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Nigeria's Income Tax (Transfer Pricing) Regulations 2018: Conceptualizing the Elephant and “Plucking the Goose”
Published online by Cambridge University Press: 15 May 2020
Abstract
In 2015, the OECD gave the world a template to address base erosion and profit shifting and ensure that profit is taxed in the jurisdiction of value addition and / or where economic activities take place. The world's jurisdictions then embarked on implementing the template. Examining the legal framework subsequently put in place for the taxation of intangibles in Nigeria, this article argues that the distinct regimes for connected and unconnected persons’ transactions create flaws. It further asserts that these flaws are consequences of the conflict between the policy that underpins the legal framework and other policies in the country. It concludes that the legal framework may not be a “Swiss army knife” (providing Nigeria with all that is needed to combat transfer pricing issues associated with the transfer of intangibles by connected persons), as it creates issues that have undesired consequences for the taxation as well as the economic system.
- Type
- Research Article
- Information
- Copyright
- Copyright © SOAS, University of London, 2020
Footnotes
*
LLD (Pretoria). Associate research fellow, Institute for Oil, Gas, Energy, Environment and Sustainable Development, Afe Babalola University, Nigeria.
**
LLB (Ekpoma), LLM (Dundee), PG cert, PhD (Glasgow Caledonian University). Visiting lecturer, Edo State Polytechnic, Nigeria.
References
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28 The method and rate of depreciation of an asset determine the tax written down value and consequential value of the asset.
29 This is because profit from the perspective of the business is the difference between income and the total cost (including tax) associated with the generation of income. This impacts on the return on investment (including dividends and interest).
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32 Substitution effect is the variation in consumer preference or the quantity demanded of goods, occasioned by a change in the price of the goods or disposable income, with income remaining constant. Where a price increase is occasioned by taxes, a consumer eschews expensive goods in favour of cheaper alternatives. The effect also applies where a taxpayer favours strategies and arrangements that would generate and / or guarantee a disposable income that is greater than would otherwise have been the case. In this case, the taxpayer adjusts his options or substitutes noncompliant behaviour to reduce the tax due on the income.
33 These are strategies implemented by the taxpayer to ensure that he pays the lowest tax possible. They are legal insofar as they fall within the confines of what is referred to as tax avoidance. See Ayrshire Pullman Motor Services and Ritchie v CIR (1929) 14 TC 754; IRC v Duke of Westminster (1935) All ER 259; Helvering v Gregory 69 F 2d 809, 810 (2nd cir 1934). Also see CIR v Willoughby (1997) 4 All ER 65 at 73, per Lord Nolan.
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35 For a discourse highlighting the relationship between taxation and inequality, see, for example, C Hallum and KW Obeng “The West Africa inequality crisis” (Oxfam briefing paper, July 2019) at 27–29, available at: <https://www.oxfam.org/en/research/west-africa-inequality-crisis> (last accessed 9 April 2020).
36 W Prichard “Improving tax and development outcomes: What next for civil society engagement?” (2018) at 2, available at: <https://www.ictd.ac/publication/improving-tax-and-development-outcomes-what-next-for-civil-society-engagement/> (last accessed 15 April 2020).
37 See generally, Report of the High Level Panel on Illicit Financial Flows from Africa (2015, commissioned by the African Union/Economic Commission for Africa Conference of Ministers of Finance, Planning and Economic Development), available at: <https://www.uneca.org/sites/default/files/PublicationFiles/iff_main_report_26feb_en.pdf> (last accessed 9 April 2020).
