All you must find out about FIRS tips on Advance Pricing Agreements will be accessed beneath.
PoliticalNews Nigeria experiences that the Federal Inland Income Service (FIRS) beneath Part 8(1)(u) of the FIRS (Institution) Act 2007 (as amended) and Regulation 9(12) of the Earnings Tax (Switch Pricing (TP)) Laws 2018, to information taxpayers, tax practitioners, tax officers and most of the people on the process and situations for Advance Pricing Contract (APA) in Nigeria, in addition to administration of executed APAs, has issued a complete Tips on Advance Pricing Agreements (APAs).
The Tips issued on November 27, 2024, have been efficient from January 1, 2025.
Analysts and international taxation advisors together with KPMG and Ernst & Younger Nigeria have highlighted the APA Tips, noting that the Tips align with worldwide finest practices in resolving Switch Pricing disputes.
KPMG, the worldwide audit and tax Advisor, in its latest publication, underscored the main significance of the Tips, which it mentioned is the mitigation of the dangers of double taxation and extended TP disputes – which usually result in vital, alleged extra tax liabilities – for multinational enterprises (MNEs) working in Nigeria.
In keeping with KPMG, the rules additionally purpose to advertise Nigeria’s tax compliance requirements in alignment with international finest practices, to make sure that related-party transactions involving entities with a taxable presence in Nigeria adhere to the Arm’s Size Precept.
In its highlights, Ernst & Younger Nigeria acknowledged that the APA Tips information related stakeholders on the procedures and situations for acquiring an APA and the administration processes for coping with executed APAs, amongst different issues.
APAs are formal agreements between taxpayer(s) and tax administration(s) that decide upfront an applicable set of standards (comparable to switch pricing (TP) methodology, comparables, changes and demanding assumptions relating to future occasions, and so forth.) for figuring out switch costs for intercompany transactions beneath the arm’s-length precept.
Beneath this association, the taxpayer and FIRS should adhere strictly to all of the phrases of the APA. As well as, the FIRS is anticipated to chorus from auditing the taxpayer throughout the set interval for the intercompany transactions coated beneath the APA, except there are causes to consider the taxpayer has considerably deviated from the agreed phrases. Important advantages of the APA embody that it ensures tax certainty and reduces the probability of TP disputes whereas fostering transparency for companies.
This Alert summarizes among the key highlights of the rules and the implications for taxpayers with managed transactions.
Goals
An efficient APA course of gives taxpayers with the chance to attain a stage of certainty that their intercompany transactions are accepted as complying with the arm’s-length precept offered all outlined situations are met. Additionally, it prevents pricey and time-consuming audits, and doable litigations that will come up from such TP disputes.
Given these targets, participating within the APA course of can foster a cooperative relationship between multinational enterprises (MNEs) and tax authorities, resulting in extra constructive and nonadversarial dispute decision.
Authorized framework
Regulation 9 of the Nigeria Earnings Tax (Switch Pricing) Laws 2018 gives the authorized foundation for taxpayers requesting an APA for managed transactions. Nevertheless, primarily based on sub-regulation 12, this provision might solely be applied by the issuance of a suggestion by the FIRS. To this finish, the issuance of the brand new APA Tips now impacts the APA provision within the TP rules. Accordingly, taxpayers with managed transactions that meet the required threshold can now apply for an APA.
Varieties of APAs
The Tips enable taxpayers the pliability to enter the next APA preparations with the FIRS:
Unilateral APA — entails the FIRS and a taxpayer
Bilateral APA — entails a taxpayer in Nigeria, the FIRS, its foreign-connected individual, and the Competent Authority (CA) of the foreign-connected individual
Multilateral APA — entails FIRS, a taxpayer in Nigeria, greater than two foreign-connected individuals and greater than two CAs of the foreign-connected individuals.
Based mostly on the rules, taxpayers searching for to use for an APA are required to think about a bilateral or multilateral APA, significantly if their intercompany transaction(s) entails a jurisdiction with an current double tax treaty (DTT) Bargain containing ample Mutual Contract Process (MAP) provisions and a corresponding APA program. This aligns with the worldwide finest practices as worldwide tax, or treaty-related disputes are finest resolved when all contracting states are concerned, and it protects taxpayers from the incidence of double taxation.
Whereas unilateral APA can be an choice, it solely gives certainty and reduces disputes with the FIRS. It doesn’t provide complete safety in opposition to the chance of double taxation. Subsequently, unilateral APAs could also be much less efficient in resolving cross-border tax points in comparison with bilateral or multilateral APAs.
