CBN Issues Guidelines on Shared Service Arrangements for Banks and Other Financial Institutions
July 7, 2021
On 26th May 2021, the Central Bank of Nigeria (CBN) issued a Circular informing banks and other financial institutions of its issuance of Guidelines on the operations of shared service arrangements between banks and other financial institutions in Nigeria and their parent company or group members (“Guidelines”). The Guidelines, which has an effective date of 1st June 2022, aims 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 Regulations in Nigeria, and reduce operational costs of recipients of those services.
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 human resource services, risk management services, internal control services, compliance services, marketing and corporate communications, information and communication technology, legal services, facilities and any other services that may be approved by CBN from time to time.
In addition, the Guidelines stipulates that the financial institution should comply with the following:
- Establish policies and procedures to ensure that shared services arrangements are conducted in a manner consistent with the arm’s length principle. This policy as approved by the board of such financial institution, should be submitted to the CBN and should include at a minimum the following information:
- Details of the services to be shared
- Indicate how the services would be shared including the roles and responsibilities of the parties involved
- Indicate the methodology for pricing shared services
- Establish governance structure for reporting exceptions to policy
- Be reviewed annually.
- Enter into a shared services agreement with the provider of the service stating 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, transfer pricing methodology used to analyse the arrangement etc. This agreement is to be submitted to the CBN for approval.
- Commission an independent consultant to determine the efficiency of the shared service arrangement on an annual basis.
- Disclose in its annual report and website, the services shared within the group and the importance of those services to their institutions.
- Comply with the provisions of the Income Tax (Transfer Pricing) Regulations, 2018, particularly with respect to the methodology used to analyse the arrangement.
- Keep all necessary documents required to demonstrate that the shared services arrangement is 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.
This Guidelines joins existing Regulations that have been recently introduced by Regulators to protect the tax base of Nigeria and prevent arrangements that may result in profit shifting that may erode the tax base of Nigeria.
Banks and financial institutions, including payment solution services providers licensed by the CBN, operating in Nigeria will, therefore, have to review their current shared service arrangements to ensure that they are compliant with the provisions of the Guidelines.