38 These include: (i) the signing of the Convention on Mutual Administrative Assistance in Tax Matters on 29 May 2013 without any reservation and its entry into force on 1 September 2015; (ii) the signing of the Multilateral Competent Authority Agreement on the Exchange of Country-By-Country Reports (MCAA) on 27 January 2016 and its ratification by the Federal Executive Council on 3 August 2016; (iii) the legislation of the Income Tax (Country by Country Reporting) Regs 2018 in January 2018, which give effect to the MCAA, secs 8(1)(i) and (t), 8(2), 26 and 27(1) of the Federal Inland Revenue Service (Establishment) Act, secs 58 and 60 of the Companies Income Tax Act cap C21 LFN (CITA), secs 31 and 32 of the Petroleum Profits Tax Act cap P13 LFN and reg 6 of the TPR; and (iv) the signing of the Multilateral Convention to Implement Tax Treaty Related Measures to Prevent Base Erosion and Profit Shifting on 17 August 2017. Note that this last convention is yet to enter into force in Nigeria as Nigeria has not deposited its instrument of ratification; see OECD “Signatories and parties to the Multilateral Convention to Implement Tax Treaty Related Measures to Prevent Base Erosion and Profit Shifting: Status as of 11 March 2020”, available at: <http://www.oecd.org/tax/treaties/beps-mli-signatories-and-parties.pdf> (last accessed 9 April 2020).
39 The TPR were preceded by the Income Tax (Transfer Pricing) Regs (No 1) 2012, which were revoked by reg 26(1) of the TPR.
40 These provisions are the Personal Income Tax Act, cap P8 LFN, sec 17; CITA, secs 13(d) and 22; and Petroleum Profits Tax Act, sec 15. See Abdulrazaq, AO “Nigeria: Effect of the OECD BEPS initiative on Nigerian transfer pricing regulations” (2016) 23/6International Transfer Pricing Journal 535Google Scholar, where these provisions are described as providing guidance for enforcement of the TPR.
41 “OECD transfer pricing guidelines for multinational enterprises and tax administrations 2017”, available at: <https://doi.org/10.1787/tpg-2017-en> (last assessed 9 April 2020).
42 “UN practical manual on transfer pricing for developing countries 2017”, available at <https://www.un.org/esa/ffd/wp-content/uploads/2017/04/Manual-TP-2017.pdf> (last assessed 9 April 2020).
43 This provision is not peculiar to Nigeria. See for example, Zambia's Income Tax (Transfer Pricing) (Amendment) Regs 2018, sec 20.
44 This is the government agency saddled with responsibility for assessing economic actors within the stratum of the Nigerian tax system that comes within the purview of the federal government, as well as collecting and accounting for the taxes collected. See Federal Inland Revenue Service (Establishment) Act, sec 2. Also see Aniyie, IA“Nigeria” in Evans, C et al. (eds) Improving Tax Compliance in a Globalised World (2018, International Bureau of Fiscal Documentation) 601Google Scholar at 622–23 for an overview of the administrative jurisdiction of the tiers of government in Nigeria.
45 OECD TPG, above at note 41 at 247.
46 See id at 249 and 252–57; and UN MTP, above at note 42 at 18.
47 Ndajiwo and Aniyie “Adoption of BEPS”, above at note 4 at 235.
48 Ibid.
49 Ibid.
50 See Aligning Transfer Pricing Outcomes with Value Creation, Action 8–10: Final Reports OECD / G20 Base Erosion and Profit Shifting Project (2015, OECD Publishing) at 63–65. This was subsequently referred to as “DEMPE-control risk associated with intangibles”.
51 See Niger Progress Ltd v NEI Corp (1989) 3 NWLR (pt 107) 68; Garba v Federal Civil Service Commission (1988) 1 NWLR (pt 71) 449; Odua Investment Limited v Talabi (1997) 10 NWLR (pt 523) 1; Bamaiyi v AG of Federation (2001) 90 LRCN 2738; Ainabeholo v ESUWFMPCS Ltd (2007) 2 NWLR (pt 1017) 33 at 37 where it was affirmed that the plain meaning approach to interpretation (also referred to as a contextual approach) should be utilized when the statute's language is clear and unambiguous.
52 Generally, persons are deemed connected when one has the ability to control or influence the other in making financial, commercial or operational decisions. They are also connected when a third person has the ability to control or influence both persons in making commercial or operational decisions. Hence, transactions between principal and subsidiary or affiliate companies, or between subsidiaries or affiliates are connected persons transactions. See TPR, reg 12(1).
53 The EBITDA of a taxpayer is generally the same as the net profit per account. It is arrived at after the cost of revenue and other operating expenses have been deducted from total revenue.
