April 2, 2019
One of the major changes in the Income Tax (Transfer Pricing) Regulations 2018 (NTPR) is the introduction of administrative penalties. The NTPR imposes penalties for failure to timely submit the Transfer Pricing (TP) statutory forms, failure to submit the TP documentation and failure to provide documents requested by the Federal Inland Revenue Service (FIRS or the Service) within the stipulated time amongst others.
By its Public Notice of 3 October 2018, the FIRS granted taxpayers up to 31 December 2018 to fulfill all pending compliance obligations and further stated that it would impose the administrative penalties under the NTPR on taxpayers with outstanding compliance obligations beginning 1 January 2019.
The FIRS has since 1 January 2019 written letters imposing administrative penalties on taxpayers who allegedly failed to regularize their compliance records. Some of these letters have imposed penalties for alleged non-compliance which occurred while the now revoked Income Tax (Transfer Pricing) Regulations 2012 (TPR 2012) was in force.
The foregoing has raised the following concerns among taxpayers:
This article aims to review these questions based on the provisions of the relevant laws and regulations.
Regulations are rules and administrative codes which receive the force of law from an enabling legislation. For instance, Section 61 of the FIRS (Establishment) Act (FIRSEA) empowers the Board of the FIRS, subject to the approval of the Minister of Finance, to make rules and regulations that in its opinion are necessary or expedient for giving full effect to the provisions of the Act and for its due administration. The FIRS has therefore issued the NTPR to give effect to the provisions of the Companies Income Tax Act (CITA), Petroleum Profit Tax Act, Personal Income Tax Act, Capital Gains Tax Act, and Value Added Tax Act.
There have been divergent views on the powers of the FIRS to introduce penalties via a regulation. One school of thought is that where the enabling Acts do not include specific penalties for non-compliance, the FIRS cannot levy penalties. The FIRS can only make adjustments where the RPTs are deemed to be artificial or unreasonable from an arm’s length perspective, as provided in the relevant Acts.
The second school of thought proposes that the FIRS can introduce penalties via a regulation. This appears to be supported by Section 12 of the Interpretation Act which provides that where an Act confers a power to make a subsidiary instrument, the power shall include power to prescribe punishments for contraventions of provisions of the instrument.