Navigating Transfer Pricing Audits in Nigeria: Key Considerations, Challenges, and Best Practices Introduction In Nigeria, transfer pricing (TP) audits have gained significant attention as the Federal Inland Revenue Service (FIRS) intensifies efforts to curb tax avoidance and ensure compliance with the arm’s length principle (ALP). Multinational enterprises (MNEs) and local companies engaged in related-party transactions must be well-prepared to defend their pricing policies against regulatory scrutiny. This article explores the key aspects of transfer pricing audits in Nigeria, common challenges faced by taxpayers, and best practices to ensure compliance with the Income Tax (Transfer Pricing) Regulations 2018 and relevant provisions of the Companies Income Tax Act (CITA). 1. Understanding Transfer Pricing Audit in Nigeria A transfer pricing audit in Nigeria is a review conducted by FIRS to assess whether intercompany transactions are priced in accordance with the ALP. The audit determines whether related-party transactions have been structured to shift profits out of Nigeria and reduce taxable income. 1.1. Objectives of a Transfer Pricing Audit in Nigeria To ensure that companies engaged in related-party transactions report their income fairly. To prevent base erosion and profit shifting (BEPS) that may lead to loss of tax revenue. To verify compliance with the Nigerian Transfer Pricing Regulations (2018) and OECD Guidelines. To identify potential tax liabilities and apply penalties where necessary. 1.2. Triggers for a Transfer Pricing Audit in Nigeria FIRS may initiate a TP audit based on: Large or irregular related-party transactions. Consistent operating losses despite significant transactions with affiliates. Significant intra-group charges such as management fees, royalties, or interest on loans. Mismatches between revenue reported in Nigeria and related-party earnings abroad. Discrepancies in financial statements or inconsistencies in TP documentation. 2. Key Areas of Focus in a Nigerian TP Audit 2.1. Functional and Risk Analysis FIRS examines the functions performed, risks assumed, and assets used by each related entity to determine whether the pricing reflects economic reality. 2.2. Selection of Comparable Companies Tax authorities scrutinize the choice of comparable companies in TP studies to ensure they are truly independent and operate under similar market conditions in Nigeria or West Africa. 2.3. Selection and Application of TP Methods FIRS evaluates whether the taxpayer applied an appropriate TP method, such as: Comparable Uncontrolled Price (CUP) Resale Price Method (RPM) Cost Plus Method (CPM) Transactional Net Margin Method (TNMM) Profit Split Method (PSM) If a company applies an inappropriate or inconsistent method, adjustments may be made. 2.4. Review of TP Documentation Compliance The FIRS assesses whether the taxpayer has properly prepared and submitted: Master file – Overview of the multinational group’s global business operations. Local file – Detailed analysis of Nigerian operations and related-party transactions. Country-by-Country Report (CbCR) – Applicable to MNEs with global revenues exceeding ₦160 billion. Failure to maintain proper documentation or submit reports on time can lead to penalties. 2.5. Examination of Intangible Assets and Intra-Group Services FIRS pays close attention to transactions involving intangibles such as brand names, patents, and software. It also assesses whether management fees, technical service fees, and royalties paid to related parties are reasonable and substantiated. 3. Common Challenges in Transfer Pricing Audits in Nigeria 3.1. Lack of Reliable Comparable Data One of the key challenges Nigerian taxpayers face is the limited availability of suitable local comparables for TP benchmarking. FIRS may challenge comparables drawn from international databases that do not reflect Nigerian market realities. 3.2. Disagreements Over TP Methodology Tax authorities may reject a company’s chosen TP method and apply an alternative approach, resulting in adjustments that increase tax liability. 3.3. Retroactive Adjustments and Tax Penalties FIRS can impose retroactive TP adjustments, leading to additional tax assessments, interest charges, and penalties for non-compliance. 3.4. Risk of Double Taxation If a TP adjustment is made in Nigeria but not correspondingly adjusted in the related jurisdiction, the company may face double taxation, reducing overall profitability. 3.5. Subjectivity in Assessing Intra-Group Charges Intercompany charges such as royalties and management fees are often subject to scrutiny, with tax authorities questioning their economic substance and necessity. 4. Best Practices for Managing a Transfer Pricing Audit in Nigeria 4.1. Maintain Robust TP Documentation Ensure timely and accurate preparation of the local file, master file, and CbCR. Align TP policies with actual business substance and operational reality. Regularly update benchmarking studies with relevant Nigerian or West African comparables. 4.2. Implement a Proactive TP Compliance Strategy Conduct periodic TP risk assessments to identify potential audit risks. Engage in advance discussions with FIRS where possible. Obtain Advance Pricing Agreements (APAs) to provide certainty on TP arrangements. 4.3. Strengthen Internal Controls and Governance Train finance, tax, and legal teams on TP compliance requirements. Establish a TP policy framework for real-time monitoring. Maintain well-documented intercompany agreements. 4.4. Prepare for Effective Audit Defense Identify potential TP risk areas before an audit is initiated. Respond to FIRS queries with clear and well-supported justifications. Seek professional tax advisory support when handling complex TP disputes. 4.5. Consider Dispute Resolution Mechanisms Engage in Mutual Agreement Procedures (MAP) under applicable tax treaties to resolve double taxation issues. Explore arbitration options where bilateral tax treaties allow. Seek judicial review as a last resort if TP disputes remain unresolved. 5. Emerging Trends in Transfer Pricing Audits in Nigeria Increased Use of Digital Tools by FIRS – FIRS is leveraging big data analytics and artificial intelligence (AI) to detect TP risks and anomalies. Stricter Enforcement on E-Commerce and Digital Transactions – Online platforms, fintech firms, and digital service providers are facing greater scrutiny. More TP Audits on Intra-Group Financing and Royalties – Related-party loans, interest charges, and licensing arrangements are key focus areas. Alignment with OECD BEPS Actions – Nigeria continues to adopt international best practices under the OECD BEPS framework, requiring businesses to stay updated on evolving compliance requirements. Conclusion A well-prepared company can navigate a transfer pricing audit in Nigeria by maintaining strong documentation, proactively managing TP risks, and engaging with tax authorities effectively. Businesses operating in Nigeria must ensure that their intercompany transactions comply with the Nigerian Transfer Pricing Regulations 2018 and global best practices to avoid significant tax liabilities and penalties. By implementing these best practices, companies can mitigate TP audit risks, enhance compliance, and safeguard their profitability in an increasingly regulated tax environment. Olatunji Abdulrazaq CNA, ACTI, ACIArb(UK) Founder/CEO, Taxmobile.Online