April 7, 2020
The much awaited maiden Transfer Pricing (TP) Judgment in Nigeria finally arrived with a big bang! For those of us who have been preaching that TP is one of the riskiest areas, if not the riskiest, in taxation and taxpayers should be highly proactive in mitigating those risks, the outcome of this case is a testament to that assertion. The case between Prime Plastichem Nigeria Limited (PPNL or the Company), the Appellant, and the Federal Inland Revenue Service (FIRS), the Respondent, at the Tax Appeal Tribunal (TAT) involved the assessment of approximately ₦1.7 billion additional tax liabilities for the audit of PPNL’s related party transactions for the 2013 and 2014 Financial Years (FY).
Considering the significant additional tax liability involved and the fact that this is the first TP Ruling by the TAT in Nigeria, it is imperative that we perform a technical review of the case and share our views on the lessons learned.
PPNL is in the business of importing plastics and petroleum products for sale to third parties in the Nigerian market. It purchases these products from a foreign related party, Vinmar Overseas Limited (VOL), meaning that this transaction falls under the purview of the Nigeria Transfer Pricing Regulations (NTPR).
In line with the NTPR, in addition to its annual TP returns filing obligations, PPNL is required to prepare an annual contemporaneous TP Documentation to demonstrate to the FIRS that its related party transactions were conducted in line with the Arm’s Length Principle (ALP); therefore profits were not shifted to VOL.
The ALP requires that transactions between related parties be conducted in a manner similar to what would have occurred between independent parties (i.e. using market prices to test whether transfer prices are reasonable).
The FIRS, upon review of PPNL’s TP disclosures, audited its FY 2013 and 2014 controlled transactions with VOL to determine consistency with the ALP. Considering that the TP Documentation is the first line of defence for a taxpayer in demonstrating compliance with the ALP, PPNL submitted its FY 2013 and 2014 TP Documentation to the FIRS.
For FY 2013, PPNL argued that they had reliable internal data to test the controlled transaction; i.e. VOL sold the same products to independent parties, and this price (a market price) can be compared to the price VOL sold to PPNL, with necessary adjustments carried out to increase the reliability of the results of the comparability analysis. This methodology is called the Comparable Uncontrolled Price (CUP) method using internal data (Internal CUP). Where applicable, this method is the most direct method and therefore deemed the most appropriate; and the use of internal data usually meets the high product comparability requirements.