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“Sunlight is said to be the best of disinfectants; electric light the most efficient policeman.” – Louis Brandeis, former US Supreme Court Justice.[1]
Introduction
Recently, as part of LeLaw’s Nigerian country chapter contribution to Bloomberg’s Winter 2020/Spring 2021: Transfer Pricing Forum,[2] (Bloomberg Publication), we used TP lenses to look closely at the Companies and Allied Matters Act 2020[3] (CAMA). It was an interesting exercise that revealed the complementariness of CAMA’s provisions to that of the Income Tax (Transfer Pricing) Regulations 2018 (TPRs 2018), that is the bulwark of Nigeria’s TP regime.[4] It is saying the obvious that Nigeria’s TP regime was until recently, stuck at its basic state – prompting calls by commentators for requisite regulatory actions.[5] Happily, the TPRs 2012, Nigeria’s inaugural TP focused instrument, was issued thereafter in August 2012, to much acclaim.[6]
Surely, heightened TP enforcement action is on the horizon of the Federal Inland Revenue Service (FIRS), and (to a lesser extent), FIRS’ State counterparts. Also, taxpayers now neglect TP compliance at their great peril, not the least because of increased penalties for breaches.[7] Indeed, the implications of the Tax Appeal Tribunal (TAT) decision in Prime Plastichem Nigeria Ltd. v. FIRS,[8] Nigeria’s first TP case, further impel compliance as prudent risk averse strategy on TP issues in Nigeria.[9] It is saying the obvious that there is likely to be an upswing in TP litigation as the FIRS and taxpayers take differing viewpoints which they are unable to resolve at the Dispute Resolution Panel (DRP) level, envisaged by Reg. 21 TPRs 2018.[10]
Has CAMA’s predecessors (CAMAs 2004 and 1990) always been this TP-disclosure prescriptive? What role can CAC play as the agency with regulatory oversight over CAMA in enforcing CAMA’s TP relevant provisions? How can the provisions further provide ammunition for the efficacy of FIRS’ TP enforcement functions? This article discusses these and related issues and concludes that the ‘searchlight’ legislative intent behind it, is a welcome one.
CAMA TP Documentation Requirement Provisions
In my view, CAMA’s TP interventions are either indirect or direct, and this article will discuss them accordingly. The former is exemplified by where an external regulatory instrument references CAMA’s provisions for TP purposes, whilst the latter is seen when CAMA makes a direct provision which could then be relevant for TP purposes.
Section 13(2)(c) and (e) CITA and the Companies Income Tax (Significant Economic Presence) Order 2020 (SEPO)
I will, with permission, quote and otherwise leverage from the Bloomberg Publication[11] as follows:
“Section 4 FA1 2020 amended section 13 CITA’s fixed base/permanent establishment rules for taxation of non-resident companies in respect of their Nigerian source profits. The new section 13(2)(c) CITA taxes such non-residents who engage in digital transactions “to the extent that the company has significant economic presence in Nigeria and profit can be attributed to such activity”. Meanwhile section 13(2)(e) targets offshore service providers (of technical, management, consultancy, professional services) to residents, ‘to the extent that the company has significant economic presence in Nigeria’. Pursuant to enabling powers in that regard (per section 13(4) CITA), the Minister of Finance issued the SEPO in February 2020.[12]
The SEPO is applicable to non-residents deriving gross turnover/income of at least N25 million from a combination of the listed digital activities/transactions, provided that for purposes of the turnover threshold, ‘activities carried out by connected persons in that accounting year shall be aggregated.’[13] Connected persons include ‘associates’ as defined in the [CAMA] or business associates (being direct or indirect participant in the management, control or capital of the other or both enterprises are subject to such management, control or capital by the same person (Para 1(6) SEPO)).”[14]
SEPO’s reference to “associates” as defined in CAMA, coupled with the fact that CAMA in turn does not directly define it, makes resort to other CAMA provisions to get the full purport of “associates”, inescapable.[15] Instructively, instead of the SEPO referring to CAMA’s definition, it could have, linked it to the “connected person” test in section 23 CGTA.[16] Or better still, given the comprehensive definition of connected person in Reg 12 TPRs 2018 (which included the CGTA definition), state that “associates” includes connected persons as defined in TPRs 2018.[17] In any event, CAMA’s connected person test in section 312(8) for purposes of giving effect to provisions in respect of property transactions involving directors also become relevant (discussed further below).
