Why multi-nationals must bolster their legal teams in TP disputes with outside legal counsel that can prepare for and argue complex TP principles in any tax trial. This first Nigerian TP case is a good example of the failure to do so.
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Case Summary by Dr Joshua Bamfo (Andersen Tax, Nigeria)
On 19 February 2020, the Tax Appeal Tribunal (TAT or Tribunal), in the case between Prime Plastichem Nigeria Limited (Prime Plastichem or the Company) v Federal Inland Revenue Service (FIRS or the Service), delivered its first ruling on Transfer Pricing (TP) in Nigeria. In this case, the Tribunal upheld additional assessments made by the FIRS on Prime Plastichem. The additional assessments arose from the Transfer Pricing (TP) adjustments made by the FIRS on a transaction between Prime Plastichem and its related supplier.
In reaching its decision, the Tribunal jettisoned the Transfer Pricing Method used by the Company in its 2013 Financial Year (Comparable Uncontrolled Price Method) and rather upheld the FIRS’ contention that the Transactional Net Margin Method (TNMM), using the Gross Profit Margin (GPM) as the Profit Level Indicator (PLI), was the appropriate method for the determination of the arm’s length price (ALP) applicable to the transaction in the relevant Financial Year (FY). Thus, the Tribunal ruled in favour of the FIRS on all the issues raised for determination and consequently, dismissed the appeal of the Company in its entirety.
Prime Plastichem is a company registered in Nigeria which purchases industrial plastics and petrochemicals from its related supplier, Vinmar Overseas Limited (VOL) and distributes to its customers.
The Company filed its TP Documentation for the 2013 and 2014 FYs in respect of the transactions with VOL. In 2013 FY, the Company applied the Comparable Uncontrolled Price Method (CUPM) in determining if its purchase price meets the arm’s length requirements. However, in 2014 FY, the Company applied the TNMM to determine the ALP using the Operating Margin as the most appropriate PLI for the transaction.
Upon review of the Company’s TP Documentation, the FIRS was of the view that the Company had wrongly applied the CUPM in determining the ALP in 2013 as the comparable data for the said year did not strongly meet the comparability requirements as provided by the Transfer Pricing Regulations, 2012 (TPR). The FIRS further stated that although the Company had used the TNMM in the 2014 FY, it had wrongly used its Operating Margin as its PLI. According to the FIRS, the Company should have used its Gross Profit Margin in determining its ALP in 2013 and 2014 as this was the most appropriate PLI for the assessment of the arm’s length condition in both years. Thus, the FIRS made TP adjustments to the relevant transactions and raised an additional assessment of over N1.7 billion on Prime Plastichem. This assessment was upheld by the FIRS’ Decision Review Panel (DRP).
Dissatisfied with the decision of the FIRS, Prime Plastichem filed an appeal at the TAT challenging the imposition of the additional assessments.
The crux of the issues before the Tribunal was whether the FIRS was right in benchmarking the Company’s TP transactions with TNMM using the Gross Profit Margin as the applicable PLI for the 2013 and 2014 FYs and whether the FIRS could impose applicable interest and penalties based on the additional assessment raised. The Tribunal also determined the issue of whether the FIRS’ Decision Review Panel which upheld the FIRS’ position had been properly constituted in line with the provisions of the TPR.
Prime Plastichem argued that CUPM was the most appropriate method to use in 2013 and the change from the use of CUPM to TNMM in 2014 was only as a result of the lack of comparable data in 2014. The Company also argued that the use of the Gross Profit Margin as PLI by the FIRS was wrong and unsupported by any law or prevailing practice. Regarding the interests and penalties imposed, the Company argued that the said interests and penalties should not apply because it had filed its Companies Income Tax returns when they were due. Prime Plastichem further argued that the DRP had not been properly constituted as the FIRS did not issue any formal notification in this regard thus, denying the Company of its right to fair hearing under the law.
However, the Tribunal ruled in favour of the FIRS dismissing the Company’s appeal in its entirety. In reaching its decision, the Tribunal, relied heavily on the arguments of the FIRS and held that the TNMM was the appropriate benchmarking method for Transfer Pricing in this case. The Tribunal also upheld the FIRS’ application of the GPM as the appropriate PLI for the said transactions. With respect to the FIRS’ application of interest and penalties on the Company, the TAT held that the FIRS has the power to disregard the TP method adopted by a taxpayer under the TP regulations and to also impose penalties enshrined in the relevant tax laws on the Company for failure to file their returns and pay the relevant taxes when due.
Regarding the DRP, the TAT held that, it was evident that the DRP had been set up. According to the TAT, the contemplation of the law under Paragraph 14(3) of the TPR is that a taxpayer may file an appeal to the DRP within 30 days of receipt of its assessment. Thus, the action to trigger filing of the appeal at the DRP is the receipt of the Assessment on the Adjustment and not a formal notification from FIRS of the setting up of the DRP.
The Tribunal’s decision in this case reiterates the provision of Regulation 6(10) of the TPR which places the burden of proof of the arm‘s length nature of a controlled transaction on the taxable person. In this case, the Company failed to convince both the FIRS and the TAT that its TP arrangement satisfies the arm’s length principle.
In the light of the foregoing, it is imperative for taxpayers to be proactive in managing their TP affairs and engage seasoned experts for guidance in order to mitigate exposure to humongous TP adjustments.
We will issue more details in subsequent publications.