Pricing of Intangible Property (“IP”) rights in Nigeria – Why commercial, fiscal and currency control interests must align

A review of Nigeria’s present fiscal and currency control regimes as they relate to commercial and industrial IP rights become imperative in order to give impetus to government’s efforts towards reviving and diversifying the country …

Prior to the introduction of the Income Tax (Transfer pricing) Regulations on 2 August, 2012 (“TP Regulations”) the National Office for Technology Acquisition and Promotion (NOTAP) had specific guidelines for recognizing technology transfer agreements between foreign licensors and Nigerian licensees.
NOTAP also has approved range of fees/royalties Nigerian licensees were permitted to pay the foreign owners and licensors for use of the licensed commercial and industrial intangible property rights (IP rights).. Also, the Central Bank of Nigeria (“CBN”) in its yearly Monetary, Credit, Foreign Trade and Exchange Policy Guidelines prescribed range of fees/royalties for which CBN was prepared to sell foreign exchange to the Nigerian companies at official government rates, for use in making the foreign payments.
It could therefore be argued that prior to 2 August 2012, there was no clearly defined parameters that Nigerian taxpayers were mandated to use in empirically valuing licensed IP rights and determining the rate of fees payable to foreign IP owners and licensors. The NOTAP and CBN guidelines were seen as only being focused on imposing foreign currency control and restrictions on sourcing of foreign exchange from the government. Hence, companies were not precluded from recourse to autonomous or private sources in meeting their foreign exchange needs.
The introduction of the TP Regulations has now filled this loophole as it requires taxpayers to adopt the Arm’s Length Standard in determining the prices of related party transactions. The practical implication of this in relation to IP rights is that taxpayers will now be called upon to adduce proof of the valuation methods used and analysis performed in determining royalty rates, fees and commissions being paid for licensed IP rights. Some of the valuation methods include:
• the income approach focusing on anticipated economic benefits accruing from the licensed IP rights,
• the market or sales comparison approach based on value of similar investments or assets that have been sold or offered for sale, and
• the cost or asset approach based on quantifying the amount of money required to replace the investment or asset with another having equivalent utility.
While it is proper to applaud the transparency in valuation and pricing of IP rights that the introduction of the TP Regulations will drive, the new TP regime has also exposed some inherent flaws in our fiscal and currency control regimes.
The first challenge that arises is aligning the restrictive band of fee/ royalty rates for IP rights recognized by both CBN and NOTAP with the true commercial values of IP rights. Unless these bands are reviewed, foreign owners and licensors of IP rights will continue to face a precarious uphill task in obtaining appropriate returns on the true commercial and economic value of their licensed IP rights, even after providing IP valuation results required by the TP Regulations; which may indicate they are entitled to higher rates of returns. The current band of fees and royalty rates recognized by CBN and NOTAP are indicated in the table below:

These present rates may not accurately compensate IP owners for commercial exploitation of the fruit of their research and development efforts.
Secondly, the categories of IP rights that are recognized under the CBN and NOTAP currency restriction regimes appear very limited when compared to the current range of IP rights internationally recognized as being commercially valuable and billable.
Action 8 of the Base Erosion and Profit Shifting (“BEPS”) initiatives of the Organization for Economic Cooperation and Development (OECD) contains new broader definitions of intangible property rights – “…anything …which is not a physical or financial asset capable of being owned or controlled for use in commercial activities, and whose use or transfer would be compensated had it occurred in a transaction between independent parties in comparable circumstances…” This description deviates from the usual classification of intangible property rights as commercial, trade, or marketing intangibles, etc.
In view of the above it has become necessary to expand the bands of IP rights and fee/royalty rates recognized under the NOTAP and CBN currency restriction regimes in order not to shortchange foreign owners of those IP rights from being legitimately compensated where the IP rights are locally licensed and used in Nigeria.
A review of Nigeria’s present fiscal and currency control regimes as they relate to commercial and industrial IP rights become imperative in order to give impetus to government’s efforts towards reviving and diversifying the country from a mono-economic / oil-dependent country, jump-starting the manufacturing and industrial sectors of the country’s economy and expanding the country’s revenue base