Eligibility standards and threshold
Corporations which might be resident in Nigeria and nonresident corporations with a everlasting institution or vital {economic} presence or some other taxable presence in Nigeria are eligible to use for an APA. Nevertheless, the intercompany transactions should meet an annual threshold of both:
US$10m or its equal for a single intercompany transaction
US$50m or its equal for a bunch of intercompany transactions
The edge is important and, as such, will scope out a excessive variety of corporations. An APA shouldn’t be declined solely primarily based on materiality issues, as advanced TP points will be encountered by smaller corporations in addition to by giant corporations. Usually, the FIRS’s consideration of APA requests relies on the actual info and circumstances of every case, the complexity of the transaction(s), the probability of double taxation the place there is no such thing as a APA and whether or not granting the request is an efficient use of governmental assets.
Given the novelty of the Tips, it’s affordable for the FIRS to initially handle the quantity of requests primarily based on out there assets utilizing materiality issues. Nevertheless, it will likely be prudent for the FIRS to think about reviewing the thresholds to handle the above issues within the not-too-distant future.
Time period of an APA
The period of an executed APA is three years, commencing from the beginning date indicated within the APA or some other interval as could also be stipulated within the related legislation or Laws. It may be renewed for one more three years.
Though the time period of the APA will be seen as similar to some jurisdictions which have a sophisticated APA programme, notice {that a} five-year period applies in another jurisdictions. With the Tips in Nigeria being new, the three-year period for all taxpayers could make the APA program costlier and extra burdensome for some taxpayers.
Accordingly, it may very well be useful for the FIRS to think about a period of three to 5 years relying on the info and circumstances of the case, as this can be extra value and administratively efficient for a lot of taxpayers. The place the APA entails advanced transactions with info and circumstances which may be simply vulnerable to vary, the tenure of the APA will be three years. For much less advanced transactions, with regular info and circumstances, an extended tenure of 5 years must be thought-about.
APA renewals
An APA could also be renewed for a most time period of three years or as stipulated within the related laws. The request for an APA renewal shall comply with the identical procedures and documentation that apply to the preliminary APA request. Taxpayers can be required to display compliance with the prevailing APA phrases and ensure that every one materials info have been totally disclosed.
Much less documentation must be required for an APA renewal than for the preliminary APA, assuming all info and circumstances of the transactions at situation within the APA are nonetheless the identical, though this isn’t clear. Additional, the APA Tips should not clear on whether or not APA renewals are restricted to a one-time incidence. Accordingly, it will be useful for FIRS to offer extra steerage on this regard.
Rollback of an APA
The phrases agreed in an APA will be utilized to prior years however mustn’t prolong again greater than three years previous the beginning date of the APA. Additionally, open historic years can solely be coated in the event that they meet particular situations, comparable to: previous years’ therapy of the transactions within the APA should align; all tax returns should have been filed for the related rollback years; and a proper utility have to be made within the prescribed type.
The rollback provision is extraordinarily helpful to taxpayers because it gives certainty on relevant TP methodology for prior open years that meet the required situations.
Value of processing an APA utility
Taxpayers searching for to enter an APA with the FIRS can be answerable for all prices which might be immediately incurred in processing an APA utility. Particularly, the associated fee implications are as follows:
Utility price: A nonrefundable deposit equal to US$20,000 have to be paid. Nevertheless, the place the prices immediately incurred by the FIRS exceed the nonrefundable deposit, the taxpayer would reimburse the FIRS earlier than the ultimate APA Bargain is executed.
Renewal price: A nonrefundable deposit equal to US$5,000 is required for renewal.
In just a few jurisdictions, taxpayers should fund APA value estimates up entrance. Nevertheless, reimbursement of overruns (i.e., requiring the taxpayer to reimburse the FIRS for any value they incur above the nonrefundable utility and renewal charges) just isn’t a standard follow within the jurisdictions which have applied APAs. This overrun idea introduces an uncertainty that will deter the participation of some taxpayers.
Accordingly, FIRS’s aligning its value reimbursement construction for APA functions with the worldwide finest practices could be a welcome growth.
APA utility course of
The APA utility course of consists of 5 key levels:
Prefiling assembly: This assembly entails a compulsory session to judge the feasibility of an APA, align on its scope and talk about expectations. Taxpayers should disclose all materials info about their managed transactions, and they are going to be notified in writing in regards to the acceptance or rejection of their APA utility. Formal submissions shall solely happen after Bargain is reached with the FIRS relating to the APA’s scope and associated issues.
