Dispute Prevention Techniques – Making A Case For Advanced Pricing Arrangements In Nigeria

Introduction

The prevalent use of tax avoidance strategies such as Transfer Pricing (TP) by multinational enterprises (MNEs) has become a major international taxation issue in recent years. By making use of several tax shifting accounting manipulations, MNEs attempt to exploit differences in marginal statutory tax rates across countries where they have subsidiaries and associate enterprises for adjusting their profits based on their cross-border transactions. 

In Nigeria, the Federal Inland Revenue Service (FIRS) functions as the TP auditor who carries out an independent review  of the taxpayer's TP documentations and financial records, after which it prepares an audit report to show whether the taxpayer has complied with the arm's length principle.

What are APAs?

APAs are key dispute avoidance mechanisms which play a key role in preventing disputes between taxpayers and tax authorities from occurring. An APA is defined in the 2017 OECD TP Guidelines for Multinational Enterprises and Tax Administrations as "an arrangement that determines, in advance of controlled transactions, an appropriate set of criteria (e.g. method, comparables and appropriate adjustments thereto, critical assumptions as to future events) for the determination of the TP for those transactions over a fixed period of time."

APAs are of different types and may be unilateral, bilateral or multilateral depending on the number of tax administrations involved in the arrangement. Unilateral APAs involve only the taxpayer and the tax authority of the country where the taxpayer is domiciled.

Prospects of adopting APAs in Nigeria

APAs have become a commonly used TP dispute prevention mechanism which promotes certainty with respect to tax outcome of the taxpayer's international transactions; ensures the fair application of the arm's length principle; saves time and costs of TP audits; avoids double taxation; and reduces the burden of record keeping and documentation.

Challenges of adopting APAs in Nigeria

Notwithstanding the benefits and prospects of APA as a dispute prevention technique in TP, there are several problems it may present for both the taxpayer and tax authority. Firstly, it may be difficult for all taxpayers to secure an APA since the procedure can be very costly and time consuming and only big taxpayers may be able to afford it particularly in situations where independent TP specialists are involved in the arrangement.

Lessons to be learnt by Nigeria from other countries and jurisdictions with an APA system

Developed and developing countries like China, India, Canada, Australia, United States and the United Kingdom have already implemented an APA system for the purpose of addressing the proliferation of TP controversies. In China, the State Taxation Administration (STA) published the 2019 APA annual report which summarises the circumstances under which the tax authorities in the country signed APA and introduced the current APA regulations, while providing data on signed APAs between taxpayers and STA covering the period from 1 January 2005 until 31 December 2019. The report shows that tax authorities in China concluded 21 APAs in 2019, including 12 unilateral APAs and 9 bilateral APAs, both of which are considered a record high since 2009.

Conclusion

There is no doubt that APA has the potential of being used as a mechanism for risk management, promoting tax certainty and transparency, as well as serving as an efficient alternative for TP dispute resolution. Notwithstanding the fact that Nigeria's TP Regulations contain provisions for APAs, the FIRS is yet to begin the APA program. Considering the recent advancement in TP, most multinational taxpayers in the country are now conscious of the need to comply with the arm's length principle in the planning phase of potential related party transactions. 

Source: KPMG Articles

 

Thankyou for this wondrous post, I am happy I watched this site on hurray.  Neuseeland Visum