54 See Aligning Transfer Pricing Outcomes, above at note 50 at 63–65 for a summary of the guidelines proffered for the treatment of intangibles.
55 “Suggested approach to drafting transfer pricing legislation” (2017, ATAF), available at: <http://ataftaxevents.org/media/documents/10/documents/ATAF_Suggested_Approach_Eng_green_LR_print.pdf> (last assessed 9 April 2020).
56 Id at 4.
57 See Coltness Iron Company v Black 6 App Ca 315 at 330, which enunciated the principle that tax cannot be imposed (or deviations be introduced) without a law to that effect. See also SA Authority v Regional Tax Board (1960–2000) 2 NTLR 686 at 700 for judicial enunciation of this principle in Nigeria.
58 See Mangioni, V and Mckerchar, M “Strengthening the validity and reliability of the focus group as a method in tax research” (2013) 11/2eJournal of Tax Research 176Google Scholar at 176, where it was argued that taxation is an area of research populated by scholars from diverse disciplines including law, accounting, economics, psychology, sociology and political science. Van Oordt described taxation as a large pile of sand that consists of other piles of sand (ie disciplines): ML van Oordt “A quantitative measurement of policy options to inform value-added tax reform in South Africa” (unpublished PhD thesis, submitted to the University of Pretoria, South Africa, 2005) at 12.
59 Leedy, PD and Ormrod, JEPractical Research: Planning and Design (10th ed, 2013, Pearson)Google Scholar at 74.
60 See Togler, B “What do we know about tax morale and tax compliance?” (2001) 48 International Review of Economics and Business 395Google Scholar; LP Feld and BS Frey “Deterrence and tax morale: How tax administrations and taxpayers interact” (2002, unpublished manuscript), available at: <http://www.oecd.org/dataoecd/9/51/2789923.pdf> (last accessed 9 April 2020).
61 Dilling-Hansen opines that the Peter Pan syndrome is a characteristic of “life-style” firms (ie firms that were established primarily as a vehicle to create revenue to support their owners’ basic costs of living). He further argues that, when the owner(s) of such firms accumulate the wealth needed to afford basic luxury goods, profit maximization becomes less important: Dilling-Hansen, M “SMEs: Peter Pan syndrome of firms not grown up?” (2017) 3/1Athens Journal of Business and Economics 7CrossRefGoogle Scholar at 14–15.
62 Rationality is at the core of the rational choice theory, which has its origins in economics. At its centre is the abstraction homo economicus: a consistently rational, self-interested individual with unlimited cognitive capabilities, acting to maximize his own utility or the attainment of a pre-determined goal and the means to it. See Vriend, NJ “Rational behavior and economic theory” (1996) 29 Journal of Economic Behavior and Organization 263CrossRefGoogle Scholar at 264. See also R Selten “What is bounded rationality” (1999, Sonderforschungsbereich discussion paper B-454) at 3, available at: <http://www.wiwi.uni-bonn.de/sfb303/papers/1999/b/bonnsfb454.pdf> (last accessed 9 April 2020); SD Levitt and JA List “Homo economicus evolves” (2008) 319/5865 Science 909. See also S Schneider “Homo economicus: Or more like Homer Simpson” (29 June 2010) Deutsche Bank Research 1, available at: <https://www.dbresearch.com/PROD/RPS_EN-PROD/PROD0000000000475711/Homo_economicus_%E2%80%93_or_more_like_Homer_Simpson%3F.PDF> (last accessed 9 April 2020); Barros, G “Herbert A Simon and the concept of rationality: Boundaries and procedures” (2010) 30/3Brazilian Journal of Political Economy 455CrossRefGoogle Scholar at 457, where the author defined rationality in a similar manner.
63 See generally Coffman, RB “Is profit maximization vs value maximization also economics vs finance?” (1983) 12 Journal of Financial Education 37Google Scholar, where the author highlights the shortcoming of profit maximization as a decision function.
64 See Hettich, W “Henry Simons on taxation and the economic system” (1979) 32/1National Tax Journal 1Google Scholar at 5.
