Tax Reforms: Guidelines on advance pricing agreements in Nigeria

Introduction

On November 27, 2024, the Federal Inland Revenue Service (FIRS) issued the Guidelines on Advance Pricing Agreements (“the Guidelines”) pursuant to Section 8(1)(u) of the FIRS (Establishment) Act, 2007 and Regulation 9(12) of the Income Tax (Transfer Pricing) Regulations, 2018 to clarify the procedures and conditions for obtaining APAs, thereby enhancing tax compliance and reduce transfer pricing disputes.

In this newsletter, we have highlighted some of the key provisions of the Guidelines.

What is an Advance Pricing Agreement (APA)?

An APA is a formal agreement between a taxpayer and the tax authority that establishes the transfer pricing methodology, defines relevant comparables, and specifies any necessary adjustments for future transactions between the taxpayer and related parties. The purpose of the APA is to determine the transfer prices for future transactions in compliance with the Arm’s Length Principle, for a fixed period, based on the fulfillment of the agreed terms and conditions.

What are the types of APA?

As indicated in the Guidelines, an APA may be unilateral, bilateral or multilateral.

Unilateral APA – this is an agreement between the FIRS and a taxpayer concerning the transfer pricing of related -party transactions.

Bilateral APA – this involves the FIRS, a taxpayer, its connected person(s) resident in a foreign country and the competent tax authority in that country.

Multilateral APA – this involves the FIRS, a taxpayer, its connected persons resident in two or more countries and the competent tax authorities in those countries.

What are the eligibility criteria and threshold for an APA application?

To be eligible to apply for an APA, a taxpayer must be a resident or a non-resident company that has a taxable presence in Nigeria and the commercial transactions that have occurred or contemplated must meet the following minimum thresholds:

i. Single Transaction – the equivalent of $10 million for each commercial transaction in each year; or

ii. Group Transactions: the equivalent of $50 million in the case of a group of commercial transactions (group of transactions) in each year.

What is the application process and costs?

Taxpayers who meet the eligibility criteria are required to begin the application process by submitting a proposal for an APA to the FIRS. Once the proposal is submitted, the application proceeds through the following stages:

Stage 1: Pre-filing Meeting

A mandatory pre-filing meeting must be held at least 30 days after the submission of the APA proposal, between FIRS and the applicant. The purpose of this meeting is to discuss the feasibility of a successful APA and to address key issues such as the nature and scope of the proposed APA, the transfer pricing method to be used, and any other relevant matters. This meeting must take place before the formal APA application is submitted.

Stage 2: Formal Application

Where the FIRS agrees that the APA is feasible, the taxpayer can proceed with the formal application within the agreed timeline. This application must be comprehensive, outlining the type of APA sought, the entities involved in the commercial transactions, any relevant treaty partners (if applicable), a general description of the market conditions, the proposed transfer pricing method, and any other relevant terms and conditions including key assumptions.
At this stage, the taxpayer is required to pay a non-refundable application fee of $20,000 and the evidence of payment is to be included in the APA application.

Stage 3: Analysis and Evaluation

Following the submission of the formal application, the FIRS will analyze the documentation, assess the data provided, and request additional information or documents if necessary to make an informed decision on the APA.

Stage 4: Negotiation and Agreement

At this stage, the FIRS will enter into discussions with the taxpayer to align and finalize the terms of the APA. If the APA is bilateral or multilateral, discussions will also involve the tax authorities of the relevant treaty partners.

Stage 5: Drafting, Execution, and Monitoring

Once the terms are agreed upon, the APA will be executed. Upon execution, the APA will be subject to ongoing monitoring to ensure compliance with its terms. Additionally, the FIRS will verify that the facts, assumptions, and circumstances remain consistent.

The taxpayer is responsible for all costs related to the processing of the APA by FIRS, including but not limited to travel expenses for field visits and consultancy fees (where the FIRS engages an expert). If the costs incurred by the FIRS exceed this amount, the taxpayer must reimburse the additional costs directly related to the processing of the APA.

What is the timeframe for applying for an APA?

The Guidelines specify that the APA application process in the case of a unilateral APA may be completed within 24 months from the acceptance of a taxpayer’s formal application, and within 36 months for bilateral or multilateral APAs. However, the actual timeframe may vary depending on factors such as the prompt submission of required information, the complexity of the issues involved, and the pace of negotiations with treaty partners.

What is the term of an APA?

An APA becomes effective from the date specified in the agreement and remains valid for up to three (3) years, with a possible rollback of up to three (3) prior years if conditions are met.

In what instances can an APA be terminated?

In line with the provisions of Regulation 9(9) of the Income Tax (Transfer Pricing) Regulations, 2018, an APA may be terminated by either the taxpayer or the FIRS through the issuance of a notice of termination, in the event of a change in the nature of the covered transaction(s), any alteration to the critical assumptions supporting the APA, or a change in tax laws that significantly impacts the terms of the APA.

What other regulatory requirements must be fulfilled by a taxpayer under the Guidelines?
Once a taxpayer has successfully negotiated an APA with the FIRS, it is required to prepare and submit an Annual Compliance Report (ACR) for each year covered by the APA. The ACR must be submitted by the deadline for filing the taxpayer’s annual Companies Income Tax returns. This report should provide comprehensive details of the taxpayer’s actual financial outcomes for the year and demonstrate full compliance with the terms outlined in the APA.

Conclusion

Given the increasing concerns among taxpayers regarding the uncertainties around transfer pricing, driven by the complexities and subjectivity in transactions, as well as the potential tax liabilities arising from transfer pricing disputes, the Guidelines, which took effect on January 1, 2025, represent a welcome development for eligible taxpayers. It is hoped that the implementation of these Guidelines will significantly reduce the occurrence of tax disputes.