Transfer Pricing: the New Reality If you make money, government shoves you in the creek once a year with it in your pockets and all that dont get wet.

Transfer Pricing: the New Reality

“If you make money, government shoves you in the creek once a

year with it in your pockets and all that don’t get wet you can keep.”

Will Rogers


Table of Contents

1. Transfer Pricing: what, how and why?

2. Key Nigerian Tax Underpinnings

3. Pre-TP Regs: Regulatory Regime

4. TP Regs: Objectives & Overview of Provisions

5. TP Regs: Compliance, “Stay Awake” issues

6. Job for the Boys?

7. Questions


1. ‘Transfer Pricing’: what, how and why?

• Inter-company (or divisional) pricing arrangements; rate at which related companies sell services and products to one another.

• Being business, pricing will seek to optimize (overall Group) tax exposure.

• Multinationals particularly adept at this (cross-border shifting of costs and profits); creating competitive advantage over other sector players (e.g. thru split contracts and recharges).

• Illustration: MNC’s global procurement arm (inputs); sells to manufacturing affiliates; in turn sells to global marketing division (cost +) which sells to respective (resident) subsidiaries. Charge out of HO/admin costs, etc. (NOTAP)

• Recent Templars example: Sandoz/Novartis (Vivian O)



– every entity separately taxable; no Group taxation relief. Cf. 2007 opinion: client not happy we shot down carefully thought out scheme involving assignment of ‘tax loan’ to affiliate that had taxable position;

– illustrated by:

• FIRS’ refusal to allow related party interest free loan or concessionary interest rate (cf. with foreign loans – why?);

• ‘uncompetitive’ cost mark-ups, etc;

• service fee arrangements oversight by NOTAP (albeit generally applicable);

• CITA provisions that management fee arrangements between Nigerian companies be approved by Minister (cf. s. 27(g) and (h).

Note: tax planning (not evasion) still a legitimate exercise: CIR v Duke of Westminster; Helvering v. Gregory; Gov. of Kogi v. Ahmadu



– CIR v Duke of Westminster [1936] A.C. 1, per Lord Tomlin : “everyman is entitled if he can to order his affairs so that the tax attaching under the appropriate Acts is less than it otherwise would be. If he succeeds in ordering them so as to secure that result, then, however unappreciative the Commissioners of Inland Revenue or his fellow taxpayers may be of his ingenuity, he cannot be compelled to pay an increased tax.”

– Justice Learned Hand in Helvering v. Gregory 69 F. 2D (2nd Cir. 1934), Aff’d 293 US 465 (S. Ct.) stated: “…there is not even a patriotic duty to increase one’s taxes”, whilst striking down a tax motivated re-organisation as lacking business purpose.

– Nonetheless, it’s no joke that “the difference between tax avoidance and tax evasion is the thickness of a prison wall.”



– Ahmadu v. Governor of Kogi State [2002] 3 NWLR (Pt. 755), 502, at 522, (CA): “a law which imposes pecuniary burden is under the rule of interpretation subject to the rule of strict construction. All charges upon the subject must be imposed by clear and unambiguous language because in some degree they operate as penalties. Thus, the subject is not to be taxed unless the language of the statute clearly imposes the obligation. The language of the statute must not be strained in order to tax as transaction which had the legislature thought of it, would have been covered by appropriate words. In a taxing legislation, therefore, one has to look merely at what is clearly said. There is no room for any intendment. There is not equity about tax, no presumption at all and nothing is to be implied.

– Tax Planning: taking advantage of tax provisions (loopholes).



- Nigeria’s GAAR (General Anti-Avoidance Rules) embodied in s.22 CITA; replicated in pari materia as ss. 20 CGTA; 15 PPTA & 17 PITA;

- S. 22(1) : “where the Board is of opinion that any disposition is not in fact given effect to or that any transaction which reduces or would reduce the amount of any tax payable is artificial or fictitious, it may disregard any such disposition or direct that such adjustments shall be made as respects liability to tax as it considers appropriate so as to counteract the reduction of liability to tax affected, or reduction which would otherwise be affected, by the transaction and any company concerned shall be assessable accordingly.”

- S. 22(2)(a): “disposition includes any trust, grant, covenant, agreement or arrangement” (concept of “sale without disposal”).

- Interesting CGTA provisions: e.g. ss.19, 21 on bargains comprising two or more transactions and market value respectively. ‘Consolidation’ and ‘splitting’ and of transactions depending on whether or not single bargain.



