In October 2015, the Organisation for Economic Cooperation and Development (OECD) released the Base Erosion and Profit Shifting (BEPS) package, consisting 15 Action Plans, to curb widespread artificial shifting of profits to no or low tax jurisdictions as well as plug loopholes in international tax systems which allowed multinational companies engage in harmful tax practices.
Action Plans 8 – 10 (Aligning Transfer Pricing Outcomes with Value Creation) and 13 (Transfer Pricing Documentation and Country-by-Country Reporting) of the BEPS package specifically relate to Transfer Pricing.
On 23 May 2016, the OECD Council approved the amendments to the Transfer Pricing Guidelines for Multinational Enterprises and Tax Administrations ("OECD TP Guidelines"), as set out in Action Plans 8-10 and 13. These amendments provide further clarity and legal certainty about the status of the BEPS changes to the OECD TP Guidelines, which have been endorsed by the Council G20 Finance Ministers and the G20 Leaders.
The new amendments include guidelines:
- requiring multinationals to comply with a 3 tier approach to TP documentation, that is, filing Master and Local Files and, where necessary, a Country by Country Report.
- A new approach to dealing with intangibles and entitlement to appropriate returns.
- A new approach to allocating returns in line with risks.
- Emphasis on aligning substance with form.
How does this affect Nigeria’s TP Regulations?
Regulation 11 (b) of the Nigerian TP Regulations (Regulations) provides that the Regulations shall be applied in a manner consistent with the OECD TP Guidelines approved by the Council as may be supplemented and updated from time to time. However, this is subject to Regulation 12 which provides that, in the case of any inconsistency, domestic tax legislation shall prevail over the OECD TP Guidelines.
Per Regulation 11 (b), the Regulations will now be interpreted in line with the updated OECD TP Guidelines. With this, the Federal Inland Revenue Service (FIRS), Nigeria’s revenue authority, need not issue formal amendments or introduce new Regulations before the OECD TP Guidelines apply, although it is expected that it will.
In the meantime, multinationals with Nigerian operations are to take note of this development and ensure that their TP documentation and related party transactions are in compliance with the new amendments.
I will provide updates on any developments.