Even if not originally intended for as TP compliance requirements, many CAMA provisions, without the prompting of the tax law, prescribe what turns out to be TP relevant requirements. Ready examples can be found in group financial statements reporting, and in transactions with directors; these are discussed below.
Sections 378-384 CAMA 2020 covers the “Form and Content of Company, Individual and Group Financial Statements”. Section 379 (Group financial statements of holding company) obligates directors in 379(1), in addition to preparing individual accounts for each subsidiary, to “prepare group financial statements …which deal with the state of affairs and profit or loss of the entire company and the subsidiaries.” Section 380 provides for the “form and content of group financial statements”, referencing the First Schedule.[18]
Part 1, First Schedule CAMA 2020 lists under Section A (General Information to be Disclosed), in Para 2(e) “its relationship with its significant local and overseas suppliers (if any) including the immediate and ultimate parent, associated or affiliated company.” Para 4 mandates the disclosure of “financial implication of inter-company transfer and technical management agreements between the company and its significant local and overseas suppliers (if any), including its immediate and ultimate, associated, affiliated company”.[19] Emphasis supplied.
Part IV, First Schedule CAMA, Para 58 provides that “where a company is a holding company or a subsidiary of another body corporate and any item required by Part I of this Schedule to be shown in the company’s balance sheet in relation to group companies includes – (a) amounts attributable to dealings with or interests in any holding company or fellow subsidiary of the company; or (b) amounts attributable to dealings with or interests in any subsidiary of the company, the aggregate amounts within paragraphs (a) and (b) respectively shall be shown as separate items, either by way of sub-division of the relevant item in the balance sheet or in a note to the company’s accounts.”
Section 381(1) CAMA 2020 deems a company as a subsidiary of another company if the company – “(a) is a member of the company and controls the composition of its board of directors; (b) holds more than 50% in nominal value of its equity share capital; or (c) the first-mentioned company is a subsidiary of any company which is that other’s subsidiary.”[20] Section 868(1) CAMA 2020 also defines persons with significant control.[21]
Section 382 whose side note is captioned “Additional disclosure required in notes to financial statements” references the Second Schedule.[22] By section 382(4) and (5), any current or past director/officer required to give notice to the company for purposes of Part V, Second Schedule but fails to do so is liable to penalty as may be specified by the CAC. Section 383 focuses on disclosure of loans in favour of directors and connected persons and references the Third Schedule. According to section 383(1), “the group financial statements of a holding company for a year shall comply with Part I of the Third Schedule (so far as applicable) as regards the disclosure of transactions, arrangements and agreements mentioned therein, including loans, quasi loans and other dealings in favour of directors.” Emphasis supplied. These same requirements are also applicable to shadow directors: section 383(3).
Section 384 also mandates disclosure of loans to officers of the company and statements of amounts outstanding. By section 384(1): they are to comply with Part II, Third Schedule, “so far as applicable, as regards transactions, arrangements and agreements made by the company or its subsidiary for persons who at any time during that year were officers of the company but not directors.” These particulars which are meant to be given by way of notes to the accounts, do not apply to officers of banks or of bank holding companies (section 384(3) and (4).
In furtherance of good corporate governance and particularly to prevent conflicts of interest, CAMA has provisions regulating transactions between the company and its directors and officers. These in turn have pro-TP effect by either preventing sweetheart deals or spotlighting them, potentially incentivising arm’s length terms where such transactions happen at all. The common underlying theme is that the company is likely to be prejudiced by related party transactions, hence the need to pay extra attention to them. We will discuss under relevant subheadings below.
The subheading of CAMA’s section 293-300 is as above. Essentially, remuneration of directors is determined by the company in general meeting (section 293(1)); tax free remuneration is forbidden (unless same was due or was for a period before CAMA came into effect (section 295)a frontal attack against TP type (related party) grossing-up;[23] section 296 forbids grant of loan, security or guarantee to directors, provided that where loan is to be provided to enable a director discharge the duties of his office, same must be with the prior approval of the general meeting with requisite disclosures as to purpose, amount of the loan or the extent of the guarantee and security.[24] Furthermore, where approval is not given, the directors authorising the loan, the entering into the guarantee, or provision of the security shall be jointly and severally liable to indemnify the company against any loss arising therefrom (section 296(3)).