Formal utility: Upon Bargain to proceed, taxpayers should submit an in depth utility outlining the APA’s scope, coated transactions, and proposed TP strategies. For bilateral or multilateral APAs, the applying can be shared with the related tax treaty companions.
Evaluation and analysis: The FIRS critiques the applying, participating with taxpayers for clarifications. For unilateral APAs, the FIRS negotiates immediately with taxpayers. For bilateral/multilateral APAs, Competent Authorities trade briefs and will contain material specialists for added insights.
Negotiations and Bargain: The FIRS and taxpayers negotiate the phrases of the APA. For bilateral/multilateral APAs, treaty companions additionally take part within the negotiations.
Drafting, execution and monitoring: The agreed phrases are formalized in a written Bargain. For unilateral APAs, the FIRS communicates the Bargain utilizing the Mannequin APA Implementation Contract. For bilateral/multilateral APAs, the FIRS finalizes agreements with treaty companions and notifies the taxpayer.
The structured levels of the APA course of present a transparent pathway for taxpayers to attain certainty of their TP preparations. Nevertheless, the {financial} and administrative burden of getting ready detailed functions could also be difficult.
Annual Compliance Report
Taxpayers which have an executed APA with the FIRS are required to submit an Annual Compliance Report (ACR). The ACR is required to display compliance with the phrases of the APA. The report is due for submitting on the due date of submitting the annual firm earnings tax returns.
This provision imposes a further compliance burden on taxpayers, who should guarantee correct preparation and well timed submission of the ACR to display adherence to APA phrases.
The body for concluding an APA
Upon acceptance of a taxpayer APA utility, the FIRS will endeavour to conclude the APA course of as follows:
Unilateral APA — inside 24 months
Bilateral or multilateral APA — inside 36 months
The precise time wanted to finish an APA is determined by a few elements, such because the well timed provision of the related info and paperwork, the complexity of the problems and the progress of negotiations with CAs of the tax treaty accomplice(s).
If the timeframe to conclude an APA is simply too lengthy, it might defeat the aim of the APA. As such, it may very well be useful for the FIRS to work towards revising the timeframe to be consistent with finest practices relevant in different jurisdictions (i.e., 12 months for unilateral APAs and 18 months for bilateral or multilateral APAs).
File-keeping necessities
Taxpayers can be required to retain all data used through the APA course of, together with these submitted with the applying and within the ACR, for six years after the APA interval ends.
TP audits
The existence of an APA doesn’t preclude audits of the associated interval; nonetheless, solely issues outdoors the APA’s scope could also be audited. Additional, taxpayers could apply for an APA throughout an audit, however just for transactions not presently beneath overview, and such functions won’t halt or delay the continuing audit course of.
In sure conditions, audits could also be quickly suspended if an APA is anticipated to expedite decision; nonetheless, the FIRS retains the best to renew audits with written discover. Data from the APA course of just isn’t thought-about voluntary disclosure; therefore, any extra taxes from resumed audits will appeal to penalties and curiosity as required by legislation.
Termination of an APA
In keeping with the TP Laws, the FIRS or a taxpayer could situation a discover to terminate an APA. Termination takes impact as laid out in regulation 9(11).
Moreover, consistent with the TP Laws, all tax shelters, offshore buildings, or associated tax preparations are required to be disclosed through the APA course of. The omission of such info can result in the termination of the APA.
Ernst & Younger Nigeria concluded that the APA tips characterize a constructive step for Nigeria in aligning with international finest practices in resolving TP disputes. With the activation of the APA framework, taxpayers can proactively agree on TP methodologies with the FIRS, making certain their intercompany transactions adjust to the arm’s size precept, thereby probably lowering the chance of pricey tax audits and disputes.
Accordingly, taxpayers are inspired to overview their intercompany transactions to evaluate eligibility, suitability and viability for an APA. The viability of the APA program from a cost-benefit perspective is especially vital for taxpayers who’ve accomplished one or two TP audit cycles in Nigeria.
Moreover, the rules have sure limitations to the scope of protection. Bilateral and multilateral APAs, which reduce double taxation in cross-border transactions, require the existence of a DTT with the jurisdiction of the counterparty and the involvement of the related competent authority; therefore the advantages of those APAs are restricted to cross-border transactions between Nigerian corporations and their related individuals in treaty nations.
Given the restricted treaty community of Nigeria, signing extra DTTs with different nations ought to improve the efficient utilization and advantages of the APA program to taxpayers.