Prior to the enactment of Transfer Pricing Regulations in Nigeria in 2012 (the Regulations), the tax authorities in Nigeria had relied solely on the general anti-avoidance rules (GAAR) in the various Nigerian tax legislation to review intra-group arrangements.
The GAAR provisions laid emphasis on 'sham arrangements' (“…dispositions that are not in fact given effect to…”), and 'artificial/ fictitious transactions' (“…transactions which have not been made on terms which might fairly be expected to have been made by persons engaged in the same or similar activities dealing with one another at arm's length…”)
One of the key defects of the GAAR provisions was that it did not provide clear guidelines and parameters on which affected transactions by taxpayers will be evaluated. Thus, the provisions were therefore ineffective to achieve its set objective - ensuring Nigeria's tax base is not eroded and it gets a 'fair share' of tax on revenue sourced therefore (not necessarily eroding other jurisdiction's tax base).
Decisions by tax authorities relying on the GAAR provisions were often discretionary, subjective, speculative and arbitrary triggering usually avoidable contention, controversies and/or disputes with taxpayers.
The introduction of the Regulations provided a more structured regime for assessing affected transactions and combating mispricing of intra-group commercial relationships and the attendant tax flight allegedly being suffered by Nigeria. Similarly, multi-national companies appreciated the potential for relief from arbitrariness under the erstwhile regime.