Compensation for loss of office can only be made pursuant to prior approval of shareholders, and upon disclosure of full particulars of the proposed payment (section 297). Similarly, such compensation arising from an M&A transaction is illegal unless the proposal has been disclosed and approved by shareholders. However, where such illegal payment is made to a director, then he is deemed to have received the amount in trust for the company; it is recoverable from such director (section 298).[25]
Part V (Paras 22-34), Second Schedule contains detailed provisions on “Chairman and Directors’ Emoluments, Pensions and Compensation for Loss of Office Emoluments”. Para 22(3) states that “For the purposes of this paragraph, ‘emolument’ in relation to a director, includes fees and percentages, any sums paid by way of expenses, allowances, (in so far as those sum are charged to Nigerian income tax), any contribution paid in respect of him under any pensions scheme and estimated money value of any other benefit received by him otherwise than in cash.”[26]
Flowing from the duty of every company to keep a register of directors’ interests, and for which directors are required to give notice to the company in that regard (sections 301 and 302), section 303 further mandates directors with direct or indirect interest in contracts to immediately notify the Board, specifying relevant particulars. The declaration of interest must be specific, and failure to comply is an offence which exposes the director to a fine as may be specified by the CAC. Sections 305 and 306 emphasizes the fiduciary duties of directors and proscribes conflicts of interests and duties, with liability to account for secret profits resulting thereby. Finally section 309 affirms that directors are trustees of the company’s moneys, properties and their powers, further underlining the duty of care and obligation to exercise their powers in the interests of the company and its shareholders.
Directors or controlling members[27] of subsidiary or parent companies or connected persons are precluded from engaging in property transactions with the company unless there is a shareholders’ resolution supporting same, after disclosure of material facts relating to the transaction (section 310).The exceptions are in section 311 – for example, no approval is required for wholly owned subsidiaries of parent companies, or if the transaction is done in the counterpart’s capacity as a member, rather than director of the company (ss. 311(1) and (3)).[28] The consequence of “an arrangement entered into by a company in contravention of section 310 …and any transaction entered into in pursuance of the arrangement … is voidable at the instance of the company or voidable by a court on its decision on a claim by members, unless…” restitution or indemnification happens, rights acquired for value and without notice would be affected by the avoidance, or the arrangement is within a reasonable period ratified and affirmed in full (section 312(1) and (2)).
By section 312(3) “If an arrangement is entered into with a company by a director of the company or its holding company or a person connected with him in contravention of section 310 of this Act, that director, controlling member and person so connected, and any other director of the company who authorises the arrangement or any transaction entered into in pursuance of such an arrangement, commits an offence and liable – (a) to account to the company for any gain which he has made and any loss or damage suffered by the company, directly or indirectly by the arrangement or transaction, (b) directly and derivatively to members of the company for any loss or damage suffered by them, (c) jointly and severally with any other person liable under this subsection, to indemnify the company for any loss or damage resulting from the arrangement or transaction, where found guilty and convicted of an offence guilty of the office, disqualified to serve as a director of the company.”[29]
According to section 312(8): “A person is connected with another person if he is – (a) that other person’s spouse, child or step-child, including illegitimate child; (b) a body corporate with which the person is associated; or (c) a person acting in his capacity as trustee of any trust, the beneficiaries of which include – (i) the director, his spouse, any children or step-children, or (ii) a body corporate with which he is associated, or of a trust whose terms confer a power on the trustees that may be exercised for the benefit of the person, his spouse or any children or step-children of his, or any such body corporate; or (d) a person acting in his capacity as partner of that director or of any person who, by virtue of paragraphs (a), (b) or (c), is connected with that director.”[30]
Another body of provisions of interest is Third Schedule CAMA 2020 (Particulars in Company Financial Statements of Loan and Other Transactions Favouring Directors and Officers).[31] Its Part I relates to “Matters to be disclosed under section 383”. Paras 1-3(1) states that:
