As the 30 June Transfer Pricing (TP) returns filing deadline approaches, taxpayers and consultants are occupied with ensuring that their Related Party Transactions (RPTs) are well-documented, accurately disclosed and filing is completed on time to avoid administrative penalties (minimum of ₦10 million). Some taxpayers are also taking advantage of the waiver of penalties and regularising their TP compliance status by filing any outstanding TP returns and Country-by-Country Reporting (CbCR) notifications on the TaxPro Max platform (the Platform).
From experience, we have observed that after the June TP returns filing season, there is usually an increase in TP audits. This might be because taxpayers' TP returns form part of the information utilised by the Federal Inland Revenue Service (FIRS) for TP risk assessment, as the returns include information about the taxpayers' RPTs. Interestingly, in the last few weeks, we have noted an increase in the FIRS' TP audit drive, as several companies have received audit letters.
While taxpayers are understandably focused on TP filing this season, it is imperative that they are aware that a TP audit could be around the corner. In this article, we will provide a refresher on TP audits in Nigeria, highlighting what to expect from a TP audit and the best practices for preparing for a TP audit.
Legal basis for TP audits
The Nigeria TP Regulations, 2018 (NTPR) establishes the framework for TP compliance and audit in Nigeria. Regulation 4(3) of the NTPR grants the FIRS the authority to review or challenge taxpayers' RPTs in compliance with the arm's length principle. It underscores the authority of the FIRS to conduct TP audits and examinations of taxpayer documents and make necessary adjustments to bring taxable profits resulting from RPTs into conformity with the arm's length principle.
What can trigger a TP audit?
Several factors may trigger a TP audit, including consistent loss-making entities, RPTs with entities in tax-friendly jurisdictions, unusual profitability patterns compared to industry peers, procurement arrangements, excessive intercompany loans, high-value transactions or those involving complex arrangements, and previous non-compliance.
TP audit: what to expect
TP audit involves a thorough examination of a taxpayer's RPTs by the tax authorities to ensure compliance with the arm's length principle. It involves reviewing the taxpayer's business operations, documents, records, financials, and economic data. In Nigeria, the TP audit process typically comprises four phases:
- Phase 1 – TP risk assessment and desk review: TP audits conducted by the FIRS begin with a detailed risk assessment of taxpayers before the decision to proceed to other phases. This phase involves the FIRS issuing an Information and Documentation Request (IDR) to the taxpayer covering multiple years. The IDR requests various documents such as TP documentation, financial statements, agreements, trial balances, and invoices. With these documents, the FIRS can check for TP risk triggers.
- Phase 2 – Field audit: After Phase 1, the FIRS may proceed with a fact-finding exercise. This involves conducting interviews, site/ office/warehouse/factory visits, and gathering documentation to verify the functions, assets, and risks related to the RPTs. This phase ends with a close-out meeting with the FIRS.
- Phase 3 – Post field audit: Following Phase 2, the FIRS will provide an audit report outlining their position on the RPTs. The report is based on the information collected in Phases 1 and 2. The taxpayer is expected to accept or challenge the FIRS' position and may provide additional documents to support its stance. The TP audit may end at this stage.
- Phase 4 – Post audit – dispute resolution: If the taxpayer and the FIRS cannot reach an agreement on their differing positions, there are several dispute resolution options available. These include negotiation, decision review panel (DRP), and litigation. These avenues provide both parties with effective means to resolve their disagreements.
The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.