The parent company's management fee
Ridgeview Foods Nigeria Ltd is a subsidiary of a Mauritius holding company. In 2023 it paid NGN 96m in management fees to the parent, equal to 8% of its NGN 1.2bn turnover, under a one-page agreement that refers to 'strategic, technical and brand support' without specifying deliverables. The company deducted the fee in its 2023 CIT return but did not remit withholding tax, which the agreement and FIRS query treat as 10% (NGN 9.6m). It has no transfer pricing documentation. FIRS sends a query asking for the agreement, evidence of services, benefit test, and WHT remittance evidence. The finance director proposes to 'backdate a transfer pricing policy to January 2023, create monthly service reports, and pay the WHT now without telling FIRS about the delay'. The company is profitable and has a tax audit scheduled for next quarter.
1. Identify the compliance failures and the potential tax exposures.
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There are at least four separate issues.
- WHT non-remittance: the company deducted the fee but did not remit the 10% WHT of NGN 9.6m. That creates a principal liability plus penalties and interest, and may affect the deductibility of the fee.
- Deductibility and benefit test: a management fee must be wholly, reasonably, exclusively and necessarily incurred for the company's business. A one-page agreement with no deliverables, no service evidence and a fee set at 8% of turnover is vulnerable to disallowance.
- Transfer pricing: as a related-party cross-border payment, the fee should be arm's length and supported by documentation. No documentation exists.
- Potential additional tax: if the NGN 96m is disallowed, additional CIT at 30% could be about NGN 28.8m, before penalties and interest. There may also be WHT gross-up issues.
The proposed backdating and creation of service reports would make the position worse, because it would involve creating misleading evidence.
2. Advise on the voluntary disclosure and regularisation strategy, including what can and cannot be corrected.
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The company should regularise honestly, not reconstruct history. It can: compute and pay the outstanding WHT with a clear covering letter; provide the actual agreement and actual correspondence; gather genuine evidence of services from emails, travel records, board minutes and employee interviews; prepare a transfer pricing policy and documentation now, marked as prepared in 2025, not backdated; and consider a voluntary disclosure to FIRS before the audit begins.
It cannot: backdate a policy to 2023, create monthly service reports that did not exist, or pay the WHT while concealing the delay. Those steps risk penalties for false information and damage the company's credibility.
The strategy should be: quantify the exposure, decide whether to disclose voluntarily, pay the undisputed WHT, and seek advice on penalty waiver or instalment arrangements. The board should approve the approach because the amounts are material.
3. How should the company respond to the FIRS query?
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Respond within the stated deadline, or request an extension in writing before it expires. Acknowledge the query and provide a clear index of documents.
Substantively: provide the agreement, explain what services were actually received and by whom, provide genuine evidence, and state the WHT position accurately. If WHT was not remitted, disclose that and show the payment being made. Do not overstate the services or rely on documents created after the event.
Where the benefit test is weak, consider whether part of the fee should be conceded or renegotiated. A credible partial concession is often better than defending an unsupportable position. Copy the response to the board or audit committee and keep a complete record. Before the audit next quarter, ensure the transfer pricing documentation is prepared on a prospective basis and that future fees are supported by a proper agreement and service evidence.