The increased presence of Multinational Enterprises (MNEs) across various jurisdictions has among other things, created the need to centralize certain functions within the MNE Group. Many MNEs have adopted a shared services arrangement to centrally provide certain business support services to members of the group. Such shared services arrangements typically include services such as accounting, finance, procurement, Human Resources (HR), Information Technology (IT), Legal etc. The reasons for such arrangements are not far-fetched.

Adopting a shared services arrangement enables MNEs achieve cost efficiency, improve in their processes and leverage existing expertise. Another reason for such arrangements by MNEs may be the need to ensure uniformity / standardization of their business processes especially for MNEs with a global brand. As such, shared services arrangements are common between related parties.

It is therefore important that shared services are conducted in line with the arm's length principle and the charge for such services allow for the appropriate allocation of profit among various jurisdictions.

In May 2021, the Central Bank of Nigeria (CBN) issued Guidelines on the operations of shared service arrangements between banks and other financial institutions in Nigeria and their parent company or group members ("the Guidelines"). The introduction of the Guidelines was informed by the apex institution's concerns on governance, financial and tax management practices related to shared services.

This article reviews the Guidelines, highlights the compliance requirements and the implications of the Guidelines for Banks and other financial institutions.

Overview of the Guidelines and Approved Services

The Guidelines were introduced to set a supervisory expectation with respect to shared service arrangements, ensure the fees charged under such arrangements are reflective of the services rendered, ensure compliance with the Transfer Pricing (TP) Regulations in Nigeria, and reduce operational costs of recipients of those services.

The Guidelines, which has an effective date for full compliance of 1 June 2022 is applicable to:

  • Commercial banks
  • Merchant banks
  • Financial holding companies
  • Other financial institutions
  • Payment services banks, and
  • Other payment services as licensed by the CBN

The Guidelines provides a list of approved services, which banks and other financial institutions can engage in under a shared service arrangement. Such services include HR, risk management, internal control, compliance, marketing and corporate communications, IT, legal, facilities and any other services that may be approved by the CBN from time to time.

The Compliance Requirements

i. Establish Policies and Procedures for Shared Services: Financial institutions are expected to establish policies and procedures to ensure that shared services arrangements are conducted in a manner consistent with the arm's length principle. This policy is to be approved by the board of the financial institution, reviewed annually and submitted to the CBN.

The policy should include at a minimum, specific information such as details of the services to be shared, how the services would be shared including the roles and responsibilities of the parties involved, methodology for pricing the services and the governance structure for reporting exceptions to the policy.

ii. Prepare a Shared Services Agreement: The financial institution should enter into a shared services agreement with the provider of the shared services. This agreement should state the terms and conditions of the service including duration, fees, a clause requiring parties to adopt the recommendations arising from the review by the independent consultant, TP methodology used to analyse the arrangement etc. This agreement is to be reviewed yearly to reflect current economic realities and submitted to the CBN for approval.

The board of the financial institution is responsible for the oversight of the arrangement and may delegate the responsibility of monitoring and managing the shared services to a board committee, which should be headed by an independent director.

iii. Appoint an Independent Consultant: The board of the company is required to commission an independent consultant to determine the efficiency of the shared service arrangement on an annual basis. The report from the independent consultant, which should show the extent of compliance with extant laws and regulations, should be submitted to the CBN annually, not later than 31 January of the relevant financial year.

iv .Disclosures in Annual Report: Financial institutions are to disclose in their annual reports and website, the shared services within the group and the importance of those services to their institutions.

v. Compliance with TP Regulations: Financial Institutions are required to comply with the provisions of the Income Tax (Transfer Pricing) Regulations, 2018, particularly with respect to the methodology used to analyse the arrangement.

vi. Maintain Relevant Documents: Financial institutions are required to keep all necessary documents required to demonstrate that the shared services arrangement has been conducted in a manner similar to that of independent parties and the fee charged is at arm's length. Such documents include journals, ledgers, contracts, invoices, bills etc.

All financial institutions are expected to comply with the Guidelines. Failure to do this is punishable under sections 95 and 96 of the Banks and Other Financial Institutions Act, 2020 (BOFIA). Officers of non-compliant companies may be liable to administrative sanctions.

Our Comments

i. Increased Compliance Requirements: The introduction of the Guidelines increases the compliance requirements for financial institutions in Nigeria. Financial institutions need to be aware of the various compliance obligations, the role of the board in ensuring compliance and engage independent consultants to aid compliance. Increased compliance requirements may result in increased compliance costs.

ii. Link with the TP Regulations: It is noteworthy that the Guidelines makes specific reference to the TP Regulations. The Guidelines do not contradict but complement the provisions of the TP Regulations by focusing on the arm's length principle and referencing the TP methods in the TP Regulations. As such, the treatment of the shared services should be in line with the provisions of Regulations 6 of the TP Regulations and Chapter 7 of the OECD Guidelines.

iii. Cooperation among Government Agencies: The link between the Guidelines and the TP Regulations is a welcome development as it indicates cooperation between the CBN and the Federal Inland Revenue Agency (FIRS). This type of cooperation among government agencies should be encouraged to ensure consistency when treating TP issues.

For example, where the FIRS, the Nigeria Customs Service or the National Office for Technology Acquisition and Promotion use different methods to determine the pricing of related party transactions, this can lead to economic double taxation, which is detrimental to the business operations of taxpayers. This is a major issue faced by taxpayers especially manufacturing companies. As such, where government agencies work together to determine uniform approaches to analyzing these transactions, this will provide comfort to taxpayers by providing certainty in the treatment of related party transactions and reduce double taxation risks.

iv. Provision of Approved Services: The Guidelines states that the approved services can be provided under a shared services agreement where the recipient entity does not have the expertise and capacity to carry out these services. It should be noted that in practice companies enter into shared services arrangements due to the benefits of centrally providing services, not necessarily due to a lack of capacity in the local entity. It is however important that there is no duplication of services where similar services are provided centrally and locally.

Conclusion

With the introduction of the Guidelines by the CBN, Nigeria has taken yet another step towards ensuring compliance with the arm's length principle and protecting the tax base of the country. As such, affected taxpayers should evaluate their shared services arrangement in light of the Guidelines and proactively work with independent consultants in order to avoid undue regulatory risks and sanctions by the CBN.

The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.