January 10, 2018
With the Federal Government in dire need of increased tax revenue to fund its expansionary fiscal policy, it is no surprise that the Federal Inland Revenue Service (FIRS) has been perceived in a recent survey of taxpayers to be aggressive with Transfer Pricing (TP) audits. Some of the TP audits have resulted in assessments of additional tax liabilities for multiple years that run into billions of naira. This article makes a compelling case for proactive strategies to mitigate taxpayers’ TP risk exposure in an aggressive TP audit regime.
The Nigerian economy recently recovered from a year-long recession. However, it is imperative that the Federal Government sustains the positive economic growth rate to ensure that the economy attains a steady state high economic growth path that will help consolidate Nigeria’s status as a full-fledged middle-income economy in the medium to long term. To this end, the Federal Government has employed an expansionary fiscal policy to help develop the much-needed infrastructure to create the enabling environment for businesses to thrive. This policy coupled with the significant decrease in tax revenue from the oil sector means that non-traditional approaches to generating tax revenue have become a paramount fiscal policy strategy.
TP is one of such non-traditional sources of raising additional tax revenue that has garnered much focus by the FIRS. Although it might not be making the headlines, the FIRS has been auditing taxpayers with both cross-border and domestic transactions with related parties to ascertain whether such taxpayers knowingly or unknowingly mispriced these transactions to leave them with lesser taxable profits. Where the FIRS determines that the prices of these related party transactions are not reasonable compared to what would have occurred in a comparable transaction with an unrelated party under similar circumstances, the taxable profit of the taxpayer is adjusted upward and the corporate income and educational tax rates applied to determine appropriate additional tax liabilities over the years being audited. Depending on the materiality of the volume of related party transactions and the resulting size of adjustments to the profits, the assessed additional tax liabilities for some taxpayers for the multiple years under audit can run into billions of naira. In light of the significant TP risk exposure faced by taxpayers, this article reviews the FIRS’ aggressive TP audit regime and recommends a number of proactive strategies that taxpayers need to adopt to mitigate their TP risk exposure and protect their businesses in a currently fragile economy.