NIGERIA Law and Practice Contributed by: Theophilus Emuwa, Jibrin Dasun, Perpetua Onyeukwu and Tubosiya Ibama, ǼLEX
4.4 Transfer Pricing Issues for Inbound Investors The availability of local comparables is one of the biggest transfer pricing challenges for inbound inves - tors operating through a local corporation; transfer pricing compliance requirements are another. This is because there is a minimum penalty of NGN10 million for each failure to declare relevant group information, to disclose related-party transaction(s) or to maintain contemporaneous transfer pricing documentation, where required. 4.5 Challenges to Related-Party Limited Risk Distribution Arrangements The local tax authorities challenge the use of related- party limited risk distribution arrangements for the sale of goods or the provision of services locally if they determine that the arrangement provides a tax advan - tage and has not been made on arm’s length terms. 4.6 Local Transfer Pricing Rules and OECD Standards The transfer pricing standards of the Organisation for Economic Co-operation and Development (OECD) and those of the UN apply in Nigeria unless they con - flict with the local standards. The local transfer pricing standards conflict with the OECD standards in two major regards. • In addition to requiring the arm’s length test in respect of royalty payments, the Income Tax (Transfer Pricing) Regulations 2018 (the “TP Regu - lations”) provide that, for the transfer of rights in an intangible among connected parties, any amount that exceeds 5% of the EBITDA derived from the commercial activity conducted using the intangible is not tax-deductible. • The TP Regulations also provide that, for exports, the related-party price will be the sale price for tax purposes if it is higher than the quoted price. For imports, the quoted price will be the sale price for tax purposes if the related-party price is higher than the quoted price. 4.7 Transfer Pricing Disputes and Mutual Agreement Procedures There is no published data regarding the use of the mutual agreement procedure (MAP) by Nigeria’s com -
petent authorities to resolve international transfer pric - ing disputes. The NRS is open to resolving tax disputes through the MAP process. In 2018, the NRS (then the Fed - eral Inland Revenue Service) issued the Guidelines on MAP in Nigeria to guide Nigerian residents seeking to initiate the MAP process regarding tax disputes, including transfer pricing disputes involving a treaty partner. By the combined provision of these guidelines and the TP Regulations, where a Nigerian resident ini - tiates a MAP in respect of a transfer pricing adjust - ment made by the tax authorities of a treaty partner, the NRS will allow a corresponding adjustment where it agrees that the adjustment done by the tax authori - ties of the treaty partner is consistent with the arm’s length principle. If the NRS does not agree that the adjustment by the tax authorities of the treaty partner is consistent with the arm’s length principle, Nigeria’s competent authority will initiate the MAP. However, it is unlikely that Nigeria’s competent author - ity would resolve international transfer pricing dis - putes via MAPs initiated by Nigerian residents, given Nigeria’s status as an import-dependent nation and its low-tax treaty network. 5. Taxation of Non-Local Corporations 5.1 Compensating Adjustments The TP Regulations do not make provisions for com - pensating adjustments. Therefore, the OECD and UN standards would apply. 5.2 Local Branches and Local Subsidiaries Unless granted a special exemption, branch opera - tions by non-local corporations are not permitted in Nigeria. As such, non-local corporations seeking to carry on business in Nigeria must set up a subsidi - ary for that purpose. There are separate rules for the taxation of local branches of non-local corporations that carry on the business of transport by sea or air. 5.3 Capital Gains of Non-Residents Capital gains of non-residents from the sale of shares of a local entity are subject to tax. Also, gains from any indirect transfer of shares in a Nigerian company
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