Nigeria’s guidelines on advance pricing agreements: Enhancing tax certainty for multinationals

INTRODUCTION

To give full effect to the provisions of the Income Tax (Transfer Pricing) Regulations 2018 with respect to Advance Pricing Agreements (APAs), the Federal Inland Revenue Service (FIRS) issued the Guidelines for Advanced Pricing Agreements (APAs), (the Guidelines). Effective from 1st January 2025, the Guidelines would potentially enhance transparency, tax certainty and significantly help in the management of transfer pricing (TP) disputes as the tax treatment of relevant controlled transactions, within the covered period, would be clearly defined ensuring better compliance with the Arm’s Length principle. This article explores the key features of the Guidelines, with a view to highlighting the potential benefits, challenges and lessons for adoption from other jurisdictions.

OVERVIEW OF THE CONCEPT OF APA AND ITS FORMS

Up to one-third of all cross-border trade occurs within Multinational Companies (MNCs). MNCs use transfer prices to determine the income, and thus the tax base, in a given place. The determination of transfer prices is difficult because, not only does the firm’s desire to avoid taxation conflict with the governments’ tax revenue objectives in high tax areas, but there is also disagreement between governments because an increase in one tax base can diminish that in another. Thus, while deciding on transfer prices, businesses have no idea whether they will be recognized by tax authorities or, if not, how much they would be altered. Hence, to manage scenarios of this kind, taxpayers may request to execute an APA with the tax authority to establish an appropriate set of criteria (e.g., transfer pricing methodology, comparable, and appropriate adjustments, as well as critical assumptions as to future events) for determining the transfer price and whether they have complied with the arm’s length principle for specific future controlled/related party transactions undertaken by the taxpayer over a fixed period of time based on the fulfilment of certain terms and conditions. The implication of this is that upon the execution of an APA, the pricing in relevant controlled transactions would automatically be deemed to have been conducted at arm’s length. APAs, which may be unilateral, bilateral or multilateral, are intended to supplement traditional administrative, judicial and treaty mechanisms for managing TP issues by preventing disputes and issues from occurring.

ELIGIBILITY, THRESHOLD AND COST OF APA APPLICATION

To ensure that APAs are utilized by businesses with significant transfer pricing risks, the Guidelines stipulates that only persons with taxable presence in Nigeria are eligible to apply for an APA. It stipulates that the applicants must meet a minimum threshold of the equivalent of USD 10 Million for each covered controlled transaction (single transaction) for each year; or the equivalent of USD 50million in the case of a group of covered transactions (group of transactions) for each year covered in the APA.

Further, pursuant to the Guidelines taxpayers will be responsible for all costs incurred by the FIRS in the processing of an APA application, including cost of engaging experts, travel costs and other direct costs to the development of the particular APA. Taxpayers are to pay a non-refundable application fee deposit of $20,000.00 to cover the cost of the process and reimburse any excess direct costs associated with the APA which exceeds the non-refundable deposit and a non-refundable deposit of $5,000.00, in the case of a renewal.

TIMEFRAME FOR CONCLUSION OF AN APA

Upon the acceptance of a taxpayer’s APA formal application, the Guidelines stipulates that the FIRS is to endeavor to conclude the process within 24months in the case of a unilateral APA, or 36months in the case of a bilateral or multilateral APA. However, this is dependent on the negotiations with the CAs of the tax treaty partners, timeline provision of documents and the complexity of the issues.

THE APA PROCESS

The APA process consists of five distinct stages:

STAGE 1: PRE-FILING MEETING

This is a preliminary informal consultation where the taxpayer consults with the tax authority to discuss its TP arrangements and determine the possibility of successful completion of the APA. To facilitate this meeting, the taxpayer is to fully disclose material facts relating to the covered controlled transactions and its operations. Though the pre-filing meeting does not bind the taxpayer or the Service to agree on an APA neither is it a proof of filing or commencement of the APA application process, it is mandatory.

