IRD’s 2015 international questionnaire and basic compliance package

In February 500 tax payer groups received a letter from the Inland Revenue Department (“IRD”) as part of their basic compliance package (“BCP”) process.

The BCP letter requests financial statements and income tax reconciliations for each member of the group, as well as the ownership structure of the entire group. This is part of the IRD’s ongoing monitoring of multinational enterprises (“MNE’s”) in its attempt to reduce any erosion of the New Zealand corporate tax base.

The BCP is a risk analysis tool for IRD use to assess whether further information (or an audit) is required to clarify the MNE’s related party transactions. Figures relating to the 2014 BCP process in the IRD’s November 2015 Large Enterprise Update, state 51% of taxpayers did not require further compliance action, 41% were required to provide additional information and 8% received an audit letter.

Based on these percentages, 205 taxpayers were required to provide additional information and 40 were audited which shows the IRD are investing a considerable amount of resource to monitor MNE taxpayers. These are worrying statistics for MNE’s.

In addition to the BCP, the IRD has also released the 2015 international questionnaire to an additional 290 foreign-owned taxpayers. In this questionnaire the IRD requests profit and loss information including finance income, finance costs, royalties, license or franchise fees with non-resident associated parties. The questionnaire also requests the amount of interest bearing debt to non-resident associated persons, and the debt percentage of the New Zealand group for thin capitalisation purposes.

In addition to financial information, the questionnaire asks about cost contribution arrangements, transactions with traditional low tax jurisdictions, in particular Hong Kong, Ireland, Luxembourg, the Netherlands, Singapore and Switzerland, and whether there were any structuring changes during the year which resulted in a reduction of the New Zealand operations.

This review process by the IRD is very in-depth and therefore careful consideration should be taken in the provision of this information to the IRD regarding the policies and documentation the MNE has in place to justify the related party transactions.

If your group has received either the BCP letter or the 2015 international questionnaire, it would be advisable to contact your transfer pricing advisor to review your response for any potential risk areas the IRD may identify. It would further be prudent to review your current documentation to ensure this is contemporaneous and review the related party transactions to ensure these are still conducted in-line with the policies and documentation in place.

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