Introduction

With the June 30th Transfer Pricing (TP) returns filing deadline quickly approaching, taxpayers and consultants are in full gear. Ensuring that Related Party Transactions (RPTs) are well-documented and accurately disclosed is essential, as missing this deadline can result in hefty administrative penalties starting at ₦10 million. Many taxpayers are also taking advantage of penalty waivers to regularize their TP compliance and file any outstanding TP returns and Country-by-Country Reporting (CbCR) notifications on the TaxPro Max platform.

Past experiences have shown that TP audits often ramp up following the June filing season. This trend likely stems from the Federal Inland Revenue Service (FIRS) using TP returns to assess risk, with these returns providing crucial information about taxpayers’ RPTs. In recent weeks, numerous companies have received audit letters, indicating a surge in FIRS’ TP audit activities.

While the focus is on filing TP returns, it’s vital to be prepared for a potential TP audit. This article offers a comprehensive overview of TP audits in Nigeria, detailing what to expect and best practices for ensuring audit readiness.

The Legal Framework for TP Audits

The Nigeria TP Regulations, 2018 (NTPR) form the foundation for TP compliance and audits in Nigeria. Regulation 4(3) of the NTPR authorizes the FIRS to review or challenge taxpayers’ RPTs to ensure they comply with the arm’s length principle. This regulation empowers the FIRS to conduct TP audits, examine taxpayer documents, and make necessary adjustments to align taxable profits from RPTs with the arm’s length principle.

Reasons for a TP Audit

Several factors can prompt 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 or complex transactions
• Previous non-compliance

What to Expect During a TP Audit

A TP audit is a thorough examination of a taxpayer’s RPTs to ensure compliance with the arm’s length principle. The audit process typically consists of four phases:

Phase 1 – TP Risk Assessment and Desk Review:
TP audits begin with a detailed risk assessment of taxpayers. The FIRS issues an Information and Documentation Request (IDR) covering multiple years, requesting documents such as TP documentation, financial statements, agreements, trial balances, and invoices. These documents help the FIRS identify TP risk triggers.

Phase 2 – Field Audit:
Following the desk review, the FIRS may conduct a fact-finding exercise involving interviews, site visits, and gathering documentation to verify the functions, assets, and risks related to the RPTs. This phase concludes with a close-out meeting with the FIRS.

Phase 3 – Post Field Audit:
After the field audit, the FIRS provides an audit report outlining their position on the RPTs. The taxpayer can accept or challenge the FIRS’ position and may provide additional documents to support their stance. The TP audit may end at this stage.

Phase 4 – Post Audit – Dispute Resolution:
If the taxpayer and the FIRS cannot agree on their differing positions, several dispute resolution options are available, including negotiation, a decision review panel (DRP), and litigation. These avenues offer effective means to resolve disagreements.

Best Practices for TP Audits

1. Establish a Group TP Policy:
   A comprehensive TP policy governs the pricing of intercompany transactions, ensuring consistency across all entities within the group. This policy aligns with local and international regulations, demonstrating compliance during an audit and reducing the risk of non-arm’s length transactions.
2. Prepare Robust TP Documentation:
   TP documentation provides evidence that RPTs are conducted reasonably from an arm’s length perspective. This documentation is critical for defending the arm’s length nature of RPTs and should contain detailed analysis and information about the transactions.
3. Maintain an Audit Defense File:
   Regulation 17 of the NTPR requires taxpayers to maintain certain records. An audit defense file should include TP documentation, intercompany agreements, invoices, bills, trial balances, benchmarking studies, audited financial statements, and tax computations. These records should be retained for six years from the date of the relevant return, as per Regulation 25 of the NTPR.
4. Conduct Regular TP Health Checks:
   Regular TP health checks ensure ongoing compliance and identify issues early, reducing the risk of penalties and adjustments. This includes periodic updates to benchmarking studies, continuous monitoring of RPT pricing, and assessing business operations and practices.
5. Foster Internal Communication and Reviews on TP:
   Periodic briefings and training on TP regulations ensure that staff are well-informed about TP policies and procedures. Clear communication channels for updates and compliance requirements are essential.
6. Prepare for Interview Sessions:
   Phase 2 of TP audits involves interviews with personnel related to the RPTs. Interviewees should be well-prepared and knowledgeable about the transactions, as misrepresentation of facts could affect the audit outcome.
7. Evaluate Dispute Resolution Options:
   Understanding the available dispute resolution options and developing strategies for navigating the audit process can significantly strengthen the taxpayer’s position in case of a dispute. This involves evaluating the potential benefits, drawbacks, and appropriate timing for each option.

Key Takeaways

• Proactive Compliance: File TP returns on time, regularly update and review TP documentation to ensure it meets regulatory requirements and reflects current business practices and the arm’s length nature of transactions.
• Audit Preparedness: Conduct TP reviews and update financials/RPTs to rectify potential issues before a TP audit.
• Engage Experts: Given the technical and contentious nature of TP, it is critical for taxpayers to have adequate support from preparation through the TP audit process. Having a technically strong TP expert can make a significant difference during the audit.

Finally,

By understanding the audit process and preparing accordingly, taxpayers can proactively prepare for TP audits, ensuring that the process runs smoothly and reducing the risks of substantial additional tax liabilities.

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, or www.sunmoladavid.com. You can also reach us via WhatsApp at +2348038460036.