The Federal Inland Revenue Service (FIRS) has released the Income Tax (Transfer Pricing) Regulations 2018 (“TPR” or “the Regulations”). The Regulations take effect for financial years commencing after 12 March 2018 and revoke the Income Tax (Transfer Pricing) Regulations, 2012. It incorporates some of the provisions of the OECD’s TP Guidelines (OECD TPG); as well as provisions contained in the African Tax Administration Forum’s (ATAF) Suggested Approach to drafting TP legislation (ATAFSA).
A connected persons relationship occurs where one person has the ability to control or influence the other person in making financial, commercial or operational decisions, or there is a third person who has the ability to control or influence both persons in making financial, commercial, or operational decisions.
The new Regulations introduce a number of prescriptive rules for pricing intercompany transactions. Some of these rules will increase the burden of proof required for taxpayers to justify the price of their intercompany transactions and others will have the effect of limiting the amount that they can charge. Taxpayers should evaluate how the new Regulations will impact them and decide how best to respond.
Taxpayers are expected to pay attention to the new penalty regime. It is advisable for taxpayers to make TP compliance a top priority to avoid these penalties notwithstanding that the legality of some of the penalties may be contested.
Taxpayers who are behind on compliance are expected to take steps to quickly address all non-compliance. In addition all taxpayers are to ensure that going forward, they are able to comply as and when due.
In a bid to reduce tax compliance costs, which is one of the indices used to measure the ease of doing business, the obligation to maintain contemporaneous TP documentation has been relaxed for companies whose controlled transactions are of total value of less than ₦300m S. 17(3). In essence, a company with intra-group transactions below ₦300m is not obliged to prepare documentation (record with sufficient data and analysis to verify compliance with the arm’s length principle) as the transactions are consummated.
However, FIRS may still require such companies to prepare and submit their documentation within 90 days of receipt of a notice. Default in providing the documentation within the 90-day period will result to a penalty equal to 1% of the value of related party transactions in addition to ₦10,000 for each day in which the default continues.
The exemption may create a tendency in qualifying taxpayers to ignore their TP obligations and the need to keep required documents / information. This may lead to practical difficulties in preparing/providing the documentation upon request by FIRS. Qualifying taxpayers, who intend to take advantage of this exemption, are advised to keep all documents/information that may be required to prepare the documentation in future.
Penalties for non-compliance
These are new and relatively material including penalties for:
a) failure to file a TP declaration – ₦10million in the first instance and ₦10,000 for every day failure continues.
b) failure to file an updated TP declaration/provide notification about directors – ₦25,000 for every day in which the default continues.
c) failure to file a TP disclosure – the higher of: ₦10million or 1% of the value of related party transactions not disclosed; and ₦10,000 for every day in which the default continues.
d) incorrect disclosure of transactions – the higher of: ₦10million or 1% of the value of related party transactions incorrectly disclosed.
e) failure to file TP documentation upon request– the higher of: ₦10million or 1% of the value of all related party transactions; and ₦10,000 for every day in which the default continues.
f) failure to furnish information/documentation upon request–1% of the value of each related party transaction for which information/document relates; and ₦10,000 for every day in which the default continues.
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