Dispute resolution under the Nigerian transfer pricing regime
The Federal Inland Revenue Service [FIRS] has begun Transfer Pricing [TP] audits and has been requesting TP documentation and other documents from taxpayers relating to their related party transactions. These actions are in line with its powers under the Income Tax (Transfer Pricing) Regulations No. 1 of 2012 [Regulations] and Federal Inland Revenue Service Establishment Act [Act]. In many cases, TP audits result in long drawn out disputes between taxpayer and tax authority. These disputes could arise from adjustments in taxable profits resulting in increased tax liabilities; double taxation where adjusted profits have been taxed in other jurisdictions; different interpretation of provisions of the Regulations etc. As it can be seen, potential areas of conflict are not exhaustive. However, the good news is that a taxpayer has, at its disposal, a number of dispute resolution mechanisms under Nigerian law each with its implications.
Dispute Resolution Mechanisms under the Regulations
These include Administrative procedures, Litigation, Mutual Agreement Procedure (MAP) under Double Tax Treaties [DTTs] and Advance Pricing Agreements/Arrangements [APA].
Administrative / Internal Procedures:
The administrative mechanism for resolving disputes under the TP Regulations is the Decision Review Panel [DRP]. Regulation 14 permits the FIRS to set up the DRP constituted by the head of transfer pricing department and two other employees of FIRS not below the rank of deputy director.
It is instructive to note that the administrative procedure for dispute resolution under the Regulations does not appear to be mandatory. The use of the word ‘may’ in Regulation 14(3) implies that the taxpayer has a discretion on whether or not to refer a dispute to the DRP.
Where a taxpayer chooses to exercise its discretion to refer the dispute to the DRP, certain legal issues may arise. One of the issues is the composition of the DRP and the question of its fairness in light of the principles of natural justice, particularly the maxim nemo judex in causa sua which means ‘no one shall be a judge in his own cause or in one in which his interest is involved’. Accordingly, a taxpayer may decide to challenge the composition of the DRP or its decision on the ground of bias. This is based on the assumption that the members of the DRP would have participated in the assessment or adjustment being appealed against. In such a situation, the courts would be faced with the question of determining whether there was a ‘real likelihood of bias’, ‘real danger of bias’, ‘reasonable suspicion of bias’, ‘real possibility of bias’ or whether ‘a fair-minded and informed observer’ would input bias.
On the other hand, the composition of the DRP may be defended on the ground of necessity if it is established that no other duly qualified panel may be constituted as decided in the Supreme Court decision in State v Ogunoye1
Another issue which may arise is the question of where an appeal from a decision of the DRP would lie – the Federal High Court [FHC] or the Tax Appeal Tribunal [TAT]?
Litigation is another dispute resolution mechanism provided under the Regulations.
The Regulations provide that appeals from decisions of the DRP lie with court of competent jurisdiction however it does not define ‘court’. Section 251 (1) (a) and (b) of the Nigerian Constitution vests the FHC with exclusive jurisdiction to hear matters relating to the revenue of the Government of the Federation and pertaining to the taxation of companies. However, the Act establishing the TAT vests it with powers to settle disputes arising from the operations of various tax laws and regulations.
The Courts have given conflicting decisions on the legality of the TAT and whether it has jurisdiction to entertain tax matters in light of the Constitutional provisions. While the FHC [Abuja Division] has held2 that the TAT has no jurisdiction to decide matters relating to revenue of the federation, the FHC [Lagos division] held that the TAT could legally hear tax matters. Both cases are on appeal. Pending the outcome of the appeal, there are arguments for and against both positions.
The case for FHC
On the application of the literal rule of construction that where words are clear and unambiguous, they should be given their ordinary and natural meaning. Given that the Regulations refer to ‘court’, then ‘court’ must be interpreted as a court in the natural sense of the word as distinct from a tribunal.
Also, by the application of the expressio unis est exclusio atterius rule (the express mention of a thing is the exclusion of another), by expressly referring to ‘court’, the Regulations exclude the TAT.
