Inside Tax : Issue 11 - Transfer Pricing Documentation
Positioning for Compliance
The TP Regulations, which became effective on 2 August 2012, have expanded the scope of compliance requirements for taxpayers to include all transactions between connected persons within or outside Nigeria and those between a Permanent Establishment (PE) and its head office or other related affiliates.
Ordinarily, a Nigerian company is required to file its annual tax returns comprising the following documents with FIRS:
- audited financial statements
- computation of tax and capital allowances
- self-assessment forms for corporate income tax and tertiary education tax
- evidence of settlement of the income and tertiary education tax liabilities
Under the TP Regulations, the Nigerian related party would in addition to the above be required to:
- prepare TP documentation
- complete TP Declaration Form.
In the case of TP documentation, the TP regulations require the Nigerian related party to “record in writing or any other electronic device or medium, sufficient information or data with an analysis of such information and data to verify, that the pricing of controlled transactions is consistent with the arm's length principle and the connected taxable person shall make such information available to [FIRS] upon written request by [FIRS]”.
The TP documentation will usually include information on the group structure and business activities of the related parties, details of the related parties' transactions; the pricing method adopted; the reasons for selecting the method; and information on comparable transactions between unrelated parties.
The TP documentation is expected to be prepared taking into account the complexity and volume of transactions which occurred during the basis period. For group of companies which already have TP policies covering the range of related party transactions occurring within the group, the Nigerian related party will be required to adapt such a policy with appropriate modification to reflect considerations for local circumstances.
There is the possibility that the TP policy may be broader than the TP documentation. This is because the TP documentation will be transaction specific i.e. the documentation would only cover such intra-group/related –party transactions which occurred during the basis period. This is why the TP documentation is expected to be updated on a yearly basis.
For instance, if there are four categories of related-party transactions covered by the TP policy and only two occurred with the Nigerian related party during the basis period, the TP documentation that will be prepared would only include the transactions which occurred and not any other transaction category included in the TP Policy.
The TP documentation is not required to be filed by the taxpayer at the time of submission of its annual tax returns. However, given that the TP Regulations empower FIRS to request by a written notice, the taxpayer to submit its TP documentation and direct that such a request be complied with by the taxpayer within 21 days, it is only logical that the taxpayer ensures that the TP documentation covering the basis period is available or finalised by the time of submission of its tax returns.
With respect to the TP Declaration Form, the format is disclosed as a schedule to the TP Regulations. The Form has 4 parts as follows:
- Part A – particulars of parent company & transaction between related companies
- Part B – particulars of company
- Part C – particulars of five major shareholders of controlled company
- Part D – other particulars
The TP Declaration Form when completed and signed is required to be submitted together with the other documents (afore-mentioned) comprised in the annual tax returns of the Nigerian related party company.
Failure to comply with these requirements exposes the taxpayer to penalty as prescribed in the relevant provision of the applicable tax law. Principal officers of the companies executing the TP declaration Form should review the Form carefully and ensure that the information contained in the TP Declaration Form would be consistent with any other information already known or provided in respect of the company in prior years or be able to clarify any new information. This is to ensure that they will not be exposed to
allegations of false declaration to FIRS, which upon conviction can result in a fine, imprisonment or both as prescribed also in the relevant provision of the applicable tax law.
There are however concerns among taxpayers on the requirement for TP documentation. These concerns include:
- Selection of comparables for the Nigerian/African market for benchmarking purposes: As TP advisors know, searching for information on comparable uncontrolled transactions and identifying comparables need a prior analysis of the company's transaction and of the relevant comparability factors.
- In the absence of comparables from African markets for instance, would FIRS accept European based benchmarks? Existing Databases for TP analysis focus more on data from developed countries. TP analysis usually relies on the use of databases and there is no reliable publicly or commercially available database covering African companies or transactions.
- Would the impact of an unstable business environment not render adjustment by FIRS subjective?
- Would FIRS truly, in practice, limit itself to inter-company transactions/balances arising only in the companies’ basis periods subsequent to 2 August 2012?
- Implementing the compliance requirements for IFRS adoption and TP Regulations simultaneously are burdensome given the level of resources or administrative time required.
Nevertheless, the importance of maintaining detailed and accurate TP documentation cannot be over emphasised particularly when FIRS seeks to carry-out a review or examination of the related party transactions. The taxpayer is enjoined to approach its tax advisors and/or FIRS for clarification on any issue of concern regarding documentation under the TP regulations.