“Group financial statements shall contain the particulars required by this Schedule of – (a) any transaction or arrangement of a kind described in section 296 of this Act entered into by the company or by a subsidiary of the company for a person who at any time during the year was a director of the company or its holding company, or was connected with such a director; (b) an agreement by the company or by a subsidiary of the company to enter into any such transaction or arrangement for a person who was at any time during the year a director of the company or its holding company, or was connected with such a director; and (c) any other transaction or arrangement with the company or subsidiary of it in which a person who at any time during the year was a director of the company or its holding company had, directly or indirectly, a material interest. 2. The accounts prepared by a company other than a holding company shall contain the particulars required by this Schedule of – (a) any transaction or arrangement of a kind described in section 296 …entered into by the company for a person who at any time during the year was a director of it or of its holding company or was connected with such a director; (b) an agreement by the company to enter into any such transaction or arrangement for a person who at any time during the year was a director of the company or its holding company or was connected with such a director; and (c) any other transaction or arrangement with the company in which a person who, at any time during the year, was a director of the company or of its holding company had, directly or indirectly, a material interest. 3.(1) For purposes of paragraphs 1(c) and 2(c), a transaction or arrangement between a company and a director of it or of its holding company, or a person connected with such a director, is to be treated, as a transaction arrangement or agreement in which that director is interested.”[32]
Interestingly, Para 7 disapplies Paras 1(c) and 2(c) if the related party transaction or arrangement was entered into “in the ordinary course of business”; or “(b) the terms of the transaction or arrangement are not less favourable to any such party than it would be reasonable to expect if the interest mentioned in that subparagraph had not been an interest of a person who was a director of the company or of its holding company.” This is a more frontal attempt to invoke arm’s length principle, akin to statutory tax provisions.[33]
Part II, Third Schedule is captioned “Matters to be disclosed under Section 384”. Thereunder, Para 13 provides that: “This Part of this Schedule shall apply in relation to the following classes of transactions, arrangements and agreements – (a) loans, guarantees and securities relating to loans, arrangements of a kind described under section 296 … relating to loans and agreements to enter into any of the foregoing transactions and agreements; (b) quasi-loans, guarantees and securities relating to quasi-loans, arrangements of a kind described in either of those subsections relating to quasi-loans and agreements to enter into any of the foregoing transactions and arrangements; (c) credit transactions, guarantees and securities relating to credit transactions and arrangements of a kind described in either of those subsections relating to credit transactions and agreements to enter into any of the foregoing transactions and arrangements.”
Conclusion
Incidentally, the “connected person” definition in Reg. 12 TPRs 2018 does not include CAMA’s definitions, but only those in substantive Nigerian tax legislation and two TP related international instruments.[34] However, the omission is not fatal and will not prevent the FIRS from using CAMA provisions to come to a decision whether a company’s financial statements comply with CAMA requirements, albeit for FIRS’ tax audit/enforcement purposes. This does not detract from the CAC’s regulatory oversight regarding CAMA’s provisions, pursuant to which for example, it insists that to be accepted for filing, the Annual Returns (ARs) of active companies must be accompanied by audited financial statements, not even statement of affairs (acceptable for dormant companies), not to talk of ARs being field without financials at all.[35]
And it is well known that the CAC will refuse to accept for filing or process, any other filing evidencing corporate changes such as changes in composition of the board or of shareholding, registered address, company secretaries, etc; if their ARs of such companies are not up to date. Thus, the first step required of such companies intending to notify CAC of corporate changes is that they regularise their AR status.[36] In doing so, they will pay accrued penalties as may be prescribed by the CAC (section 425).[37]
The above analysis has attempted to show how CAMA’s transparency and good corporate governance objectives (enshrined in its mandatory provisions some of which have been highlighted herein), can also help further the Revenue’s TP enforcement strategy. This writer firmly believes that the legislature’s has effectively, even if unwittingly, interposed the CAMA as part of Nigeria’s TP compliance architecture.[38] Incidentally, CAMA seemed to have even blazed the trail, when Nigeria’s GAAR regime was stuck in obsolescence before the issuance of TPRs 2012.[39]
Even the Nigerian Code of Corporate Governance 2018 (NCCG) made pursuant to the Financial Reporting Council of Nigeria Act[40] has also come in to lend its weight, vide ‘CAMA reinforcing’ provisions that also indirectly advance TP compliance. Ultimately, it is a case of “all’s well that ends well”, as FIRS’ toolbox is now sufficiently sophisticated and adaptable to its TP enforcement focus, with potential for prompt regulatory action (exemplified by the promised annual enactment of Finance Acts and revisions to the TPRs), in line with macro-economic and business realities.
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