Third, by virtue of another latin maxim – generalia specialibus non derogant which literally means the provisions of a general statute must yield to those of a special one, the Act, a general legislation, must yield to the Regulations, a special legislation.
The case for the TAT
Given that appeals to the DRP are not mandatory, a taxpayer may appeal directly to the TAT since appeals from the TAT would still lie to the FHC. Second, the Act provides that the TAT, being a tribunal (and not a court) is an appropriate forum for resolving disputes arising from the operations of tax laws and regulations (such as the Regulations). Finally, considering the objectives of the TAT – to resolve tax issues while decongesting the FHC and ensuring speedy resolution of cases etc. – it may be argued that it is an appropriate forum or condition precedent for appealing to the FHC. It is expected that the appeal court would resolve this dispute.
Mutual Agreement Procedure [MAP]
MAP is contained in many avoidance of double taxation treaties (DTTs). It is a mechanism for tax authorities of contracting States to resolve international tax disputes. Although MAP is not expressly mentioned in the Regulations, Regulation 11 (b) provides that the Regulations should be interpreted in a manner consistent with the Organisation for Economic Cooperation and Development’s Transfer Pricing Guidelines [OECD Guidelines]. The OECD Guidelines and Model Tax Treaty [OECD MTT] provide that MAP may be applied to resolve international tax disputes.
It is instructive to note that Nigeria’s DTTs differ, in one material aspect, from the OECD MTT – they do not contain any provision for arbitration. It is suggested that, going forward, arbitration should be included as a complement to MAP.
Advance Pricing Agreements
Regulation 7 provides for an Advance Pricing Agreements [APA]. As the name suggests, an APA is an agreement between a taxpayer and a tax authority of the State in which the former is resident which determines, in advance, an appropriate set of criteria for the purpose of determining the taxpayer’s transfer prices for a fixed period of time (the maximum period under the Regulations is 3 years). An APA could also be unilateral (involving a taxpayer and one tax authority, usually the tax authority of the State in which the taxpayer is resident), bilateral (involving a taxpayer and two tax authorities) and multilateral (involving more than two tax authorities).
Strictly speaking, an APA is not a dispute resolution mechanism. It is more of a dispute preventive measure as parties can agree beforehand on appropriate set of criteria which gives some certainty of tax liability.
It is arguable that APAs are contractual in nature therefore, the question may arise as to whether common law contractual rules would apply. Interestingly, this question came up before the US Courts in the case of Eaton Corporation v Commissioner.4 In that case, the IRS cancelled two APAs with Eaton by reason of which additional income was assessed in excess of USD 400 million. IRS claimed that the cancellation was because Eaton breached a fundamental term of the APA while Eaton argued that the common law rules of contract would apply, therefore, since IRS alleged a breach of a fundamental term of the APA, the burden of proving same rested on IRS. In response, the IRS argued that the cancellations were administrative determinations which it has the discretion to make and which could only be overturned if it abused its discretion. In other words, Eaton bore the burden of proving that IRS abused its discretion. The court agreed with the IRS.
Although Nigerian courts are not bound by the decisions of US courts the decision may provide some guidance as the conditions for cancellation of an APA under both US law5 and the Regulations are similar.
Currently, the FIRS is not entertaining any requests for APAs. However when it does, will it be able to cancel an APA for an alleged breach of a fundamental term without proving actual breach given that under Nigerian law, ‘he who asserts must prove’? Until FIRS engages taxpayers on APAs we will have to keep our fingers crossed.
It is expected that TP audits would result in disputes. Therefore, every taxpayer should be aware of the different dispute resolution mechanisms and their consequences. Where necessary you should seek professional advice early in the dispute resolution process rather than when the dispute has crystallised.
Folajimi is an Assistant Manager in Tax & Regulatory Services unit at PwC Nigeria. He is an expert in dispute resolution specialising in tax, international tax and transfer pricing.