
lawyers - advisory services, case evaluation, support with representation
with DRP, anticipated increase in tax litigation (TP related), etc.
-
FIRS too will be busy!
Transfer Pricing: the New Reality
Questions?