INSIGHT: Revised Transfer Pricing Regulations in Nigeria—Implications for MNEs

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By Tayo Ogungbenro, Victor Adegite and Omojo Okwa

The recent Transfer Pricing Regulations in Nigeria have introduced some major changes which impose additional obligations and requirements for taxpayers. Significant administrative penalties have also been introduced in an attempt to improve compliance.

Nigeria’s Federal Inland Revenue Service (“FIRS”) released the revised Income Tax (Transfer Pricing) Regulations (2018) (“the revised Regulations”), which became effective on March 12, 2018, and apply to a company’s basis periods commencing after that date.

The major changes introduced by the revised Regulations are as considered below.

Significant Administrative Penalties

The Income Tax (Transfer Pricing) Regulations are subsidiary to the main income tax laws such as the Companies Income Tax Act (“CITA”), Petroleum Profits Tax Act, Personal Income Tax Act and Value Added Tax. The Transfer Pricing (TP) Regulations enable the tax authority to ensure compliance with provisions of the main legislation relating to related party transactions.

Thus, the Income Tax (Transfer Pricing) Regulations (2012) (“the maiden Regulations”) did not have separate penalties for non-compliance with any aspect of the TP Regulations.

Rather, the authority envisaged that the penalties available in the main legislation should suffice as an indirect deterrent to wilful non-compliance with any aspect of the TP Regulations.

For instance, where a company fails to file an annual TP Disclosure Form, which should form part of annual income tax returns, the company is deemed not to have filed complete tax returns and therefore to be liable to penalties imposed by the CITA.

However, it appears that this approach has not been effective. Thus, the revised Regulations now impose significant penalties for even minute infractions, separate from what is applicable in the main legislation. The penalties are as set out in the table.

These penalties are some of the highest in the history of taxation in Nigeria. The tax authority does not appear to be ready to condone any form of non-compliance with the revised Regulations. It is therefore expected that most companies in Nigeria will seek to comply with the revised Regulations if only to avoid exposure to the penalties.


Nigeria is a high import-dependent economy. Importation permeates every sector of the economy, from primary to tertiary. Thus, most companies operating in the country, especially multinational enterprises (“MNEs”) usually set up a separate entity that coordinates their import activities. It is usually the function of this entity to search for appropriate products, negotiate terms, coordinate shipment and arrange payment.

In addition, given the distinctive financial system of Nigeria, coupled with a complex and complicated legal system that makes contract enforcement difficult when there is a dispute, most original suppliers outside the country prefer to enter into supply agreements with entities registered offshore, especially in countries whose legal systems have been designed for such purposes.

On the other hand, despite the economic justification for this type of procurement arrangement, the Nigerian tax authority, possibly based on lessons from the Organisation for Economic Co-operation and Development (“OECD”) base erosion and profit shifting (“BEPS”) project, now requires greater transparency in this regard.

Companies are now required to provide information and documents in respect of procurement arrangement between the original manufacturers or suppliers and the intermediating related parties. The supporting documents must include “contracts, invoices, bills or similar documents issued by the unrelated person from whom the items originated.”

Since the start of transfer pricing audit in Nigeria, this has been one of the major issues discussed during reconciliation meetings.

The tax authority has questioned not only the compensation (usually mark-ups) paid to the related parties, which in most instances, is shielded from Nigeria tax; the opaqueness of the transaction between the original suppliers and the intermediating related parties is also of serious concern. The tax authority strongly believes that most MNEs even inflate the cost of imported items.

The tax authority takes the view that such companies prefer to pay the lower import duties and related levies and taxes, compare to the higher tax rate that would have been applicable on the mark-up income. The ability of companies to also repatriate profits promptly outside the country has also been deemed to be more attractive when it is done through higher cost of importation.

Intra-group Services

Many MNEs now seek to take advantage of the economies of scale provided by centralized service centers, such as intra-group service arrangements involving Nigerian subsidiaries of MNE groups.

The revised Regulations adopted the recommendations in the OECD’s 2017 Transfer Pricing Guidelines. This provides greater clarity.

It is important to note, however, that the Nigerian tax authority did not adopt the simplified approach for low value-added transactions suggested by the OECD Transfer Pricing Guidelines. Therefore, Nigerian subsidiaries of MNE groups may still be required to prepare a benchmark study to justify the mark-up rate applicable.


The revised Regulations also adopt the recommendations of the OECD Transfer Pricing Guidelines on intangibles.

