Head office/ Management/Shared services (Intra-group services).
It is common within groups to give an entity the responsibility for providing services to other group entities. Typically, the service provider would be the holding company. In other instances, it may be one of the operating companies within the group. The services include strategic functions and centralised management services such as executive administration (e.g. HR and legal), financial control, treasury management, internal audit, IT etc.
Other functions which are usually performed by holding companies include financing, procurement and holding of intellectual property such as the brand and trademark. Commercial reasons for these intra-group services include greater economies of scale, standardisation of processes and increased efficiency.
As with other connected party transactions, the pricing for these services must be at arm’s length. For Nigerian headquartered groups, the FIRS will be looking to ensure that the Nigerian head office receives an appropriate remuneration for the head office and other services provided to group companies outside Nigeria.
Where the Nigerian company is a subsidiary of a foreign company, the emphasis will be on ensuring that payments made for the head office and other services are not excessive.
Although different groups may have similar “service transactions”, the structure and manner of providing the services including the allocation of functions, risks and assets between the service provider and service recipient may be different.
This will mean that the pricing approach and methods for the services could be different for different groups even though the services could appear to be similar on the surface. This creates a risk when dealing with tax authorities.
Often, the expectations which the authorities form as a result of reviewing the transfer pricing affairs of one financial services group can influence their thinking on the pricing of these services in another group as they could expect the pricing arrangements to be the same or similar. Industry players would therefore need to provide robust analysis supporting their transfer pricing practices.
This analysis should include all factors relevant to the pricing of the transactions including industry factors, business specific factors etc.
A key consideration in determining whether it is appropriate to charge for a service is to determine whether an independent party would be willing to pay for the particular service.
Duplication of services : The FIRS (and other tax authorities) may not allow a management fee deduction if it believes the services are duplicated. This risk is high where a service recipient has staff that appear to be performing activities which are similar to those being provided by the service provider. The tax authority may argue that there is a duplication of services and there is no additional benefit which the service recipient obtains from the service provider. For example, if a management service fee is being charged for financial accounting services and the company receiving the service has a well staffed financial accounting function, the tax authorities could argue that the management services are not necessary To prevent the risk of duplication, companies should clearly delineate the activities performed centrally from those performed locally. This information should be recorded in their TP documentation reports. Companies should also record evidence of the direct benefit derived from the provision of these services. Sometimes, demonstrating the benefit derived from the services can be challenging.
Shareholder services : These are activities which a holding company or head office undertakes for its own benefit and which do not provide any clear commercial benefit to the subsidiary. Tax authorities will not allow holding companies to recharge costs relating to shareholder activities to their subsidiaries. A common example of a shareholder cost will be costs incurred by the holding company while raising funds for the acquisition of its interests in subsidiaries. Another example is costs relating to the reporting requirements of the holding company such as consolidation of reports. The line between what is for the benefit of the holding company and what is for the benefit of the subsidiary / operating company may not always be clear.
Pricing and allocation :
Compensation to the service provider should be commensurate with the services and benefit. A common practice is for the provider to receive a fee which covers the costs incurred in providing the services together with an arm’s length mark-up. Where there are multiple recipients, the costs should be apportioned based on an allocation key that reflects the relative benefit received. Some common allocation keys include time spent by staff in providing services to each entity, headcount, number of IT users etc. The mark-up to be charged will depend on the nature, complexity and risks associated with providing the service.