The Federal Government of Nigeria has formally released the Income Tax (Country-by-Country Reporting) Regulations, 2018 (the Regulations), with an effective date of 1 January 2018. The Regulations set the framework for the automatic exchange of Country-by-Country (CbC) Reports in accordance with the Multilateral Competent Authority Agreement (MCAA) signed by Nigeria in January 2016 and ratified by the Federal Executive Council in August 2016.
The Regulations primarily seek to provide guidance to Multinational Enterprises (MNEs) on their reporting obligations to the Federal Inland Revenue Service (FIRS) in relation to their global activities, profits, taxes, accumulated earnings and other indicators of the MNE group’s economic activity. It is expected that the relevant information, when provided by the MNEs, will enable the FIRS to conduct improved transfer pricing risk assessments and ultimately prevent tax evasion or avoidance through base erosion and profit shifting (BEPS).
This recent development reflects the effort of the Nigerian Government in implementing the minimum standard under Action 13 (implementation of transfer pricing documentation and CbC reporting (CbCR)) of the Organisation for Economic Co-operation and Development’s BEPS plan and more importantly, its determination to prevent BEPS in Nigeria.
The FIRS, in line with its mandate to implement the BEPS plan in Nigeria, has issued the Regulations with an effective date of 1 January 2018. The Regulations constitute a significant landmark towards establishing the necessary framework for the automatic exchange of CbC reports. The CbC reports are to be filed with the FIRS who can then exchange them with tax administrators of other countries that are signatories to the CbCR MCAA.
The Regulations set out a number of key provisions that MNEs should adhere to/consider in respect of their potential CbCR obligations.
Key highlights of the Regulations are:
- Filing obligation and notification requirements of companies headquartered in Nigeria
Companies headquartered in Nigeria with consolidated revenues of NGN 160 billion (approximately US$440 million) or more in the previous reporting period must:
- File a notification of their filing obligation with the FIRS, no later than the last day of the MNE group’s accounting year end; and
- Prepare and file the annual CbC report based on the prescribed template, within 12 months after the last date of the group’s accounting year end.
- Filing obligation and notification requirements of subsidiaries in Nigeria
Subsidiaries of an MNE group resident in Nigeria for tax purposes and permanent establishments with financial statements will be required to notify the FIRS of the identity and tax residence of the entity within the group who has the responsibility to file the CbC report on behalf of the group.
Where there is more than one constituent entity of the same MNE group that are resident for tax purposes in Nigeria, the MNE group may designate one of the constituent entities to file the CbC report and to notify the FIRS that the filing is intended to satisfy the filing requirement of all the constituent entities of such MNE group that are resident for tax purposes in Nigeria.
- Filing exemptions and notifications
MNE groups with total consolidated group revenue of less than NGN160 billion in the immediately preceding accounting year are exempted from CbCR.
Further, an Ultimate Parent Entity (UPE) will not be required to file a CbC report with the FIRS if the MNE group has elected a constituent entity to act as a Surrogate Parent Entity (SPE) to file the CbC report with the FIRS.
The FIRS shall be notified by the constituent entity who has the reporting responsibility no later than the last day of the reporting accounting year of such MNE group. The constituent entity is also required to notify the FIRS of the identity and tax residence of the reporting entity (UPE or SPE).
- Content of the CbC report
The contents of the CbC report should include the aggregate information of the MNE group relating to the following:
- The amount of revenue, profit or loss before income tax, income tax paid, income tax accrued, stated capital, accumulated earnings, number of employees, and tangible assets other than cash or cash equivalents with regard to each jurisdiction in which the MNE group operates
- An identification of each constituent entity of the MNE group setting out the jurisdiction of tax residence of such constituent entity and, where different from such jurisdiction of tax residence, the jurisdiction under the laws of which such constituent entity is organized, and the nature of the main business activity or activities of such constituent entity
- Filing and notification deadline for the CbC report
The CbC report is required to be filed no later than 12 months after the last day of the MNE group’s accounting year end while the notification requirement should be made to the FIRS no later than the last day of the MNE’s accounting year end.
- Use and confidentiality of CbC report information
The FIRS shall use the CbC report to assess transfer pricing risks and related BEPS risks in Nigeria. However, transfer pricing adjustments by the FIRS shall not be based on the CbC report. The regulations also provides that the FIRS will preserve the confidentiality of the information contained in the CbC report at least to the same extent that would apply if such information were provided to it under the provisions of the Multilateral Convention on Mutual Administrative Assistance in Tax Matters.
- Non-compliance and penalties
The penalty for failure to file the CbC report to the FIRS by the filing deadline is NGN10 million in the first instance and NGN1 million for every month the failure continues. In addition, there is a penalty of NGN10 million where a reporting entity files an incorrect or false report while failure to provide notification attracts a penalty of NGN5 million in the first instance and NGN10,000 for every day in which the default continues.
The CbCR specifically focuses on enhancing transparency for tax administrations by providing them with adequate information to conduct transfer pricing risk assessments and examinations which are critical to tackling the BEPS problem.
An MNE group with headquarters in Nigeria and subsidiaries of MNEs carrying on business in Nigeria have an obligation to comply with the requirements of this regulation from the effective date i.e., accounting year of MNE groups beginning on or after 1 January 2018. As such, companies are encouraged to take necessary steps to proactively examine the potential gaps that may arise from full implementation of the Regulations, as well as perform an in-house review to help mitigate potential tax risk exposures.
In addition, considering the magnitude of the penalties that can arise in the event of default in filing or errors in completing the CbC report, it is imperative that companies ensure they not only file the CbC report, but also do so accurately to avoid any additional penalty for incorrect/false information.
EYG no. 010021-18Gbl
DID YOU LIKE THIS ARTICLE?
Subscribe to the Tax Insights newsletter for the latest thinking in tax.