Major changes in the tax and transfer pricing landscape driven by the implementation of the recommendations of the Organization for Economic Co-operation and Development’s Base Erosion and Profit Shifting project were introduced in Nigeria. These changes will significantly impact taxpayers in the conduct of their business and so far, are already driving increased tax compliance.
New Transfer Pricing Regulations
The much-anticipated revision to the Nigeria Transfer Pricing (“TP”) Regulations finally happened in the second half of 2018. The new TP Regulations were made public by the Federal Inland Revenue Service (“FIRS”) on August 28, 2018. As expected, the contents of the TP Regulations largely align with the recommendations of the OECD’s BEPS Actions 8–10 and 13.
The new TP Regulations have an effective date of March 12, 2018, and apply to taxpayers’ basis periods commencing after that date.
The major changes introduced by the regulations include the following:
- steep administrative penalties;
- threshold for maintaining contemporaneous TP documentation;
- new compliance requirements on procurement transactions and intragroup services;
- inclusion of guidelines on the use of quoted prices in determining the pricing for the export and import of commodities;
- limitation of deduction on royalty payments for intangibles to not more than 5 percent of earnings before interest, tax, depreciation and amortization.
Areas of Controversy
While the revised TP Regulations provide clarity on many areas of TP documentation, they have also stirred up controversy in three major areas:
- Does the FIRS have the power to administer and enforce penalties via the Regulations rather than through the main legislation?
- Will penalties be applied to prior periods given that the Regulations state that their contents will apply to basis periods commencing after March 2018?
- Can the FIRS limit outflows accruing on the use of intangibles contrary to the provisions in the Companies Income Tax Act relating to tax deductibility of business expenses?
The new TP Regulations have jolted many taxpayers into action in respect of their TP compliance obligations. What remains to be seen however, is how the controversies relating to the administration and enforcement of the Regulations and their stiff penalty regime will play out.
Publication of Country-by-Country Reporting Regulations
The FIRS issued the country-by-country reporting (“CbCR”) Regulations on June 19, 2018. The CbCR Regulations, which adopt the OECD template, bring to life the recommendations of BEPS Action 13 and detail the reporting requirements for multinational enterprises (“MNEs”) groups whose ultimate parent entity is tax resident in Nigeria.
The CbCR Regulations also highlight the notification obligation of Nigerian resident constituent entities of MNE groups with CbC reporting obligations in jurisdictions other than Nigeria.
Similar to the new TP Regulations, the CbCR Regulations stipulate very stiff penalties for non-compliance ranging from failure to file the CbCR, failure to file a notification, to filing incorrect or false reports.
In addition to the CbCR Regulations, the FIRS further released Guidelines for CbCR in Nigeria (“the Guidelines”) in July 2018. The Guidelines provide guidance on the procedure for completing and filing CbC reports.
With the first set of CbCR reports due by December 31, 2019 and CbCR notifications to the FIRS due by December 31, 2018 for MNEs with a December 31 reporting year end, MNEs operating in Nigeria have been increasingly engaging with their related entities offshore and within Nigeria, as well as with tax consultants, in readiness to meet these reporting obligations in view of the prescribed penalties.
The FIRS on the other hand is aggressively putting measures in place to ensure full compliance, while strengthening its ability to assess the TP and BEPS risks of MNEs through greater access to the MNE’s global information.
Inauguration of the Tax Appeal Tribunal
During the second half of 2018, the Federal Government of Nigeria ("FGN") reconstituted and inaugurated the Tax Appeal Tribunal (“TAT”). The inauguration of the TAT is a welcome development considering the technical suspension of the TAT since May 2016 when the tenure of the previous Tax Appeal Commissioners expired.
Given the huge backlog of tax appeals that accumulated during this period, the resumption of the TAT is a significant development for taxpayers, tax professionals and tax authorities.
On October 8, 2018, the Nigerian President signed Executive Order No. 008 authorizing the Attorney-General of the Federation and Minister of Justice to set up a Voluntary Offshore Assets Regularization Scheme (“VOARS” or “the Scheme”). The Scheme applies to all persons, entities and their intermediaries who hold offshore assets and are in default of their tax liabilities.
The Scheme provides a one-year window commencing October 8, 2018, during which affected taxpayers may declare their offshore assets and income from sources outside Nigeria relating to the preceding 30 years of assessment, regularize their tax status and ensure full compliance.
Eligible taxpayers are expected to pay a one-time levy of 35 percent of their offshore assets to the FGN in lieu of all outstanding taxes, penalties and interest.
The Scheme has raised a number of concerns, chief among which is the alignment of the intention of the Scheme with existing tax laws and norms. Many taxpayers are also not clear as to whether the VOARS is an extension, or another version, of the recently concluded Voluntary Assets and Income Declaration Scheme (“VAIDS”).
Tax Inspectors Without Borders—Involvement with the FIRS
Tax Inspectors Without Borders is a joint initiative of the OECD and the United Nations Development Programme launched in 2015 to support countries in building tax audit capacity.
According to the TIWB’s 2017/2018 annual report, five TIWB missions have been carried out as part of the TIWB program in Nigeria. The FIRS received support in respect of TP audits in the oil and gas sector: this program provided support on transfer pricing audits to officers in the FIRS’ International Tax Department.
The support received from TIWB has improved the FIRS’ tax risk assessment processes and transfer pricing audit work.
Outlook for 2019
What should tax stakeholders expect in 2019?
