As Nigeria continues its drive to enhance government revenue, taxes play a pivotal role in funding the national budget. Transfer Pricing (TP) has not been exempt from this focus, with the Federal Inland Revenue Service (FIRS) increasingly conducting TP audits. Consequently, the likelihood of a taxpayer undergoing a TP audit has substantially risen.
The elevated risk, coupled with the technical complexity of TP and the potential for significant tax adjustments, places TP as a key area of concern for taxpayers. Given the diverse interpretations and subjective application of TP concepts, the probability of taxpayers entering TP disputes with tax authorities is high. It is crucial for taxpayers to adopt a proactive stance during TP audits, considering dispute resolution options from the outset.
This article aims to provide readers with an understanding of the TP audit process in Nigeria, particularly focusing on the available dispute resolution options for taxpayers.
The TP Audit Process
A TP audit involves a comprehensive examination of a taxpayer’s Related Party Transactions (RPTs) by tax authorities to ensure adherence to the arm’s length principle. This process entails reviewing the taxpayer’s business operations, documents, records, financials, and economic data. In Nigeria, the TP audit process typically unfolds in four phases:
- Phase 1 – TP Risk Assessment and Desk Review: FIRS conducts a resource-intensive risk assessment of taxpayers, often commencing with an Information and Documentation Request (IDR). This phase identifies audit triggers such as consistent loss-making entities, RPTs with entities in tax-friendly jurisdictions, and excessive intercompany loans.
- Phase 2 – Field Audit: After the risk assessment, FIRS may proceed to a fact-finding exercise, involving interviews, site visits, and documentation gathering. This phase culminates in a close-out meeting with FIRS.
- Phase 3 – Post Field Audit: FIRS provides an audit report outlining their position on RPTs, derived from information gathered in the initial phases. The taxpayer may accept or rebut FIRS’ position, providing additional documents to support its stance.
- Phase 4 – Post Audit: If a consensus is not reached, dispute resolution options come into play. These include negotiation, decision review panels, and litigation.
Dispute Resolution Options
In navigating TP audits, taxpayers have various dispute resolution options to consider. A proactive evaluation of these options is crucial, as it can significantly strengthen the taxpayer’s position in case of a dispute.
Negotiations:
This option facilitates dialogue and negotiation between the taxpayer and tax authorities to reach a mutually agreeable position. Negotiations foster a cooperative attitude, encouraging both parties to work together and build trust. This approach is cost-effective and can lead to quicker, more efficient outcomes compared to formal litigation, saving time and resources for all stakeholders involved.
In conclusion, as Nigeria intensifies efforts to bolster government revenue, the focus on taxes, particularly through Transfer Pricing (TP), has grown, leading to an increased frequency of TP audits conducted by the Federal Inland Revenue Service (FIRS). The inherent risks, combined with the intricate nature of TP and the potential for substantial tax adjustments, elevate TP as a critical concern for taxpayers. The nuanced and subjective application of TP concepts further raises the likelihood of disputes between taxpayers and tax authorities.
Understanding the TP audit process in Nigeria, which unfolds through phases such as risk assessment, field audit, and post-audit evaluation, is paramount for taxpayers. Equally important is the recognition of available dispute resolution options, with negotiation emerging as a preferred approach. Negotiations foster collaboration, trust-building, and cost-effectiveness, offering a quicker and more efficient path to resolution compared to formal litigation. Therefore, taxpayers navigating TP audits should adopt a proactive stance, carefully evaluating dispute resolution options to fortify their position and promote constructive dialogue with tax authorities.
For professional advice on Accountancy, Transfer Pricing, Tax, Assurance, Outsourcing, online accounting support, Company Registration, and CAC matters, please contact Inner Konsult Ltd at www.innerkonsult.com at Lagos, Ogun state Nigeria offices, www.sunmoladavid.com. You can also reach us via WhatsApp at +2348038460036.
