The Federal Inland Revenue Service (FIRS) under Section 8(1)(u) of the FIRS (Establishment) Act 2007 (as amended) and Regulation 9(12) of the Income Tax (Transfer Pricing (TP)) Regulations 2018, to guide taxpayers, tax practitioners, tax officers and the general public on the procedure and conditions for Advance Pricing Agreement (APA) in Nigeria, as well as administration of executed APAs, has issued a comprehensive Guidelines on Advance Pricing Agreements (APAs).

The Guidelines issued on November 27, 2024, were effective from January 1, 2025.

Analysts and global taxation advisors including KPMG and Ernst & Young Nigeria have highlighted the APA Guidelines, noting that the Guidelines align with international best practices in resolving Transfer Pricing disputes.

KPMG, the global audit and tax Advisor, in its recent newsletter, underscored the major significance of the Guidelines, which it said is the mitigation of the risks of double taxation and prolonged TP disputes – which typically lead to significant, alleged additional tax liabilities – for multinational enterprises (MNEs) operating in Nigeria.

The Guidelines, according to KPMG, also aim to promote Nigeria’s tax compliance standards in alignment with global best practices, to ensure that related-party transactions involving entities that have a taxable presence in Nigeria adhere to the Arm’s Length Principle.

In its highlights, Ernst & Young Nigeria stated that the APA Guidelines guide relevant stakeholders on the procedures and conditions for obtaining an APA and the administration processes for dealing with executed APAs, among other things.

APAs are formal agreements between taxpayer(s) and tax administration(s) that determine in advance an appropriate set of criteria (such as transfer pricing (TP) methodology, comparables, adjustments and critical assumptions regarding future events, etc.) for determining transfer prices for intercompany transactions under the arm’s-length principle.

Under this arrangement, the taxpayer and FIRS must adhere strictly to all the terms of the APA. In addition, the FIRS is expected to refrain from auditing the taxpayer within the set period for the intercompany transactions covered under the APA, unless there are reasons to believe the taxpayer has significantly deviated from the agreed terms. Significant benefits of the APA include that it ensures tax certainty and reduces the likelihood of TP disputes while fostering transparency for businesses.

This Alert summarizes some of the key highlights of the guidelines and the implications for taxpayers with controlled transactions.

Objectives

An effective APA process provides taxpayers with the opportunity to achieve a level of certainty that their intercompany transactions are accepted as complying with the arm’s-length principle provided all defined conditions are met. Also, it prevents costly and time-consuming audits, and possible litigations that may arise from such TP disputes.

Given these objectives, engaging in the APA process can foster a cooperative relationship between multinational enterprises (MNEs) and tax authorities, leading to more constructive and nonadversarial dispute resolution.

Legal framework

Regulation 9 of the Nigeria Income Tax (Transfer Pricing) Regulations 2018 provides the legal basis for taxpayers engaged in controlled transactions to request an APA. However, based on sub-regulation 12, this provision could only be implemented through the issuance of a guideline by the FIRS. To this end, the issuance of the new APA Guidelines now gives effect to the APA provision in the TP regulations. Accordingly, taxpayers with controlled transactions that meet the required threshold can now apply for an APA.

Types of APAs

The Guidelines allow taxpayers the flexibility to enter the following APA arrangements with the FIRS:

Unilateral APA — involves the FIRS and a taxpayer

Bilateral APA — involves a taxpayer in Nigeria, the FIRS, its foreign-connected person, and the Competent Authority (CA) of the foreign-connected person

Multilateral APA — involves FIRS, a taxpayer in Nigeria, more than two foreign-connected persons and more than two CAs of the foreign-connected persons.

Based on the guidelines, taxpayers seeking to apply for an APA are required to consider a bilateral or multilateral APA, particularly if their intercompany transaction(s) involves a jurisdiction with an existing double tax treaty (DTT) agreement containing adequate Mutual Agreement Procedure (MAP) provisions and a corresponding APA program. This aligns with the international best practices as international tax, or treaty-related disputes are best resolved when all contracting states are involved, and it protects taxpayers from the incidence of double taxation.

While unilateral APA is also an option, it only provides certainty and reduces disputes with the FIRS. It does not offer total protection against the risk of double taxation. Therefore, unilateral APAs may be less effective in resolving cross-border tax issues compared to bilateral or multilateral APAs.

