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Inside Tax : Issue 14 - Is there a 'safe harbor' under Nigeria's TP Regulations?


Transfer PricingTransfer pricing documentation with its necessary requirement for functional and benchmarking analyses is not an easy task under the TP regime.

In recognition of the need for a leeway out of the burdensome compliance requirements, TP safe harbors have been recommended/created under OECD TP guidelines and successfully implemented by several jurisdictions especially for less complex transactions and/or smaller taxpayers.

According to the OECD guidelines on transfer pricing, a ‘safe harbor’ is a provision that applies to a defined category of taxpayers or transactions and which relieves eligible taxpayers from certain obligations otherwise imposed by a country's general transfer pricing rules. These obligations include some or all associated transfer pricing documentation requirements.

Nigeria's TP Regulation 6 requires taxpayers to prepare and maintain contemporaneous TP documentation evidencing the application of “arm's length” principle in the pricing of related party transactions. In addition, affected taxpayers are also required to file the TP Declaration form, which is to be appended to the annual income tax returns of the  taxpayer.

However, Regulation 15 stipulates Nigeria’s 'safe harbor' rule as follows: “A connected taxable person may be exempted from the requirements of Regulation 6 where:

(a) the controlled transactions are priced in accordance with the requirement of Nigerian statutory provisions; or

(b) the prices of connected transactions have been approved by other Government regulatory agencies or authorities established under Nigerian law and satisfactory to the Service to be at arm's length”.

Essentially, the 'safe harbor' rules are designed to:

  • reduce compliance costs for taxpayers relating to TP documentation for qualifying controlled transactions;
  • provide a level of assurance to taxpayers that prices charged or received on controlled transactions will be accepted by the tax authority and not be subjected to audit or re-assessment.
  • it also allows tax administrators to direct their resources from examination of such transactions to more complex or higher risk transactions.

A typical example of 'safe harbors' under the Nigerian TP Regulations is the thresholds approved for companies by National Office for Technology Acquisition and Promotion (NOTAP) in respect of payment for consultancy, management, technical services and license fees.

Some practical considerations however around Nigeria's TP ‘safe harbor’ rules are:

  • Would the ‘safe harbor’ rules strictly apply to all connected transactions  approved by Government regulatory agencies e.g. NOTAP, such that the prices would be adopted as arm's length prices during any TP review process?
  • Does the typical process of obtaining a Government approval on connected transactions (NOTAP for instance) relate in any way to the TP functional and benchmarking analysis, in which case, the transactions may not require further testing?
  • Could there be any practical convergence between the two processes and/or the Government body involved and FIRS to make the safe harbor a certainty?

As stated above, where 'safe harbor' exemptions are applicable, taxpayers need not comply with the documentation and filing requirements under the TP Regulations other than the administrative requirements that provide the ‘safe harbor’ cover in the first instance e.g. NOTAP's approval on service/licensing agreements.

However, in Nigeria, the expected effect of the ‘safe harbor’ provisions is significantly whittled down to the extent that the prices are subject to the satisfaction of FIRS that they are at arm's length.

An inevitable inference from Nigeria's TP Regulations then is that FIRS has chosen not to tread the path of “absolute safe harbors” as done in countries like Brazil, United States, New Zealand, and Australia where once a regulatory agency sanctions the prices of the relevant related party transaction, the tax authorities do not subject those transactions to further review or examination. The question then would be whether FIRS' approach of reserving a power to review those transactions reflects its level of confidence in the competence of personnel, credibility and transparency of the process available within the 'safe harbor' agency.

Despite the apparent window that the 'safe harbor' rules under the TP Regulations purport to represent in relation to TP documentation for the affected transactions, it would be prudent for the taxpayer engaged in such related party transactions to establish the prices that are justifiable for TP review purposes since FIRS can review those transactions if it is of the opinion that they are not at arm's length. This will ensure that the taxpayer is not caught unawares.

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