Nigeria's Tax Appeal Tribunal Rules In Favour Of FIRS In A Landmark TP Case

On 19 February 2020, the TAT held that the ₦1.74 billion  assessment issued by the FIRS to Prime Plastichem Nigeria Limited (PPNL) with respect to the company's TP audit was lawful. The TAT's decision is a landmark ruling as it represents the first major TP ruling in Nigeria since the introduction of TP rules in 2012. Below is a summary of the ruling.

Background

PPNL is a private limited company which engages in the business of trading in imported plastics and petrochemicals. In PPNL's 2013 TP documentation, PPNL applied the Comparable Uncontrolled Price (CUP) method in evaluating the arm's length nature of its purchase of petrochemical products from its offshore related party, Vinmar Overseas Limited (VOL) by comparing the prices VOL sold similar products to third party customers. However, in 2014, VOL did not transact with third party customers in Nigeria therefore there was no comparable information available to apply the CUP. As a result, PPNL was constrained to apply the Transactional Net Margin Method (TNMM) in evaluating the purchase of petrochemical products from VOL. 

In 2016, the FIRS reviewed PPNL's TP documentation and disregarded the CUP analysis applied in the 2013 TP documentation, applied TNMM to both 2013 and 2014 transactions, and issued an assessment of ₦1.74 billion. Both parties disagreed on the applicable profit level indicator (PLI) to be adopted in applying the TNMM and the comparables selected in the TNMM analysis. PPNL appealed to the TAT and on 19 February 2020, the Tribunal upheld the FIRS' assessment. 

Key issues for determination

1. Whether FIRS' action in benchmarking PPNL's transaction with TNMM for 2013 and 2014 was valid and in accordance with the TP Regulations and the OECD/UN Guidelines
2. Whether the FIRS' action of using the Gross Profit Margin Method as the PLI in the instant TP transaction is valid and in accordance with the TP Regulations, OECD and UN Guidelines
3. Whether PPNL's failure to file their returns within the prescribed period validates the penalty and interest imposed by the FIRS
4. Whether the Decision Review Panel purportedly set up by the FIRS was in accordance with the TP Regulations

TAT's decision

1. On issue 1, the Tribunal decided in favour of the FIRS on the basis that: PPNL could not provide satisfactory explanation for its use of CUP for 2013; there was insufficient information available to reliably apply the CUP; PPNL admitted it applied CUP in error and on its own volition changed methodology to TNMM in 2014; and the fact that PPNL had not applied the benchmarking analysis consistently across years.
2. On issue 2, the Tribunal agreed with the FIRS that Gross Profit Margin was the applicable PLI especially because the FIRS was able to establish that the Gross Profit Margin is in line with best practices and the fact that it also took into account the various factors enumerated by the OECD.
3. On issue 3, the Tribunal decided that the FIRS is empowered to impose penalties on PPNL for failure to file its returns, and to pay the relevant taxes as and when due.
4. On issue 4, the Tribunal held that the receipt of an assessment, and not a formal notification from the FIRS, is the trigger for the establishment of the DRP. This is because the contemplation of the law is that the taxpayer may within 30 days of receipt of the assessment/adjustment refer the assessment to the DRP.

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