Eligibility criteria and threshold

Companies that are resident in Nigeria and nonresident companies with a permanent establishment or significant economic presence or any other taxable presence in Nigeria are eligible to apply for an APA. However, the intercompany transactions must meet an annual threshold of either:

US$10m or its equivalent for a single intercompany transaction

 

US$50m or its equivalent for a group of intercompany transactions

The threshold is significant and, as such, will scope out a high number of interested companies. An APA should not be declined solely based on materiality considerations, as complex TP issues can be encountered by smaller companies as well as by large companies. Typically, the FIRS’s consideration of APA requests is based on the particular facts and circumstances of each case, the complexity of the transaction(s), the likelihood of double taxation where there is no APA and whether granting the request is an effective use of governmental resources.

FIRS Chairman/CEO, Dr. Sacch Adedeji

Given the novelty of the Guidelines, it is reasonable for the FIRS to initially manage the volume of requests based on available resources using materiality considerations. However, it will be prudent for the FIRS to consider reviewing the thresholds to address the above concerns in the not-too-distant future.

Term of an APA

The duration of an executed APA is three years, commencing from the start date indicated in the APA or any other period as may be stipulated in the relevant law or Regulations. It can be renewed for another three years.

Although the term of the APA can be seen as comparable to some jurisdictions that have an advanced APA programme, note that a five-year duration applies in some other jurisdictions. With the Guidelines in Nigeria being new, the three-year duration for all taxpayers may make the APA program costlier and more burdensome for some taxpayers.

Accordingly, it could be helpful for the FIRS to consider a duration of three to five years depending on the facts and circumstances of the case, as this will be more cost and administratively effective for many taxpayers. Where the APA involves complex transactions with facts and circumstances that may be easily susceptible to change, the tenure of the APA can be three years. For less complex transactions, with steady facts and circumstances, a longer tenure of five years should be considered.

APA renewals

An APA may be renewed for a maximum term of three years or as stipulated in the relevant legislation. The request for an APA renewal shall follow the same procedures and documentation that apply to the initial APA request. Taxpayers will be required to demonstrate compliance with the existing APA terms and confirm that all material facts were fully disclosed.

Less documentation should be required for an APA renewal than for the initial APA, assuming all facts and circumstances of the transactions at issue in the APA are still the same, although this is not clear. Further, the APA Guidelines are not clear on whether APA renewals are limited to a one-time occurrence. Accordingly, it would be helpful for FIRS to provide more guidance in this regard.

Rollback of an APA

The terms agreed in an APA can be applied to prior years but should not extend back more than three years preceding the start date of the APA. Also, open historical years can only be covered if they meet specific conditions, such as: past years’ treatment of the transactions in the APA must align; all tax returns must have been filed for the relevant rollback years; and a formal application must be made in the prescribed form.

The rollback provision is extremely beneficial to taxpayers as it provides certainty on applicable TP methodology for prior open years that meet the required conditions.

Cost of processing an APA application

Taxpayers seeking to enter an APA with the FIRS will be responsible for all costs that are directly incurred in processing an APA application. Specifically, the cost implications are as follows:

Application fee: A nonrefundable deposit equivalent to US$20,000 must be paid. However, where the costs directly incurred by the FIRS exceed the nonrefundable deposit, the taxpayer would reimburse the FIRS before the final APA agreement is executed.

Renewal fee: A nonrefundable deposit equivalent to US$5,000 is required for renewal.

In a few jurisdictions, taxpayers must fund APA cost estimates up front. However, reimbursement of overruns (i.e., requiring the taxpayer to reimburse the FIRS for any cost they incur above the nonrefundable application and renewal fees) is not a common practice in the jurisdictions that have implemented APAs. This overrun concept introduces an uncertainty that may deter the participation of some taxpayers.

Accordingly, FIRS’s aligning its cost reimbursement structure for APA applications with the global best practices would be a welcome development.

APA application process

The APA application process consists of five key stages:

Prefiling meeting: This meeting involves a mandatory consultation to evaluate the feasibility of an APA, align on its scope and discuss expectations. Taxpayers must disclose all material facts about their controlled transactions, and they will be notified in writing about the acceptance or rejection of their APA application. Formal submissions shall only occur after agreement is reached with the FIRS regarding the APA’s scope and related matters.