- Nigeria’s GAAR (General Anti-Avoidance Rules) (cont’d):

- S.22(2)(b) seeks to catch related party transactions: “transactions between persons one of whom either has control over the other or, in the case of individuals, who are related to each other or between persons both of whom are controlled by some other person, shall be deemed to be artificial or fictitious if in the opinion of the Board those transactions have not been made on terms which might have been expected to have been made by persons engaged in the same or similar activities dealing with one another at arm’s length.”

- Taxspectives’ Artificial Transactions article (Feb 2012, reiterated 2007 view): Nigerian GAAR ‘basic’ vis a vis increasing sophistication of transactions; risk of ‘equity varying according to the size of Chancellor’s foot’.

- TP Regs 2012 a welcome attempt to provide clarity, play ‘catch up’ with the market.



- Issue date 2nd August 2012 but enforcement date 1st Jan 2013 (no provision to latter effect in the Regs);

- Purpose (Reg 1): to give effect to s.22 CITA and equivalents in PITA, PPTA (no reference to CGTA, SDA, VATA - “other relevant tax laws” per Reg.19(s). Is it because CGTA already ‘watertight’? Focus on the big picture: income taxes? Not much room for TP in VAT (TP Regs cant change rule that reimbursements not VATable, only mark-up is).

- Objectives (Reg 2): taxation on appropriate basis corresponding to economic activity undertaken in Nigeria; checking ‘evasion’ through under/overpricing; provision of tax regulatory enforcement (‘fighting’) tools; level playing field with MNCs; ensure certainty of Nigerian TP treatment; obviate double taxation.

- Scope (Reg 3): covers transactions between CTPs (connected taxable persons) carried out in a manner not consistent with arm’s length principle. “Arm’s length” is a picture: tax law wants businesses to keep their distance!



- Scope (Reg 3): businesses to keep their ‘transactional’ distance in:

- sale/purchase of goods and services; - sale, lease, purchase of tangible assets; - transfer, purchase, license or use of intangible assets;- provision of services;- lending or borrowing of money;- manufacturing arrangement;- any transaction that may affect profit and loss or any other matter

incidental to or connected with listed transactions above.

- Transactions between PEs and HQ/other CTP is regarded as controlled transaction (caught by the Regs).

- Reg 4. prescribes compliance with arm’s length principle (ALP) in transactions between CTPs: “taxable profits resulting from the transaction(s) must be in a manner consistent with the [ALP].” Failure entitles FIRS to make adjustments.



- TP Methods & Evaluation of Transactions (Reg 5): in determining consistency with ALP applicable TP methods shall be utilised:

- Comparable Uncontrolled Price (CUP); - Resale Price; - Cost Plus;- Transactional Net Margin;- Transactional Profit Split; and- Any other method as may be prescribed by FIRS from time to time.

Most appropriate method to be a question of circumstances of the relevant transaction: strengths and weaknesses; analysis of functions performed, assets employed and risks assumed; availability of reliable information; degree of comparability between controlled and uncontrolled transactions, etc.

Starting point for FIRS’ review is to use the TP method used by the taxpayer.

Taxpayer can use different method if listed ones cant be reasonably applied and the different method gives rise to result that is consistent with ALP.


4. TP Regs: Objectives & Overview of Provisions- TP Methods & Evaluation of Transactions (Reg 5) (cont’d):

- Combination of transactions where closely linked or forms a continuum to perform comparability analysis or apply any of the listed TP methods.

- Advance Pricing Agreements (APA, Reg 7):

- APA between CTP and FIRS to establish appropriate criteria for determining whether CTP has complied with ALP for certain future controlled transactions over a fixed period, provided such APA is consistent with TP Regs.

- Request for APA to be accompanied by comprehensive information/ documentation on activities subject to the APA (Reg. 10(2) - not an avenue to “blindside” the Revenue): detailed descriptions, analysis of functions, risks and assets, proposed duration, proposal for determination of TP for covered transactions, etc.

- Cumulative amounts not less than N250 million of deductible costs or taxable revenues in any YoA.

- APA may have cross-border coverage (IRS of other Countries, Reg. 7(2)(c).



- Advance Pricing Agreements (APA, Reg 7):

- FIRS may specify basis for acceptance, modification or rejection of request. Will the last two ground the tax objection process under 5th Schedule FIRS Act? Yes, subject to Decision Review Panel (DRP) potentially reviewing the objection (Reg. 14) but DRP’s decision will be subject to appeal to TAT/FHC.

- Quaere: Any benefit in having APA, why not proceed on a PAYG basis (within context of TP Regs)?

- Quaere: how binding are APAs, given the FHC decision in Halliburton WA v. FBIR? Should be binding, subject to underlying assumptions for future event holding true (Reg 7(b)(iii)).

