Tax Alert – The Income Tax (Transfer Pricing) Regulations, No. 1, 2012


1. Tax Alert – The Income Tax (Transfer Pricing) Regulations, No. 1, 2012

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The Income Tax (Transfer Pricing) Regulations, No. 1, 2012


The proposed Income Tax (Transfer pricing) Regulations, 2012 (“TPRs”) is published by the Federal Inland Revenue Service (“FIRS”) in pursuance of the powers conferred on it by Section 61 of the Federal Inland Revenue Service (Establishment) Act. No.13 of 2007.

The proposed commencement date for the implementation of the Transfer Pricing Regulations is 1st January 2013.

Objectives of the Transfer Pricing Regulations, 2012

One of the primary objectives of the Transfer Pricing Regulations is the provision to the Nigerian tax authorities, tools to fight tax evasion, which is usually promoted through over or under–pricing of transactions between associated enterprises or corporations not adhering to the arm’s length tax principle.

Two other objectives of the Transfer Pricing Regulations are the reduction of the risks of economic double taxation; and the provision of a level playing field between associated companies on the one hand and independent un-associated companies doing business in Nigeria on the other hand.

Transfer Pricing – Arm Length and Artificial Taxable Transactions

Section 17 of the Personal Income Tax Act (as amended), Section 22 of the Companies’ Income Tax Act (as amended) and Section 15 of the Petroleum Profit Tax Act authorises FIRS to disregard and substitute a proper tax assessment for a prior tax assessment where any transaction is intended to artificially or fictitiously reduce the amount of the tax that will otherwise be assessed and paid by a tax payer in Nigeria.

A transaction will be deemed to be artificial or fictitious where one of the parties either has control over the other party, or the parties are so related that the terms of the transaction will be biased or more favourable as amongst the controlled or related parties; in contrast to where the parties are engaged in the same or similar transactions as independent parties, dealing at arm’s length basis.

A company that is affected by a decision of FIRS in the above regard has a right to appeal against such a FIRS decision in the first instance to a FIRS appointed Decision Review Panel, with a further right of appeal to the Federal High Court, the Court of Appeal and the Supreme Court which is the Court of last resort in Nigeria.

Permanent Establishments and Transfer Pricing Regulations, 2012

The proposed Nigerian Transfer Pricing Regulations, 2012 now formally provides that permanent establishments (“PE”) will be treated under these Regulations as separate tax entities, and any transaction between a permanent establishment and its parent company or head office, or between it and another connected taxable persons, shall be treated as a controlled transaction liable to the application of the provisions of the Transfer Pricing Regulations, 2012.

Compliance with Arm’s Length Principle, Documentations, Advance Pricing Agreements, etc.

Arm’s Length Principle: The arm’s length principle requires that the conditions of a transaction, between connected taxable persons, should not differ from the conditions that would have applied if the connected persons were independent contracting parties engaged in comparable similar transactions carried on under comparable similar circumstances.

Connected persons are therefore required by Article 4 of the Transfer Pricing Regulations to always ensure that all taxable profits that result from transactions between them are in compliance with the arm’s length principle. Where connected persons fail to abide with the arm’s length principle, the Federal Inland Revenue Service is authorised to make such necessary tax adjustments that will bring the transaction within the parameters of the arm’s length principle.

Transfer Pricing and Comparability Factors

Barring repetition, Article 9 of the proposed Transfer Pricing Regulations, 2012 provides that for the purpose of determining whether the pricing and other conditions of a controlled transaction are consistent with the arm’s length principle, the tax payer shall, in the first instance, ensure that the transaction is comparable with a similar or identical transaction between two independent persons carrying on business under comparable conditions.

Transfer Pricing Methods

Some of the Transfer Pricing Methods that can be applied in determining whether a transaction is transacted within the parameters of the Arm’s Length Principle include (i) the Comparable Uncontrolled Price (“CUP”) method, or (ii) the Resale Price Method, or (iii) the Cost Plus Method, or (iv) the Transactional Net Margin Method, or (v) the Transactional Profit Split Method, or (vi) any other method as may be prescribed by FIRS, from time to time.

The Cost Plus Method is described by the proposed Transfer Pricing Regulations to mean the method in which the mark-up on the costs direct

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DISCLAIMER: Because of the generality of this update, the information provided herein may not be applicable in all situations and should not be acted upon without specific legal advice based on particular situations.

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