Formal application: Upon agreement to proceed, taxpayers must submit a detailed application outlining the APA’s scope, covered transactions, and proposed TP methods. For bilateral or multilateral APAs, the application is also shared with the relevant tax treaty partners.

Analysis and evaluation: The FIRS reviews the application, engaging with taxpayers for clarifications. For unilateral APAs, the FIRS negotiates directly with taxpayers. For bilateral/multilateral APAs, Competent Authorities exchange briefs and may involve subject matter experts for additional insights.

Negotiations and agreement: The FIRS and taxpayers negotiate the terms of the APA. For bilateral/multilateral APAs, treaty partners also participate in the negotiations.

Drafting, execution and monitoring: The agreed terms are formalized in a written agreement. For unilateral APAs, the FIRS communicates the agreement using the Model APA Implementation Agreement. For bilateral/multilateral APAs, the FIRS finalizes agreements with treaty partners and notifies the taxpayer.

The structured stages of the APA process provide a clear pathway for taxpayers to achieve certainty in their TP arrangements. However, the financial and administrative burden of preparing detailed applications may be challenging.

 

Annual Compliance Report

Taxpayers that have an executed APA with the FIRS are required to submit an Annual Compliance Report (ACR). The ACR is required to demonstrate compliance with the terms of the APA. The report is due for filing on the due date of filing the annual company income tax returns.

This provision imposes an additional compliance burden on taxpayers, who must ensure accurate preparation and timely submission of the ACR to demonstrate adherence to APA terms.

The frame for concluding an APA

Upon acceptance of a taxpayer APA application, the FIRS will endeavour to conclude the APA process as follows:

Unilateral APA — within 24 months

Bilateral or multilateral APA — within 36 months

The actual time needed to complete an APA depends on a couple of factors, such as the timely provision of the relevant information and documents, the complexity of the issues and the progress of negotiations with CAs of the tax treaty partner(s).

If the timeframe to conclude an APA is too long, it could defeat the purpose of the APA. As such, it could be helpful for the FIRS to work toward revising the timeframe to be in line with best practices applicable in other jurisdictions (i.e., 12 months for unilateral APAs and 18 months for bilateral or multilateral APAs).

Record-keeping requirements

Taxpayers will be required to retain all records used during the APA process, including those submitted with the application and in the ACR, for six years after the APA period ends.

TP audits

The existence of an APA does not preclude audits of the related period; however, only matters outside the APA’s scope may be audited. Further, taxpayers may apply for an APA during an audit, but only for transactions not currently under review, and such applications will not halt or delay the ongoing audit process.

In certain situations, audits may be temporarily suspended if an APA is anticipated to expedite resolution; nonetheless, the FIRS retains the right to resume audits with written notice. Information from the APA process is not considered voluntary disclosure; hence, any additional taxes from resumed audits will attract penalties and interest as required by law.

Termination of an APA

According to the TP Regulations, the FIRS or a taxpayer may issue a notice to terminate an APA. Termination takes effect as specified in regulation 9(11).

Additionally, in line with the TP Regulations, all tax shelters, offshore structures, or related tax arrangements are required to be disclosed during the APA process. The omission of such information can lead to the termination of the APA.

Ernst & Young Nigeria concluded that the APA guidelines represent a positive step for Nigeria in aligning with global best practices in resolving TP disputes. With the activation of the APA framework, taxpayers can proactively agree on TP methodologies with the FIRS, ensuring their intercompany transactions comply with the arm’s length principle, thereby potentially reducing the risk of costly tax audits and disputes.

Accordingly, taxpayers are encouraged to review their intercompany transactions to assess eligibility, suitability and viability for an APA. The viability of the APA program from a cost-benefit perspective is particularly important for taxpayers who have completed one or two TP audit cycles in Nigeria.

Furthermore, the guidelines have certain limitations to the scope of coverage. Bilateral and multilateral APAs, which minimize double taxation in cross-border transactions, require the existence of a DTT with the jurisdiction of the counterparty and the involvement of the relevant competent authority; hence the benefits of these APAs are limited to cross-border transactions between Nigerian companies and their connected persons in treaty countries.

Given the limited treaty network of Nigeria, signing more DTTs with other countries should enhance the effective utilization and benefits of the APA program to taxpayers.

We’ll bring you the full text of the APA Guidelines shortly….