Nigeria: Safe harbour in the transfer pricing regulations?

Nigeria: Safe harbour in transfer pricing regulations?

The Nigerian transfer pricing regulations—officially known as “Income Tax (Transfer Pricing) Regulations No 1, 2012”—regulate transactions between connected taxable persons, or controlled transactions. The aim of the regulations is for transactions between or among connected taxable persons to be conducted at arm’s length. Applying the arm’s length principle to controlled transactions can be a tedious and time consuming process; hence, there can be a need to exempt some transactions or categories of taxpayers from application of the transfer pricing rules. This partial or full exemption is known as the “safe harbour” or safe haven provisions.


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Safe harbour provisions

The safe harbour provisions in the Nigerian transfer pricing regulations are found in Paragraph 15:


… a connected taxable person may be exempted from the requirements of regulation 6 of these Regulations where (a) the controlled transactions are priced in accordance with the requirement of Nigerian statutory provisions; or (b) the prices of connected transactions have been approved by other Government regulatory agencies or authorities established under Nigerian law and satisfactory to the Service to be at arm’s length.


A cursory review of this provision may lead to a conclusion that Nigeria has safe harbour provisions; however, a critical analysis of these provisions may cause one to question the adequacy of or even the existence of a safe harbour. Contrary to what is obtainable in other tax jurisdictions, no specific categories of taxpayers or specific types of transactions to which the safe harbour provision will apply are identified in the regulations, thereby denying taxpayers the benefit of certainty. The phrase “…in accordance with the requirement of Nigerian statutory provision” is viewed as being too generic, if not ambiguous. 

Paragraph 15(b) appears to provide a leeway to taxpayers with respect to connected transactions for which approval has been obtained from other government regulatory agencies or authorities established under the Nigerian law. However, the provision notes that such approvals must be satisfactory, to the tax authority, to have been given at arm’s length. Although a government regulatory agency may consider economic and commercial circumstances when reviewing a taxpayer’s application for the relevant approval, it may not necessarily apply the arm's length principles. 

For instance, a company that depends on its foreign related entities for management and technical services is required by law to obtain approvals from the National Office for Technology Acquisition and Promotion (NOTAP). In granting the relevant approval, NOTAP has often times adopted a “rule of thumb” that approval for licenses such as patent and trademarks is usually set at 0.5% to 5% of net sales value or profit before tax, when net sales value is not available. Management service fees approval is usually set at a range of 2% to 5% of the local company’s profit before tax. Based on this, it may appear to some that the arm’s length condition attached to Paragraph 15(b) totally defeats the essence of a safe harbour provision, as put forth in the OECD transfer pricing guidelines. Thus, the benefits of compliance relief, administrative simplicity, and certainty are unavailable to taxpayers. 

Further, Nigeria’s transfer pricing regulations do not specify the categories of taxpayers or the types of transactions to be covered by the safe harbour provisions. This is contrary to the norms under the OECD transfer pricing guidelines. According to Paragraph 4.95 of the OECD guidelines:


A safe harbour may have two variants regarding the taxpayer’s conditions of controlled transactions: certain transactions are excluded from the scope of application of transfer pricing provisions (in particular by setting thresholds), or the rules applying to them are simplified (for example by designating ranges within which prices or profits must fall)…


For the safe harbour provisions to be useful to taxpayers, some advocate that Nigeria’s Federal Inland Revenue Service may need to publish further guidance in this regards and also Paragraph 15(b) may need to be amended to make it conform to the global best practice.


Read a September 2015 blog posting prepared by the KPMG member firm in Nigeria: Nigerian Transfer Pricing Regulations: Any Safe Harbour?

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