OPINION
Michael Hewson
Accordingly, banks that are operating
in the countries mentioned above need
to pay particular attention to the area of
transfer pricing to reduce the reputational
or financial damage that could result from
incorrect transfer pricing policies.
In contrast to other industries (such
as fast-moving consumer goods or the
resources sector), banking generally does
not lend itself to companies establishing
offshore sales and marketing companies
or procurement companies in low tax
jurisdictions.
This is because traditional banks need
to have significant substance in the same
country as their clients. Therefore, the
transfer pricing considerations that are
relevant to banks are distinct from the
considerations for other industries.
Most multinational banks rely on the
sharing of resources across the countries
in which they operate and therefore enter
into significant cross-border related party
transactions, which typically include,
inter alia:
• Providing support services from one
company to a foreign related party
(including management support
services and technical support services);
• Developing complex information
technology systems which are used
by foreign related parties;
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• Valuable intellectual property that is
developed by one entity and used by
other entities;
• The use of balance sheets of foreign entities
in order to enable trading activities;
• Financing arrangements (including loans
and guarantees).
Since transfer pricing involves
determining the arm’s length price for related
party transactions, the question that arises
in relation to the transactions listed above
is, “What is the arm’s length price of these
transactions?”
Generally these transactions are not
entered into with independent third
parties and, as a result, it can be difficult to
determine the open market price for them.
Banks therefore need to apply internationally
acceptable methods of determining the
appropriate intercompany prices.
Some of the challenges encountered
in determining prices for foreign related
parties include:
• The lack of visibility in all intercompany
transactions;
• Difficulty in tracking all of the underlying
costs related to a particular transaction;
• The perception of minority shareholders
of the recipients of the services that
the services are not adding value and
accordingly there should not be a charge
for them;
• Exchange control, taxation or other
regulatory factors may reduce the fees that
companies rendering services may be able
to recover from their foreign related parties
(especially in Africa);
• In many countries in Africa there is
uncertainty regarding how the transfer
pricing provisions will be applied by the
revenue authorities.
RECENT TRANSFER PRICING
DEVELOPMENTS LIKELY TO IMPACT
THE BANKING SECTOR IN AFRICA
In response to the global attention given to
the cross-border activities of mul