Under proposed changes, businesses will be required to demonstrate commercial substance (e.g., real and resident personnel having key responsibilities, substantive office space, etc). The days of holding annual board meetings in places like Bermuda and British Virgin Islands just to demonstrate effective management may be over.
(iii) Tightening Transfer Pricing (TP) rules on high-risk transactions. BEPS seeks to tackle “excessive” interest deduction and other high-risk transactions. There are situations where a local affiliate enters into an intercompany arrangement that would rarely be acceptable between third parties (e.g., a Nigerian startup with little or no market ratings obtaining high levels of borrowings from its parent). Under BEPS, equity capital adequacy will become a considered item, notwithstanding freedom of capitalisation granted under local legislation. Beyond providing TP documentation on appropriateness of intercompany interest, taxpayers may at a more fundamental level be required to benchmark capital structures of highly-leveraged Nigerian affiliates with potential consequences for non-deduction of excessive interest and/or re-characterisation as dividend. This may well portend the formal introduction of thin capitalisation or other deduction-limiting rules in Nigeria as a way of providing a uniform standard for taxpayers.
(iv) Greater demand for taxpayer disclosures. Taxpayers naturally have an information advantage over the authorities. While some countries like the Netherlands have progressed information-sharing models such as horizontal monitoring and cooperative compliance, it is often difficult for tax authorities to obtain details before the fact except through voluntary opportunities like advanced pricing arrangements or advanced tax rulings. BEPS proposes specific and mandatory taxpayer disclosures on aggressive or abusive tax planning arrangements, as well as TP disclosures on global value chain on a country-by-country basis which can be accessed by every tax jurisdiction in which companies do business. This type of reporting is a notch above the typical “masterfile” contained in many TP documentation packs and would have far-reaching implications of international proportions for taxpayers, not least in Nigeria. Tax authorities would be inclined to ask: Why are there lots of profits attributed to country ‘A’ but so little headcount/assets/functions? Many multinationals are concerned how this information will be used and whether it will be interpreted in a reasonable and confidential manner.
(v) Coming of age for FIRS? BEPS places enormous responsibility on tax administrations around the world to share information and make tax adjustments based on cross-border counterparty’s tax treatment. The likelihood of subsequent adjustments creates uncertainty. This new approach would require FIRS to be proactive, collaborative with taxpayers, and consistent in its interpretation and practice. The need for deep, sustained capacity upgrade on both sides has never been greater. As a key stakeholder representing Nigeria at many multilateral tax forums, FIRS has an immense opportunity to influence the BEPS debate and develop consensus that best aligns with Nigeria’s fiscal imperatives. The roll-out of many OECD tax initiatives would not be successful without active embrace by developing countries. It is important therefore that FIRS and Nigeria do not allow themselves to be railroaded in ongoing negotiations. FIRS has been offered a seat at the table as an equal partner – it must now make its views count.
(vi) Creating strategic comparative country advantage. With emphasis on business purpose, many multinationals are resourced enough to move substance to preferential tax regimes rather than lose the associated tax benefits. Tax-friendly jurisdictions like the Netherlands in Europe; Singapore in Asia; and Dubai in the Middle East are already strategically positioned as regional economic hubs to profit from this global remobilisation of capital (well-organised societies; English-speaking; strong financial systems; extensive air travel networks, general liveability). Although the biggest economy in Africa, Nigeria is expected to do more to attract investments entering the continent. South Africa, its main economic rival, has ratified over 80 double tax treaties (compared with Nigeria’s 12), including with significant trade partners like the US, United Kingdom, BRIC, MINT and several OECD countries. Yet while little evidence suggests tax treaties on their own are a major driver in deciding investment destination for multinationals in Nigeria (of greater concern is general business climate and enforceability of contracts, for example), developing an important treaty network is a statement of intent and can be a source of competitive advantage, particularly as a way of deepening and diversifying the economy. Feedback from taxpayers shows they are more concerned with the impact of double taxation than tax avoidance through artificial structures.
(vii) The multilateral instrument. If the BEPS proposals are adopted in their current form, the discussion around creating a multilateral instrument that allows countries amend existing domestic or bilateral provisions automatically will probably represent the biggest sea change of the entire project. In reality though, how will this work? Apparently, there are concerns whether countries would not be giving away too much of their sovereignty by acceding to this approach, or whether a one-size-fits-all would not be detrimental to years of favoured country relations built over time. Although use of the instrument will only be for “interested” parties, chances are it would become strongly suggestive to remain integrated in global business, especially for the developing countries. This is an innovative proposition that will be scrutinised by government ministries and departments of justice across the world in the months and years to come.
Conclusions
Nigeria has generally aligned with and benefitted from developments in the international taxation space, the most recent example being the 2012 TP Regulations modelled loosely after the OECD Guidelines. For both FIRS and taxpayers, time and cost implications of monitoring these global changes and ultimately addressing compliance requirements if introduced are going to increase. FIRS should be able to rationalise what is tenable for the Nigerian environment.
Long-serving global business models will be challenged. This is the time to start planning anew and telling a story that checks out. There is concern as to whether BEPS would not have a disproportionate impact on smaller cross-border companies, rather than the big multinationals that appear to be the intended target. For Nigerian taxpayers, relying on approvals from government agencies (e.g., National Office for Technological Acquisition and Promotion) as a basis for tax deduction of intercompany payments may no longer be sufficient, as recent taxpayer/FIRS engagements on transfer pricing have shown.
Countries have different economic priorities. For many of the developing world, finding the right policy balance of attracting foreign capital and protecting their tax base continues to pose a challenge in an ever dynamic and competitive world. It is crucial that Nigeria is clear on its own agenda and engages in a strategic way. Tax administrations and taxpayers can look forward to interesting times ahead.
Izinegbe Aibangbee
