Transfer Pricing issues within the Financial Services Industry
The Income Tax (Transfer Pricing) Regulations No 1, 2012 (“TP Regulations”) came into force in August 2012.
The Regulations provide a clear set of rules for the application of the general anti-avoidance provisions in the Companies Income Tax, Petroleum Profits Tax and Personal Income Tax Acts with respect to transactions between related parties.
The Regulations are to be interpreted in a manner consistent with the United Nations and Organisation for Economic Cooperation and Development (“OECD”) Model Tax Conventions and the OECD Transfer Pricing Guidelines for Multinational Enterprises and Tax Administrations (OECD Guidelines).
The Regulations require related parties (referred to as connected taxable persons) to observe the arm’s length principle. Under the Regulations, persons are related if one of them participates (directly or indirectly) in the management, control or capital of the other or if a third person participates (directly or indirectly) in the management, control or capital of both persons.
Related parties are required to transact at prices and terms that would normally be agreed between independent parties transacting under similar conditions. If this is not done, the tax authorities can adjust the transfer prices and tax any additional profits that arise as a result.
To comply with the Regulations, connected parties are required to prepare, and update annually, a TP documentation report.
This report is to contain information and analysis which demonstrate that the transfer prices and other commercial terms of their related party transactions are in accord with the arm’s length principle.
Other compliance requirements include maintaining a TP Policy and filing TP declaration and disclosure forms. The Federal Inland Revenue Service will typically use this information to perform a risk assessment and subsequently select taxpayers for TP audits.
Banking and financial services groups often have transactions involving one or more group members. Some of the more common transactions include provision of loans (and other forms of financial support) and intragroup services. Intergroup services include management services, head office services and various other services (e.g. IT services, treasury services, risk management services etc.).
The intergroup services within a financial services group will depend on the specific industry sub sector within which the group operates and could include generic management services and more specialised services. For example, an insurance group could have intragroup services such as risk management and reinsurance, contract and claims management, investment and asset management etc.
Some of the intercompany transactions that cut across the various industry subsectors as well as the key TP issues arising from those transactions are discussed below.