The New Zealand Inland Revenue Department ‘IRD’ has announced a two year focus on multinational businesses. The IRD has also identified specific transactions that will be actively reviewed during this project.
These transactions are:
1. Unexplained tax losses
2. Loans in excess of $10m
3. Payment of unsustainable royalties and service charges
4. Material transactions with low tax jurisdictions
5. Supply chain restructures out of New Zealand
6. Unusual arrangements or outcomes
The majority of the above transactions can be identified by the IRD in the IR10 disclosure filed with each year’s income tax return. Other information will be obtained through the IRD’s transfer pricing questionnaires. The IRD are using these questionnaires in increasing numbers and are the first sign of a potential tax audit.
Intercompany loans and service charges are two of the most common transactions for New Zealand multinationals. These transactions are specifically disclosed to the IRD in the entities annual income tax return therefore updating existing transfer pricing documentation would be highly recommended. This is increasingly important should the entity be in a tax loss position or where transfer pricing documentation has not been prepared.
The most interesting change in the IRD’s update was relating to service charges. The IRD has increased the de minimis threshold for its administrative practice for service charges to NZ$1 million to align closer with Australia – New Zealand’s closest trading partner.
The IRD has also identified wholesale distributors as the most common form of multinational business in New Zealand. For those wholesale distributors defined as small, turnover of under $30m, the IRD has stated they will seek clarification where performance results in a weighted average profit-before-tax of less than 3% of sales.
Given the increased focus on related party cross-border transactions, it is important tax payers review their transfer pricing documentation to ensure it is up-to-date. The IRD’s narrative on documentation states:
"If a company’s documentation inadequately explains why its transfer prices are considered to be consistent with the arm’s length principle, we are more likely to audit those transfer prices in detail."
Given there is no statutory documentation requirement, there is a common misconception among parent companies of New Zealand businesses that a simple agreement between the related parties or a calculation of how the transfer price is arrived at is sufficient. This is not the case and the above implies a higher level of documentation is required.
For further information please contact RSM Prince’s Transfer Pricing specialists.
E [email protected]
Transfer Pricing Consultant
E [email protected]rsmprince.co.nz