65 NOTAP was established pursuant to the NOTAP Act cap N62 LFN 2004.
66 These include registering all agreements for the transfer of foreign technology to Nigerian parties (ie technology transfer agreements) and the imposition of a regulatory cap on the fees payable for licences, royalties, etc. See NOTAP Act, secs 4 and 20. For a restatement of NOTAP's responsibilities, see Financial Reporting Council of Nigeria, Regulatory Decision in the Matter of Financial Statements of Stanbic IBTC Holdings Plc for Years Ended 31st December 2013 and 2014 (2015), available at: <https://drive.google.com/file/d/0BxB1-bqcIt35aHh2OXBFNFBneWM/view> (last accessed 15 April 2020).
67 NOTAP “History”, available at: <https://www.notap.gov.ng/content/history> (last accessed 9 April 2020).
68 For the TPR objectives, see TPR, reg 2.
69 This channel is managed by the Central Bank of Nigeria (CBN). Under the CBN Act 2007, sec 2, the CBN is saddled with the responsibility of ensuring monetary and price stability in Nigeria. The CBN issued the CBN Foreign Exchange Manual under the Foreign Exchange (Monitoring and Miscellaneous Provisions) Act, cap F34, LFN 2004, sec 1(1) to provide guidance to authorized foreign exchange dealers, authorized buyers and the general public in processing foreign exchange applications.
70 (2015) 18 TLRN 1.
71 Cap C20 LFN 2004.
72 Oando v FBIR, above at note 70 at 31. Also see Independent Television / Radio v Edo State Board of Internal Revenue (2014) 16 TRLN 37 at 58–59, where the Court of Appeal reiterated the superior position of special provisions in the course of statutory interpretation.
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74 Credit for the origin of this theory goes to Becker, who developed the “Simple model of rational crime” to combat illegal behaviour, including white collar crimes such as tax evasion: Becker, GS “Crime and punishment: An economic approach” (March – April 1968) 76/2Journal of Political Economy 169CrossRefGoogle Scholar. The current form is the product of the work of Allingham and Sandmo, Srinivasan as well as Yitzhaki. See generally, Allingham, MG and Sandmo, A “Income tax evasion: A theoretical analysis” (1972) 1 Journal of Public Economics 323CrossRefGoogle Scholar; Srinivasan, TN “Tax evasion: A model” (1973) 2 Journal of Public Economics 339CrossRefGoogle Scholar; and Yitzhaki, S “A note on income tax evasion: A theoretical analysis” (1974) 3 Journal of Public Economics 201CrossRefGoogle Scholar at 201–02. The theory has two assumptions at its core. The first is that individuals respond to incentives (whether positive or negative) and the prevalence of crime in a jurisdiction is inversely proportional to the effectiveness of the crime detection apparatus of the jurisdiction as well as the severity of the punishment on detection. The second is that, after a rational analysis of their situation to gauge the probability of apprehension (or success) as well as the consequence of failure, individuals commit crime and / or indulge in illegal behaviour only when there is an incentive to so do. From an economic point of view and in the context of taxation, the theory suggests that a taxpayer will embrace avoidance or evasion if the expected gain or incentive (ie the hidden taxable income) would exceed the utility (ie income) derivable from the use of economic resources (ie time and other resources, such as tax intermediaries) for purposes other than tax evasion (or avoidance).
75 See Manhire, JT “There is no spoon: Reconsidering the tax compliance puzzle” (2015) 17/8Florida Tax Review 623Google Scholar at 628–29, where taxpayer rationality, non-rationality, morality, social and cultural norms, trust in government and alignment of government policies with those of the citizenry were listed as factors that motivate the compliance orientation and behaviour of taxpayers. See R Aiko and C Logan “Africa's willing taxpayers thwarted by opaque tax system, corruption” (2014, Afrobarometer policy paper no 7), highlighting data pointing to the fact that Africans are willing to pay tax, notwithstanding the existence of psycho-social referents that could catalyse noncompliant behaviour. Also see Togler, B “Speaking to theorists and searching for facts: Tax morale and tax compliance in experiments” (2002) 16/5Journal of Economic Surveys 657CrossRefGoogle Scholar at 662–69 for a review of some of the non-economic variables that often propel compliance.
