February 26, 2019
Taxpayers and tax administrators have continued to grapple with the burden of undertaking complex Transfer Pricing (TP) analyses in order to justify the arm’s length principle. For taxpayers, these complexities in TP analysis often lead to uncertainties, which create TP risks, and increase their compliance costs. In order to mitigate these risks, tax administrators in other jurisdictions have introduced safe harbour provisions which help to simplify TP compliance and provide certainty on the treatment of related party transactions.
This article examines the concept of safe harbour, reviews the benefits of clear safe harbour provisions and calls on the Nigeria tax authority to incorporate safe harbours into the TP Regulations in order to improve the administration of TP in Nigeria.
According to the Organisation for Economic Cooperation and Development Transfer Pricing Guidelines for Multinational Enterprises and Tax Administrations (2017) (the OECD Guidelines), a safe harbour in a TP regime is “…a provision that applies to a defined category of taxpayers or transactions and that relieves eligible taxpayers from certain obligations otherwise imposed by a country’s general TP rules”.
Safe harbour provisions are instrumental to achieving the following:
The biggest potential drawback of a safe harbour provision is the risk of double taxation in the event that the counter-party’s tax authority rejects the safe harbour pricing for the controlled transactions and insists on applying the arm’s length principle. As such, this has led the OECD to provide guidance on mechanisms of putting in place an effective safe harbour regime.
One of the key points from the guidance is that an effective safe harbour provision must approximate the result of an arm’s length study on such transactions. This will effectively minimize the incidence of double taxation risk, should the foreign tax administration not recognize the safe harbour provision.