Combating Base Erosion and Profit Shifting (BEPS): An In-depth Analysis of Nigeria's Transfer Pricing Regulations

The Income Tax (Transfer Pricing) Regulations, 2018, introduced by the Federal Inland Revenue Service (FIRS), represent Nigeria's commitment to tackling Base Erosion and Profit Shifting (BEPS). These regulations are designed to ensure that multinational enterprises (MNEs) operating in Nigeria adhere to international standards and pay their fair share of taxes in jurisdictions where economic activities occur and value is created.

This article delves into how Nigeria's Transfer Pricing Regulations address BEPS concerns in intra-group transactions and the documentation requirements imposed on MNEs to ensure compliance.

Addressing BEPS in Intra-Group Transactions

BEPS arises when MNEs exploit gaps and mismatches in tax rules to shift profits to low- or no-tax jurisdictions. Nigeria's Transfer Pricing Regulations address this issue through robust mechanisms grounded in the arm’s length principle and aligned with the OECD Transfer Pricing Guidelines.

1. Arm’s Length Principle

The regulations require that all controlled transactions between connected persons (related parties) be conducted at arm’s length. This means the terms and pricing of these transactions must reflect what would have been agreed upon by independent parties in similar circumstances.

Controlled Transactions Include:

• Sales of goods and services.
• Royalties and license fees.
• Loans and financial arrangements.
• Management and technical service fees.

By enforcing the arm’s length principle, the regulations prevent MNEs from setting artificially low prices for transactions in Nigeria to minimize taxable profits.

2. Alignment with OECD Guidelines

The regulations adopt methodologies consistent with the OECD Guidelines, ensuring global comparability and compliance. This alignment reflects Nigeria’s active participation in the Inclusive Framework on BEPS, which comprises over 140 jurisdictions working to implement BEPS action plans.

3. Anti-BEPS Provisions

The Transfer Pricing Regulations include specific provisions to address common BEPS strategies:

• Re-characterization of Transactions: The FIRS may disregard or re-characterize a transaction that lacks economic substance or is primarily aimed at tax avoidance.

Example: A Nigerian subsidiary making excessive payments to a parent company for services not delivered.

• Thin Capitalization Rules: Interest deductions on related-party loans are capped at a percentage of earnings before interest, taxes, depreciation, and amortization (EBITDA). This prevents MNEs from using excessive debt to reduce taxable income in Nigeria.
• Profit Split Method: Ensures that profits are allocated to Nigeria based on value creation within the country, particularly in cases involving intangible assets or highly integrated operations.
• Penalty for Non-Compliance: Significant penalties are imposed for non-compliance with the regulations, serving as a deterrent to abusive practices.

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Documentation Requirements

To ensure compliance, MNEs are required to maintain extensive documentation to justify the arm’s length nature of their intra-group transactions. The documentation requirements are designed to enhance transparency and provide the FIRS with sufficient information to assess compliance.

1. Master File

The Master File provides a high-level overview of the global operations and transfer pricing policies of the MNE group. It ensures the tax authorities have a comprehensive understanding of the group’s operations.

Key Components:

• Organizational structure, including the ownership of the group.
• Description of the group’s business activities and value chain.
• Transfer pricing policies applied across the group.
• Allocation of global profits and economic activities.

2. Local File

The Local File focuses on the specific Nigerian entity and its related-party transactions. It ensures that the entity’s transfer pricing practices align with the arm’s length principle.

Key Components:

• Detailed description of related-party transactions, including the nature and terms.
• Comparability analysis, demonstrating that the pricing is consistent with independent transactions.
• Justification for the chosen transfer pricing methodology.

3. Country-by-Country Report (CbCR)

The CbCR applies to MNE groups with consolidated annual revenue exceeding NGN 160 billion. It provides tax authorities with an overview of the global allocation of income, taxes, and economic activity.

Key Components:

• Breakdown of revenue, profits, and taxes paid in each jurisdiction.
• Number of employees, assets, and business activities in each location.
• Identification of the jurisdictions housing the group’s entities.

This reporting ensures that profits are not artificially shifted to low-tax jurisdictions, promoting fairness and transparency.

Compliance Challenges and Penalties

While the regulations are robust, MNEs operating in Nigeria face certain challenges in ensuring compliance:

1. Challenges

• Comparable Data: Nigeria's unique economic environment makes it challenging to find comparable data for certain transactions.
• Cost of Compliance: Preparing and maintaining detailed documentation, especially for multiple jurisdictions, can be resource-intensive.
• Complexity of Regulations: Navigating the intricacies of transfer pricing laws and aligning them with international operations can be overwhelming.

2. Penalties for Non-Compliance

The FIRS imposes significant penalties for non-compliance, including:

• NGN 10 million for failure to file the CbCR.
• Additional penalties for incorrect or incomplete documentation.
• Reputational risks and potential double taxation from unresolved disputes.

Conclusion

Nigeria’s Transfer Pricing Regulations establish a robust framework to combat BEPS, ensuring that MNEs contribute their fair share of taxes where value is created. By adhering to the arm’s length principle, aligning with OECD Guidelines, and maintaining comprehensive documentation, MNEs can navigate the complexities of intra-group transactions while minimizing tax risks.

Compliance with these regulations is a legal obligation and a strategic imperative for MNEs operating in Nigeria. By fostering transparency and mitigating BEPS, Nigeria reinforces its commitment to building a fair and sustainable tax environment that supports economic growth.

Olatunji Abdulrazaq CNA, ACTI, ACIArb (UK)

Founder/CEO, Taxmobile.Online