More Stringent TP Audit Process
In 2018, the FGN adopted an expansionary fiscal policy in a bid to achieve economic growth. However, with oil revenues low due to global and other country-specific factors, other sources of generating revenue, particularly taxation, are being optimized. The FIRS has recently displayed real determination to shore up its revenue generation strategy, with the number of TP audits being conducted consistently rising.
In 2019, we expect to see even more stringent audits, given the regulatory changes.
We also expect the FIRS to rely on support from multilateral agencies such as TIWB, the African Tax Administration Forum, and the World Bank, with a view to increasing its competence in conducting TP audits.
Imposition of Administrative Penalties on Defaulting Taxpayers
Both the new TP Regulations and CbCR Regulations stipulate very severe penalties for defaults, with the highest put at 10 million Nigerian naira ($27,434) (the penalty may be higher where the Regulations stipulate the fine to be the higher of 10 million Nigerian naira or 1 percent of the total value of all controlled transactions).
In 2019, it is expected that the FIRS will attempt to impose these huge fines on taxpayers who violate the provisions of the Regulations. This is especially important for taxpayers in light of the FIRS’ Public Notice urging compliance in respect of prior years’ TP obligations by December 31, 2018, after which fines will be imposed.
Now that the stipulated deadline has elapsed, we can only wait to see how the administrative penalties will be imposed and enforced.
Ratification of the MLI
The Multilateral Convention to Implement Tax Treaty Related Measures to Prevent Base Erosion and Profit Shifting (“MLI”)) is a legal instrument developed as part of Action 15 of the OECD’s BEPS Project to modify existing bilateral treaties to implement BEPS measures. The instrument is intended to streamline the implementation of tax treaty-related measures without the need to individually renegotiate each treaty.
Nigeria signed the MLI on August 17, 2017 but is yet to deposit its instrument of ratification with the OECD. In line with Nigeria’s commitment to implement the BEPS minimum standard, we expect Nigeria to follow through on the ratification process this year.
Implementation of Common Reporting Standard
In 2014, the G-20 Finance Ministers and Central Bank Governors, and subsequently the G-20 leaders, endorsed the OECD’s proposal for a new Automatic Exchange of Financial Account Information Standard (the “AEOI Standard”). The AEOI Common Reporting Standard (“CRS”) was finalized in 2014 and enables jurisdictions that sign up to this framework to obtain information from their financial institutions and automatically exchange that information with other jurisdictions within the framework, on an annual basis.
Nigeria signed the CRS Multilateral Competent Authority Agreement (“MCAA”) in August 2017 and committed to an implementation deadline of 2019 with respect to the OECD’s Automatic Exchange of Information (AEOI) Framework.
Taxpayers and other stakeholders can expect to see the first automatic information exchanges between Nigeria and other jurisdictions in 2019. It is also possible that the provisions of the CRS MCAA enabling AEOI will be integrated into domestic legislation in 2019 as Nigeria is required to enact relevant legislation and publish regulations and guidelines to enable a successful implementation of the CRS.
Additional Guidance on Format of CbCR Filing
As an outcome of BEPS Action 13, the OECD provides a standardized electronic template for the exchange of CbC Reports between jurisdictions—the CbC XML Schema.
CbC reports, to be electronically transmitted between competent authorities in accordance with the CbC XML Schema, will assist tax administrations in obtaining a complete understanding of the way in which MNEs structure their operations, by providing them annually with key information on the global allocation of income and taxes paid, together with other indicators of the location of economic activity within the MNE group.
In 2019, it is expected that the FIRS will provide additional guidance to taxpayers in Nigeria on how the first CbC reports will be filed. Such guidance is essential, as it is not yet known whether the CbCR filing will be in electronic format ab initio or whether it will be done in physical copies by taxpayers and uploaded to the XML Schema by the FIRS when exchanging the information with other jurisdictions.
Businesses need to be flexible enough to respond to changing laws and regulations, as failure to do so may be costly. The tax regulatory landscape in Nigeria over the last year has triggered “tax compliance re-sets” spurring multinational and domestic companies to reassess their compliance positions and take necessary steps to close any gaps.
From financial years starting in 2019, taxpayers must endeavor to leave zero margin for default in terms of compliance with the revised TP Regulations and CbCR Regulations. To achieve this, proper planning is key. Officers responsible for tax matters in their respective organizations must be proactive and stay abreast of current issues locally and globally.
With the global focus on stemming BEPS in a CbCR era, MNEs that are tax resident in Nigeria need to continue to pay attention to how they structure and conduct their business. They also need to be more in tune with their related entities offshore to ensure that information flows as expected to meet local reporting requirements when due.
MNEs will also want to keep a close eye on the developments relating to Nigeria’s ratification of the MLI to assess when the MLI may begin to modify tax treaties they rely on in conducting their business.
Additionally, with the AEOI expected to kick-off in September 2019, financial institutions in Nigeria must be prepared to deal with the increased pressure that AEOI will put on these institutions, in terms of meeting required timelines, managing data, as well as confidentiality of customer information.
Going forward, it will take deliberate effort, careful planning and proactivity on the part of taxpayers and other stakeholders to rise above the challenges accompanying changing regulations while staying competitive in their respective industries.
Victor Adegite is a senior manager and Ngozi Onyebezie is a senior adviser with KPMG’s global transfer pricing services, based in the firm’s Lagos, Nigeria office.