76 See Report of the High Level Panel, above at note 37 at 13, stating that Africa has lost USD 1 trillion in the last 50 years and loses USD50 billion annually in illicit financial flows.
77 Deadweight loss is the efficiency loss associated with tax-induced substitution in the decision function of an economic agent. In real terms it is the loss suffered, whether real or intrinsic, because of choices made to reduce or avoid the impact of taxes.
78 These are the four largest accounting firms in terms of global revenue: Deloitte, PricewaterhouseCoopers, Ernst & Young and KPMG. See: “Revenue of the Big Four accounting / audit firms worldwide in 2019” Statista, available at: <https://www.statista.com/statistics/250479/big-four-accounting-firms-global-revenue/> (last accessed 9 April 2020).
79 In 2016, attention was drawn to the inadequate number of staff within the FIRS transfer pricing unit, at that time numbering approximately half the number of KPMG Nigeria staff dedicated to advising clients on the subject. See Ogungbenro, T et al. “Transfer pricing in Nigeria: The journey so far” (2016) 84 Tax Notes International 789Google Scholar at 791.
80 2015 ATAF statistics show that 43.7% of staff disengage from FIRS after nine years and put average disengagement from the service of African tax authorities after nine years of employment at 68.2%: ATAF African Tax Outlook (2nd ed, 2017, ATAF) at 150–51. See also Dealing Effectively with the Challenges of Transfer Pricing (2012, OECD Publishing) at 58, available at: <http://dx.doi.org/10.1787/9789264169463-en> (last accessed 9 April 2020), where the OECD affirmed this.
81 Africa Capacity Report 2015: Capacity Imperatives for Domestic Resource Mobilization in Africa (2015, African Capacity Building Foundation) at 6, available at: <https://www.acbf-pact.org/sites/default/files/ACR_2015_11_2015_Web_v2.pdf> (last accessed 9 April 2020). Also see African Tax Outlook (3rd ed, 2019, ATAF) at 169 for some of the staff retention and motivation schemes employed by tax administrations in Africa.
82 See Dealing Effectively, above at note 80 at 58–73.
83 See Musgrave and Musgrave Public Finance, above at note 11 at 3–14, where it was proposed that the function of the state is to allocate resources, stabilize the economy and redistribute income.
84 Avi-Yonah, RS “The three goals of taxation” (2006) 60 Tax Law Review 1Google Scholar, where the Musgravian objectives were described as the “three goals of taxation”.
85 This is often the source of uncertainty for the taxpayer, as the court has been known to hand down conflicting decisions. See the decisions in Gazprom Oil & Gas Nigeria Limited v FIRS (2015) 19 TLRN 66 and Vodacom Business Nigeria Limited v FIRS (unreported, appeal TAT/LZ/VAT/016/2015, delivered 12 February 2016); in these two cases the Tax Appeal Tribunal handed down conflicting decisions with regard to the VAT obligation of a Nigerian company that consumes goods or services provided by a non-resident company. The conflict stood until the Federal High Court, sitting in its appellate jurisdiction in Vodacom Business Nigeria Limited v FIRS (unreported, appeal FHC/L/4A/2016, per Kuewumi J, delivered 19 December 2017) affirmed the decision in Vodacom Business Nigeria Limited v FIRS.
86 These are alternative trade policy measures with the potential to have an economic effect on the international trade in goods, changing quantities traded, prices or both. They encompass non-customs tariff measures like sanitary / phytosanitary or environmental protection measures, quotas, price control and export restrictions, or contingent trade protective measures and behind-the-border measures like competition, trade-related investment measures, government procurement and distribution restrictions. See UN Conference on Trade and Development “Non-tariff measures: Evidence from selected developing countries and future research agenda” (2010, UN) at XVI, available at: <https://unctad.org/en/Docs/ditctab20093_en.pdf> (last accessed 9 April 2020).