New Zealand
Stephen Rutherford
by Stephen Rutherford
The New Zealand transfer pricing regime applies to cross-border, related-party transactions. This includes transactions between associated persons, transactions with members of a non-resident owning body (e.g., those who ‘act together’ to control the New Zealand taxpayer), and cross-border, related-party borrowings.
The New Zealand transfer pricing rules are applied consistently with the OECD transfer pricing guidelines and require taxpayers to treat all cross-border transactions with associates as having been made for an arm’s-length consideration. One notable exception is the restricted transfer pricing rule, which applies to inbound debt in excess of NZD 10 million (as discussed below).
The transfer pricing rules apply to arrangements for the acquisition or supply of goods, services, money, intangible property, and anything else (other than non-fixed rate shares or capital transactions) where the supplier and acquirer are associated persons.
There are various methods that are appropriate for determining the ‘arm’s-length consideration’ as defined by the OECD guidelines. The parties are required to use the method that produces the most reliable measure of the amount that independent parties would have paid or received in respect of the same or similar transactions when operating in a commercially rational manner by using one or more of the five permitted transfer pricing methods, being:
The comparable uncontrolled price method
The resale price method
The cost-plus method
The transactional profit split method, or
The transactional net margin method.
The arm’s length amount of consideration is to be ascertained considering the arm’s length conditions for the transaction. The legal form of the parties’ agreement may be reconstructed or disregarded if it is commercially irrational and would not have been entered into by parties acting on an arm’s length basis.
Advanced pricing agreements (APAs) are extremely useful as a robust upfront means of dealing with transfer pricing risk, especially the more complex issues that arise.
The NZ IRD sees APAs as co-operative approaches that encourage up-front compliance and early resolution of potential disputes.
While there is no current regulatory requirement to maintain transfer pricing documentation in New Zealand, the New Zealand Inland Revenue has published guidelines that make it clear that documentation is required to support a taxpayer’s transfer prices. The New Zealand tax system operates on a self-assessment basis, where taxpayers are expected to keep sufficient records to support their tax position. The onus of proof has shifted to the taxpayer, a move that increase the importance of keeping proper documentation.
New Zealand will accept that documentation prepared in accordance with OECD guideline and have not imposed any additional requirements. [The New Zealand IRD considers it is local management’s responsibility to maintain transfer pricing documents.]
New Zealand transfer pricing rules have a range of simplification measures targeting intra-group services (where cost plus 5% without the need for bench-markup), small loans and for wholesale distribution markups.
New Zealand endorses the OECD approach to transfer pricing documentation and accepts local file and master file documentation prepared in accordance with this approach. In the interests of containing compliance costs, the IRD has not implemented specific rules for the maintenance or filing of local file and master file documentation.
The OECD’s Master File and Local File concept is regarded as best practice. In addition, for larger groups (over EUR750m) NZ has implemented CbCR (Country by Country Reporting).
New Zealand has enacted a restricted transfer pricing (RTP) rule that applies to inbound debt in excess of NZD 10 million. The RTP rule contains a prescriptive set of rules and criteria and moves away from traditional arm’s-length principles. The rule effectively requires debt to be priced as plain vanilla senior debt with a rebuttable presumption of parental support unless the foreign parent has substantial third-party debt that includes different terms.
In addition, New Zealand has implemented (BEPS) rules in accordance with the OECD 16 20 BEPS project that require specific documentation for multinational entities, in contrast with New Zealand’s thin capitalisation rules. Country by country (CBC) reporting requirements apply to groups headquartered in New Zealand with annual consolidated ground reviews over EUR 750 million.
The New Zealand IRD considers transfer pricing to be one of the most important issues arising in international tax and therefore actively focuses on this area. Audits or investigations may be performed specifically for transfer pricing issues, or alternatively combined with normal tax audits. The IRD has published the following risk factors that they consider could give rise to transfer pricing enquires.
Significant enterprises that target smaller subsidiary companies under the ownership of prominent multinational corporations. The Inland Revenue is likely to do an analysis of basic compliance packages (financial statements, tax reconciliations, and corporate structures) supplemented by questionnaires.
Unexplained tax losses returned by foreign-owned groups (two consecutive years of tax losses).
Loans in excess of NZD 10 million principle and guarantee fees.
Material associated party transactions with no or low tax jurisdictions.
Supply chain restructures involving the shifting of any major functions, assets or risks away from NZ.
Any unusual arrangements or outcomes that may be identified in controlled foreign company disclosures.
Specified penalties may be applied in addition to adjustments arising from transfer pricing issues and can range from 20% up to 150% of the tax shortfall. Determination of the penalties focuses on culpability and can also reflect the level of co-operation by the taxpayer. Interest will also be charged on any tax shortfall.
In conclusion, New Zealand transfer pricing rules are expected to be consistent with the OECD guidelines and have appropriate documentation compatible with the level of economic activity in New Zealand and transfer pricing risk associated with that activity.
GGI member firmBlackmore Virtue & OwensAuckland, New ZealandT: +64 9 5204 089
Auditing & Accounting, Tax, Advisory, Corporate Finance, Fiduciary & Estate Planning
Blackmore Virtue & Owens (BVO) is a traditional accountancy firm built on strong relationships, forged over years of advice and guidance. Even in today’s changing world we still adhere to our core values of service, accountability, and most importantly, accessibility. Our clients only ever work side-by-side with senior business advisors at all times.
Stephen Rutherford is a chartered accountant with more than 30 years’ experience in both the public and private sector. Prior to moving to BVO, he was employed by the Chartered Accountants of Australia and New Zealand in the New Zealand tax policy team. Steve worked previously with a major second tier firm and the Inland Revenue Department. Steve has been involved with all major tax developments over the last ten years and now brings his unique expertise and skills to BVO.Contact Stephen.
