Article by: Suleiman Yahaya & Wuraola Okuwobi (Andersen Tax, Nigeria)
The Nigerian tax landscape has continued to witness significant changes, with the most recent being the presidential assent to the Finance Bill 2019 (now Finance Act) on 13 January 2020.
The Finance Act, 2019 (the Act) sets five strategic objectives, which include:
- raising government revenue through various fiscal measures;
- reforming domestic tax laws to align with global best practice;
- promoting fiscal equity by mitigating instances of regressive taxation;
- supporting small business entities in line with Ease of Business Reforms; and
- introducing tax incentives for investments in infrastructure and capital market.
In order to achieve the broad objectives stated above, the Act amended some key provisions of the Companies Income Tax Act (CITA), Value Added Tax Act (VATA), Personal Income Tax Act (PITA), Petroleum Profit Tax Act (PPT), Stamp Duties Act, Capital Gains Tax Act (CGTA) and the Customs, Excise Tariff etc. (Consolidation) Act. The amendments have wide tax implications for companies doing business in Nigeria. This article specifically examines the Transfer Pricing (TP) implications of the Act and makes some recommendations on how to manage the impact of these changes on businesses.
What has changed?
The following are some of the key changes in the Act that have TP implications:
Compliance with the TP Regulations now a pre-condition for tax deductibility of related party transactions.
The Act has introduced a new provision which stipulates that for any related party expense to be tax deductible, it has to be consistent with the TP Regulations. Particularly, section 27(g) of CITA has now been replaced with a new provision that says “…no deduction shall be allowed for the purpose of ascertaining the profits of any company in respect of any expenses whatsoever incurred within or outside Nigeria involving related parties as defined under the Transfer Pricing Regulations, except to the extent that it is consistent with the Transfer Pricing Regulations”. The new provision broadens the scope of the section by requiring all related party transactions, rather than only transactions giving rise to management fees, to comply with the Income Tax (Transfer Pricing) Regulations 2018 (TP Regulations).
With the introduction of this section, the provisions of the TP Regulations will now trump all other considerations for tax deductibility of related party transactions. For instance, the requirement to obtain the Minister’s approval in respect of payment of management fees between related parties will no longer be required for tax deductibility purposes.
Also, this provision implies that tax payers can no longer rely on the approvals of government regulatory agencies (e.g. National Office for Technology Acquisition and Promotion, Nigerian National Petroleum Corporation etc.) to demonstrate the arm’s length nature of the pricing of their related party transactions. Tax payers will now be required to perform detailed TP analysis to justify the pricing of their related party transactions in line with the provisions of the TP Regulations. This will involve preparing robust TP Documentations and relevant benchmarking analyses in respect of those transactions.