January 12, 2021
Recent developments in Nigeria including the impact of the global COVID-19 pandemic on the economy, the urgent need for the Federal Government (FG) to raise more tax revenue to help fund the significant budget deficit and developments in the tax and Transfer Pricing (TP) space have contributed in making TP one of the riskiest areas in taxation in Nigeria.
Specifically, the release of the maiden TP judgment in Nigeria between Prime Plastichem Nigeria Limited (PPNL) and the Federal Inland Revenue Service (FIRS) [which resulted in a ₦1.7 billion additional tax liability], management changes within the FIRS International Tax Division (ITD), introduction of the Finance Act 2019 and the Significant Economic Order (SEP) 2020 were significant TP developments with implications for taxpayers. The negative impact of the pandemic on the economy also resulted in taxpayers earning abnormal returns, which could trigger TP audits.
The introduction of a TP specific penalty regime in the 2018 TP Regulations means that taxpayers do not only face the risk of TP adjustments and the assessment of additional tax liabilities, but also face the risk of being levied significant administrative penalties for non-compliance.
In light of these developments, among others, it is imperative for taxpayers to understand the potential TP implications for their businesses in 2021 and the measures they should put in place to manage these risks. This article provides an outlook of the potential implications of these developments on taxpayers in 2021.
Impact of the COVID-19 pandemic
The impact of the COVID-19 pandemic has been profound and the effects will continue to be felt in 2021. The unique economic challenges and policies adopted by companies to cushion the effects of the pandemic on their businesses may lead to challenges in defending the arm’s length nature of Related Party Transactions (RPTs).
One of such challenges will be how taxpayers will defend the reduced revenues/ profit margins earned from their RPTs during the COVID-19 period, which may be deemed to be non-arm’s length during normal times.
For instance, companies with RPTs that were expected to make high profit margins may be reporting significantly lower margins or even losses for this period. Others may have significant intercompany debts/financing arrangements and need to ascertain whether the interest rates charged are reasonable from an arm’s length perspective. It is important to note that TP policies, transfer prices and agreements, which were agreed prior to the pandemic, may be insufficient to capture the effects of the COVID-19 pandemic.