One of the more common related party transactions conducted by taxpayers in Nigeria is intra-group services. It has been observed that Nigerian companies are net recipients of intra-group services therefore creating significant outflow in the form of payments for head office charges, shared services costs, management services etc. It is therefore not surprising that this transaction has become a transaction of interest to the Federal Inland Revenue Service (FIRS).

The interest in intra-group service transactions is supported by the inclusion of specific provisions on intra-group services in the Income Tax (Transfer Pricing) Regulations, 2018 (the revised Regulations). These provisions adopted some provisions included in the 2017 OECD Transfer Pricing (TP) Guidelines (the OECD TP Guidelines). The FIRS provided specific guidelines that must be adhered to by taxpayers to demonstrate the substance of the intra-group services and the appropriateness of the charge applicable, if it must be allowed for tax deduction purposes.

This article focuses on highlighting the key requirements for supporting the arm's length nature of intra-group services, the key risk areas for taxpayers as well as suggesting mitigating actions.

What are intra-group services?

Intra-group services are centralized support services provided by one or more entities within a Group of companies such as a Multinational Enterprise (MNE) Group to other entities within the MNE Group. These services include technical, management services and back office support services such as legal, Human Resources (HR), finance, Information Technology (IT) and administrative services. Intra-group service arrangements are used by MNE Groups to achieve economies of scale, quality consistency and group synergy.

Key considerations for intra-group services

In analyzing intra-group services, a taxpayer must be able to demonstrate the substance of the transaction and show that the charge is in accordance with the arm's length principle. Where this can be demonstrated reliably, the charge for intra-group services should be tax deductible.

We have summarized below, the key considerations for intra-group services as recommended by the revised Regulations and the OECD TP Guidelines.

1. Demonstration of substance

The FIRS may question the validity of services received. In order to prove the substance of the intra-group service, Regulation 6(1) of the revised Regulations states that the service recipient should be able to prove that the services were actually rendered, that the services received had economic value and the services can be provided between independent parties in the open market. The service recipient should also be willing to pay an independent party for the provision of such services. This analysis is called a benefit test analysis.

The revised Regulations however excludes shareholder costs from intra-group service costs. Shareholder costs are costs incurred solely because of a shareholder's ownership interests in an entity. Examples include cost relating to corporate governance, consolidation of financial statements, among others to meet regulatory requirements.

Additionally, the OECD TP Guidelines provides further factors to consider in determining the substance of intra-group services. Particularly, duplicated services and services which provide incidental benefits to an entity will not be accepted as part of intra-group services.

The FIRS will seek to establish that the services were actually rendered before evaluating whether the charges were appropriate. This is typically achieved by reviewing key deliverables from these services and any other relevant documents/ information that can provide comfort that the services were rendered. In the event that the taxpayer is unable to establish substance to the transaction, there is a risk that the entire service charge will be disallowed and subjected to tax accordingly.

2. Determination of costs attributable to benefiting entities

Where the services provided by the service provider can be directly attributed to each benefiting entity such that the cost relating to the provision of the services can be clearly delineated, the direct charge method would be the most preferred method. However, where the direct method cannot be reasonably applied, the indirect method may be applied.

In line with the OECD TP Guidelines, Regulation 6(4) of the revised Regulations states that where it is not possible to identify the specific services being provided to each beneficiary (direct method), the total service charge should be allocated among all the recipients using reasonable allocation criteria (indirect method).

The cost allocated to recipients should be based on an appropriate measure of usage or expected benefit such that each service beneficiary bears its fair share of the total cost incurred by the service provider. For example, when allocating rental cost, floor space occupied might be a more appropriate allocation key rather than using the revenue of the benefiting entities.

The revised Regulations requires that the allocation of costs and application of mark-up be done at arm's length. Where there is a mismatch of cost allocated and the proxy for expected benefit; i.e. the allocation key, the risk of TP adjustments exists.

3. Determination of an arm's length charge

The basic principle for intra-group charges is to determine whether independent parties under similar arrangements will be willing to pay for such services. Service providers are typically expected to earn a mark-up on the costs of providing such valuable services. As such, a benchmark study should be carried out to determine the range of applicable mark-ups charged between independent parties under comparable circumstances.

The total costs are also expected to be segregated into direct and pass-through costs. Direct cost are the operational costs incurred by the service provider for the provision of the intra-group services, and pass-through costs are cost earned by a third-party providing services to the MNE entities on behalf of the service provider. The mark-up is applicable on the direct costs of providing the services and not applicable on the pass-through costs as they must have already suffered a profit element from the third-party service provider.

4. Low value-adding (intra-group) services

The OECD TP Guidelines distinguished between low value-adding intra-group services (LVAS) and other types of intra-group services and provided the Simplified Approach as an elective approach to determine the arm's length charge for LVAS.

LVAS are services performed by an MNE Group entity which are of a supportive nature; are not part of the core business of the group; do not require the use/creation of unique and valuable intangibles and do not involve the assumption of and creation of significant risk. Examples of LVAS include accounting and auditing, HR services, IT services, legal and tax activities and general services of an administrative nature.

The Simplified Approach in the OECD TP Guidelines provides that the service provider shall apply a mark-up equal to 5% of the relevant cost of providing the LVAS. This mark-up does not need to be justified by a benchmarking study and will have to be applied consistently across all jurisdictions.

It is important to note that the revised Regulations did not include provisions on LVAS. As such, where intra-group services qualify as LVAS, a benchmark study may still be required to justify the arm's length nature of such transactions in Nigeria.


The inclusion of a section on intra-group services in the revised Regulations has provided taxpayers with more relevant information on the requirements to ensure that the transactions are conducted at arm's length. Coupled with the provisions of the OECD TP Guidelines, taxpayers now have sufficient information on how to conduct intra-group services and prepare adequately for scrutiny by the FIRS.

Taxpayers must ensure all agreements, benchmarking studies, allocation keys and other supporting documents are put in place in order to support the arm's length nature of their intra-group services.

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.