Survey: FIRS’ Approach on Transfer Pricing Audit Adversarial

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Peter Uzoho

The approach of the Federal Inland Revenue Service (FIRS) on Transfer Pricing (TP) audit, with respect to taxpayers is adversarial and aggressive, KPMG Transfer Pricing Awareness Survey 2017 has shown.

A transfer price is the price at which divisions of a company transact with each other, such as the trade of supplies or labour between departments. Transfer prices are used when individual entities of a larger multi-entity firm are treated and measured as separately run entities.

The report was presented at the KPMG Tax Breakfast Seminar held Thursday, in Lagos, with the theme: ‘Transfer Pricing Audit Global Perspective & Nigeria’s Experience.’

According to the survey administered on 52 persons, mainly Tax Managers/Directors, Chief Finance Officers (CFOs) and Heads of Finance in leading organisationsacross major industry sectors in Nigeria, with responses on TP compliance, TP audit, TP controversy and dispute resolution, as well as Base Erosion and Profit Shifting (BEPS).

It showed that 46 and 36 per cent of the respondents considered the FIRS stance on TP audit as ‘aggressive’ and ‘very aggressive’ respectively, while only 18 per cent viewed the Service’s stance as ‘friendly.’

The survey also showed that majority of the companies (73 per cent), preferred a less adversarial approach of TP dispute resolution between them and the Service through the Decision Review Panel (DRP). It further revealed that given this preference for a less adversarial approach, the FIRS would have to reconsider its delay in implementing its Advance Pricing Agreement (APA) provision, to ensure that taxpayers with high risk transactions can seek for certainty in the pricing of such transactions.

Also revealed by the survey was that 57 per cent of the respondents believed that the assessment of additional tax liabilities by the revenue agency was material. It noted that it was important for companies to comply with all the TP documentation requirements and proactively perform TP diagnostic reviews to ensure they mitigate their TP risk exposure before undergoing TP audits.

Further findings of the survey indicated that FIRS needs to pay more attention to the TP area of tax administration, stressing the need for it to enhance capacity, training and development of TP staff. To achieve this, the findings suggested that the agency should obtain support from multilateral agencies to implement a medium to long term secondment training programmes for staff.

These staff, it noted, would learn more and develop faster if they worked with their counterparts in more matured tax administrations outside Nigeria. It also said the staff would then be able to dispense international best practices in TP administration in Nigeria.

However, it stated that with the recent wave of TP audits, adequate care must be taken by companies to ensure that safeguards are in place to avoid costly errors during TP audit process.

It highlighted such safeguards as, ensuring that dedicated TP personnel track and compile all relevant TP documentation and supporting documents to defend the arm’s length nature of the company’s related party transactions, adding that taxpayers may outsource the TP function to external TP specialists who are able to assist the company in mitigating TP risks.