August 21, 2018
With the increase in what is perceived by most taxpayers as aggressive Transfer Pricing (TP) audits, the anticipated introduction of TP specific penalty era, increasing TP disputes and the need for the Federal Inland Revenue Service (FIRS) to achieve one of the key objectives of the TP Regulations (the Regulations) of providing certainty in TP treatment in Nigeria, it has become imperative that the FIRS implements the provision for Advance Pricing Arrangements (APA) in the Regulations.
This article provides a general overview of APA, reviews the global trends in APA, highlights the benefits of APA and concludes with a call to the FIRS to consider issuing guidelines for tax payers interested in entering into APA.
According to the OECD Transfer Pricing Guidelines for Multinational Enterprises and Tax Administrations, 2017 (OECD Guidelines), An “APA is an arrangement that determines, in advance of controlled transactions, an appropriate set of criteria (e.g. method, comparables and appropriate adjustments thereto, critical assumptions as to future events) for the determination of the transfer pricing for those transactions over a fixed period of time”.
APA requires negotiations between the taxpayer, one or more associated enterprises, and one or more tax administrations. The primary motive of an APA is to improve the efficiency of tax administration by encouraging taxpayers to engage with the tax authorities on all the facts relevant to a proper transfer pricing analysis and to work towards a mutual agreement. Negotiating an APA may consume a lot of time and resources. While completion times vary by country, the average time to process and complete APAs typically runs for up to two years.
Under the unilateral APA, the agreement is reached between the taxpayer and the competent authority in the country where the taxpayer is resident. This agreement is only binding on this country. For example, where an intercompany transaction occurs between two related parties based in Germany and Nigeria respectively, a unilateral APA would only bind one of the countries and would not bind the other.