However, with regard to consideration payable for transactions involving the transfer of rights in an intangible (e.g., patents, trade secrets, trademarks, etc.), the amount deductible for income tax purpose is limited to 5 percent of earnings before interest, tax, depreciation and amortization.

This limitation is inconsistent with the arm’s length principle and it is arguable whether such limitations can be brought into effect through a Regulation.

BEPS Action 13 Transfer Pricing Documentation Approach

The master file and local file approach to contemporaneous documentation put forward in the OECD Transfer Pricing Guidelines have been included in the revised Regulations: taxpayers, in addition to preparing a local file, must also prepare a master file.

The revised Regulations also include a detailed schedule outlining the information and analysis to be contained in the contemporaneous documentation. The requirement to file the transfer pricing documentation within 21 days of receipt of a request from the FIRS has, however, been maintained.

In addition, the revised Regulations introduce a threshold for maintaining contemporaneous documentation. Taxpayers with less than 300 million Nigerian naira (approx. $823,000) value of controlled transactions are no longer required to maintain contemporaneous documentation. However, the tax authority may require such taxpayers to prepare transfer pricing documentation within 90 days of receipt of notice to do so.

This update has now made Nigeria fully compliant with the recommendations of BEPS Action 13.

Safe Harbor

The pricing arrangements approved by government agencies such as the National Office for Technology Acquisition and Promotion (NOTAP), Nigeria National Petroleum Corporation (NNPC), Central Bank of Nigeria (CBN), Department of Petroleum Resources (DPR), etc., qualified as a safe harbor in the maiden TP Regulations. This implies that companies do not require extensive documentation once they can demonstrate that the approved pricing arrangements are at arm’s length.

Strictly speaking, the need to demonstrate that the approved prices by these other government agencies were at arm’s length rendered the safe harbor provision redundant in the maiden Regulation. The Nigerian tax authority was still rejecting approved pricing arrangements that failed the arm’s length test.

In order to avoid this confusion, the tax authority has withdrawn the power of other government agencies to approve pricing arrangements that can be considered for safe harbor. In the revised Regulations, only the pricing arrangement approved by the FIRS qualify for safe harbor. This basically resolves the conflict in the maiden legislation, since the FIRS will most likely approve pricing arrangements that meet the arm’s length rules.

Dispute Resolution Process

The dispute resolution process under both the maiden and the revised Regulations leaves much to be desired, at least based on the current level of transfer pricing knowledge in Nigeria. The only people with adequate knowledge of transfer pricing within the FIRS are currently located in one office. In the event of a dispute, there is practically no other individual with adequate knowledge and experience on the subject matter that can challenge their position.

Thus, while under the maiden Regulations, either the aggrieved taxpayer or tax administration can refer a dispute to the DPR, the revised Regulations now limit this to the head of the Transfer Pricing Division of the FIRS. This change, though major, is not of any substance, as there is currently no other personnel within the FIRS, outside of the Transfer Pricing Division, that has appreciable or working knowledge of transfer pricing.

Thus, the same transfer pricing assessment officers that prepare the report find themselves attending to the appeals filed by aggrieved taxpayers. It may take some time before knowledgeable independent arbitrators will be available to adjudicate on major transfer pricing issues in Nigeria.

Planning Points

In order to avoid the stiff penalties stipulated in the revised regulations, taxpayers are advised to begin to put in place systems and processes to ensure that the information required for the contemporaneous TP documentation and the annual statutory filing obligations are in place prior to the stipulated timelines.

Also, taxpayers who have entered into any of the transactions specifically covered by the revised Regulations must ensure that, in addition to complying with the recommendations of the OECD Transfer Pricing Guidelines, these transactions fully satisfy the requirements of the revised Regulations.

The revised Regulations include some welcome updates which may help reduce the administrative burden of compliance with the TP Regulations, such as the inclusion of a threshold for maintaining contemporaneous documentation, while introducing some complexities which may not necessarily ensure arm’s length outcomes for MNEs.

The FIRS is still expected to release a Practice Note to provide detailed guidance on the application of the provisions of the revised Regulations.

The revised Regulations may also herald a spike in transfer pricing litigation if taxpayers choose to challenge the legality of contentious issues in court.

Tayo Ogungbenro is a Partner, Victor Adegite is a Senior Manager and Omojo Okwa is a Senior Adviser with Global Transfer Pricing Services, KPMG in Nigeria.

They can be contacted at:;; and

The opinions expressed in this article are strictly those of the authors.

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