- Termination of APAs by:- FIRS: (a) Max duration is 3 years (effluxion of time); (b) Material non-compliance

with APA by taxpayer; (c) Material change/breach of critical underlying assumptions; (d) Change in tax laws; and (e) APA vitiated by fraud, omission or misrepresentation;

- Taxpayer (on notice to FIRS): (a) material change in premise of APR; (b) change structure (business model) renders APA irrelevant; and (c) legislative change.


4. TP Regs: Objectives & Overview of Provisions- Miscellaneous:

- FIRS to treat trade secrets/commercially sensitive information/ documentation provided by taxpayer for purposes of negotiating APA confidential (Reg 7(10)). Quaere: no explicit damages for breach; damages may not even suffice if material is sufficiently sensitive/access by competitors could spell negative consequences for taxpayer. Safeguards to ensure non-accidental or unauthorized disclosure necessary.

- Corresponding adjustment by FIRS (to avoid double taxation) where Revenue of another country having DTT with Nigeria adjusts the taxation of transaction involving a CTP (and that adjustment is consistent with ALP).

- Comparability Factors (Reg 9): - presumptive benchmark is similar/identical transaction between two

independent parties carrying on business in sufficiently comparable conditions;

- uncontrolled transaction is comparable to controlled transaction where no significant differences between both under comparable circumstances that could impact conditions being examined under relevant TP method.


4. TP Regs: Objectives & Overview of Provisions- Comparability Factors (Reg 9) (cont’d): relevant factors in determining

whether two or more transactions are comparable (economic relevance to circumstances of the transaction):

- Characteristics of subject matter goods, property or services;

- Functions undertaken party (CTP) to transaction vis a vis assets used and risks assumed;

- Contractual terms of the transaction;

- Economic circumstances/context for the transaction; and

- Business strategies pursued by the CTP

- Applicability of UN & OECD Tax Documents (Reg 11): helpful for interpretative views from other jurisdictions, capacity leverage for compliance/enforcement by CTPs and FIRS. Note that provisions of tax laws prevail in event of inconsistency (Reg 12).

- TP Regs superior to other regulatory authorities approvals (e.g. NOTAP/DPR/NNPC (NAPIMS), Reg. 12(2)). Quaere – is this not open to challenge?


5. TP Regs: Compliance, “Stay Awake” issues - Comprehensive documentation and disclosure requirements (Reg 6). Q:

whether TP Regs didn’t take too long in coming – given TP’s reported jostling with corruption as capital flight leader out of emerging economies;

- CTP to record sufficient info/data with analysis to verify that pricing of controlled transactions consistent with ALP.

- Obligation established without prejudice to FIRS’ entitlement to request additional information pursuant to audit/review functions.

- Documentation to be in place prior to filing income tax returns for relevant YoA.

- TP Declaration Form (11 pages) must be completed and appended to the tax returns for the YoA. Impact on Nigeria’s Ease of Paying Taxes rating?

- FIRS’ request for information must be complied with by taxpayer within 21 days, extension may be granted upon reasonable request.

- Documentation retained by taxpayer must be adequate to enable FIRS verify that CTs consistent with ALP.


5. TP Regs: Compliance, “Stay Awake” issues - Burden of proof that conditions of CT are consistent with ALP is on the

taxpayer: pressure to provide documentation (Reg. 6(10).

- Generally, increased compliance burden but arguably ‘worth the trouble’.

- Offences and penalties as in applicable tax laws (Reg.13, superfluous provision?)

- Dispute Resolution (Reg. 14)- 3 person Decision Review Panel (DRP) to resolve disputes/controversy

arising from implementation of the TP Regs. DRP ‘internal’ to FIRS.

- Taxpayer to refer assessment on adjustment to DRP within 30 days of receipt (risk of final and conclusive assessment for default – doctrine of exhaustion)

- Decision of DRP ‘final and conclusive’ without prejudice to taxpayer’s right of appeal to TAT or FHC, effectively making decision equivalent to a NORA (Notice of Refusal to Amend).


5. TP Regs: Compliance, “Stay Awake” issues

- Definitions (Reg. 19)

- “CTPs”, “CTs”, “UCTs”, “ALP” (name it!) are all defined there. Technical terms necessary to interprete and apply the TP Regs would make constant resort to the definition provision inevitable.


6. Job for the Boys?

- Compliance means lots of work for professional advisors including lawyers - advisory services, case evaluation, support with representation with DRP, anticipated increase in tax litigation (TP related), etc.

- FIRS too will be busy!


Questions?

Transfer Pricing: the New Reality If you make money, government shoves you in the creek once a year with it in your pockets and all that dont get wet.

Documents

transfer pricing

tax evasion

tax planning

tax avoidance

tax attaching

increased tax

assignment of tax loan

ahmadu slide