May 7, 2019
Since the introduction of Transfer Pricing (TP) Regulations in Nigeria in 2012, the Federal Inland Revenue Service (FIRS) has not only focused on driving compliance with the TP Regulations but has also embarked on the audit of taxpayers’ Related Party Transactions (RPTs) to confirm compliance with the arm’s length principle.
In recent years, the chances of a taxpayer being selected for a TP audit has increased significantly due to the increased revenue drive by the government. Revenue generation through TP is especially attractive as the additional tax liabilities which may crystalize from a Transfer Pricing audits are typically significant.
With the introduction of the Revised Nigeria TP Regulations in 2018, the FIRS has commenced the imposition of administrative penalties to increase revenue generation and drive compliance. It is however not farfetched that the FIRS might sooner rather than later redirect their efforts to conducting TP audits in order to meet revenue targets.
It is therefore important that taxpayers are prepared and equipped to effectively manage the TP audit process. This article highlights the Transfer Pricing audits process as well as ways to prepare for and effectively manage the TP audit, i.e. “the Dos” and potential pitfalls to avoid in a TP audit, i.e. “the Don’ts”.
A TP Audit is a review or examination of a taxpayer’s RPTs by the tax authorities to determine whether the prices charged are reasonable from an arm’s length perspective. The Nigerian TP audit process is typically in four (4) phases:
Phase 1 – Risk assessment: This involves a review of a taxpayer’s TP returns, TP policy and TP documentation and other documents to determine the risk profile of the taxpayer. Some audit triggers the FIRS considers include; consistent loss making entities, RPTs with entities in tax-friendly jurisdictions, volume of related party transactions, procurement arrangements, excessive inter company loans, weak TP documentation etc.
Phase 2 – Desk query: Where the TP risk is perceived high at phase 1, the FIRS proceeds to carry out a desk query to evaluate the existence of possible TP issues. The FIRS may send out preliminary Information Document Requests (IDRs) at this phase.
Phase 3 – Field query: Following a desk query, the FIRS may proceed on a fact-finding exercise that involves conducting interviews, site visits and documentation gathering to verify the functions, assets and risks regarding the RPTs.
Phase 4 – Post-audit: Where the taxpayer and the FIRS are unable to reconcile their respective positions, both parties can embark upon a dispute resolution process.