Central governments and tax authorities around the world are paying more attention to cross-border transactions in order to improve transfer pricing regimes.
Nigeria has introduced legislations and regulations with detailed requirements for taxpayers to document and support the application of arm’s length principle to intercompany transactions.
Transfer price is the price at which services, tangible and intangible properties are traded among related entities. Nigeria introduced transfer pricing regulations (Regulations) in 2012. With effect from August 2 2012, every company with related party or intra-group transactions is required to conduct such transactions at arm’s-length.
The Regulations require a taxpayer to conduct and document an adequate transfer pricing study to demonstrate arm’s-length by conducting and documenting. While it is clear that transfer pricing is relatively new in Nigeria, it is vital that taxpayers start on a good note by managing their transfer pricing risk proactively.
Experts say, although Nigeria recently introduced its regulations for transfer pricing audit, which will be commonplace as soon as taxpayers start filing transfer pricing statutory forms. Effective transfer pricing risk management begins long before the tax authority decides to audit a taxpayer.
“Contemporaneous documentation is the first line of defence in case of a transfer pricing audit. Proper documentation establishes the basis to support and defend tax positions. This will help the taxpayer to shift the burden of proof to the tax authorities” Victor Adegite, Senior Manager, Tax, Regulatory & People Services at KPMG Advisory Services, Lagos said.
People familiar with the matter contend that another strong reason why managing transfer pricing risk is important is the possibility of simultaneous transfer pricing audits across tax jurisdictions in Africa. The African Tax Administration Forum (ATAF), an umbrella body for tax authorities across the continent, recently signed a Mutual Assistance Agreement for information exchange on tax matters. This agreement will allow for mutual information exchange of taxpayer information, joint assessment and audits as well as inter-jurisdictional support on complex tax matters.
The global significance of this was played up, Feb. 28 with the agreement between the Organisation for Economic Corporation and Development (OECD) and Brazil, which launched a joint project to examine the similarities and gaps between the Brazilian and OECD approaches to valuing cross-border transactions between associated firms for tax purposes. The project will also assess the potential for Brazil to move closer to the OECD’s transfer pricing rules, which are a critical benchmark for OECD member countries and followed by countries around the world.
The first step in addressing any transfer pricing risk is to identify its source. Taxpayers unfamiliar with the concept of transfer pricing run the risk of rushing into compliance mode without proactively identifying and dimensioning the issue. This may trigger unexpected additional tax liability in future. This was the issue in a case involving the French tax authority and eBay France.
STEPHEN ONYEKWELU