STAGE 2: FORMAL APPLICATION

Subsequent to the FIRS’ written acceptance to an APA process, the taxpayer submits a detailed written application, including business operations, intercompany transactions, the type of APA, detailed functional analysis, and proposed TP methods amongst others, to initiate the official review by the tax authority. The APA application is to reflect the discussions, agreements, and timeframes agreed at the pre-filing meeting. In the case of a bilateral or multilateral APA, the APA application is also to be submitted to the tax treaty partner(s) concerned.

Upon the submission of an APA application, the FIRS is to consider such an application and determine whether or not to accept the application and notify the taxpayer (and the relevant Competent Authorities (CAs), in the case of a bilateral/multilateral APA, where the application is accepted) in writing of its decision.

STAGE 3: ANALYSIS AND EVALUATION

Upon the acceptance of the APA application, the FIRS would proceed to analyze and evaluate the data provided by the taxpayer. Depending on the case, the FIRS may engage subject matter experts to make non-binding recommendations. In the case of a bilateral or multilateral APA, the FIRS is to exchange briefs with treaty partners on the APA process including with respect to possible revisions, terminations and renewal.

STAGE 4: NEGOTIATIONS AND AGREEMENT

This stage involves a review of the taxpayer’s proposals, gathering, analysis and evaluation of material facts and available data including data on the involvement of each connected party in respect of the controlled transactions. This stage would also include discussions on findings, inferences, and decisions taken with the taxpayers and the CA of the treaty partner in the case of a bilateral/multilateral APA. At this stage, the terms of the APA would be negotiated between the relevant parties – FIRS, taxpayers, and relevant CAs – with the aim of resolving all collateral issues.

STAGE 5: DRAFTING, EXECUTION, AND MONITORING

Upon the agreement of the parties as to the terms of the APA, the FIRS will draft the terms of the Agreement in line with the form provided in the Guidelines. Following which the principal officer of the taxpayer is required to sign a copy of the APA and return to the FIRS for sign-off.

TERM OF AN APA

The APA commences on the date indicated in the APA, which corresponds with the financial year indicated in the APA application or as mutually agreed between the parties. However, the APA shall not exceed three (3) years. Also, an APA may be renewed with the agreement of all relevant parties for a maximum term of 3years or as stipulated in relevant legislation.

Notably, the Guidelines allow for the application of the elements agreed in an APA to controlled transactions carried out within a maximum of three (3) years immediately preceding the coming into force of the APA, except where judicial decisions have been reached on such matters and controlled transactions. The FIRS or the taxpayer may issue a notice of termination of the APA on the basis of a material breach of the terms of an APA; or a material change in tax laws amongst others.

COMMENTS

The publication of the Guidelines portends immense benefits to the FIRS and taxpayers as it offers a level of tax certainty, reduces and manages TP disputes, limits the risk of double taxation and conflicting assessments and improves tax compliance, if properly implemented.
Notwithstanding its potential benefits, significant concerns arise with respect to the high-cost threshold stipulated. This threshold effectively limits its applicability, as very few Nigerian MNEs are likely to meet this threshold. Further, the timeline for the negotiation and application of the APA is another issue. By the provisions of the Guidelines, taxpayers have to wait for a minimum of 24months, in the case of a unilateral APA and 36months in a bilateral or multilateral APA before the APA is concluded. While the timeframe for the process in the case of bilateral and multilateral APAs are relatively realistic, the timeline for the unilateral APA process needs to be revised to allow taxpayers access the benefits faster.

RECOMMENDATIONS

A review of the threshold in order to allow more Nigerian MNEs to participate in the process is recommended. This is worth highlighting when we consider other jurisdictions such as Australia, Japan, Tanzania and Uganda which do not charge any fees for APA applications and India which stratifies its fees. There is also need to ensure that the timeline for finalization of unilateral APAs are shortened to enable taxpayers enjoy the benefit of the process faster. The FIRS must also ensure sufficient capacity building for its experts to ensure they are capable of handling complex APA negotiations efficiently.

Authors:

Kelechi Okparaocha, Managing Partner, WTS Blackwoodstone
Dede Ikeazor–Akaraiwe, Trainee Associate at WTS Blackwoodstone