RSM New Zealand

Large enterprise focus by the IRD

The Inland Revenue Department (IRD) has this month released their quarterly large enterprise update. Unsurprisingly the update includes some changes to the IR’s focus on transfer pricing. This is without doubt the start of the IR’s response to the OECD’s Base Erosion and Profit Shifting (BEPS) project.

In the February large enterprises update, the IRD has outlined its transfer pricing focus for 2016. Most of the focus areas identified are the same as those the IRD released in their current focus document back in April 2015. The IRD has however included some additional focus points which are directly attributable to the issues raised in the BEPS project.

Areas of ongoing focus for the IRD are;

  • Unexplained losses returned by foreign-owned groups;
  • Inbound and outbound loans in excess of NZ$10m principal as well as guarantee fees;
  • Payment of unsustainable royalties and/or service charges;
  • Material associated-party transactions with low or no tax jurisdictions;
  • Supply chain restructures involving the shifting of any major functions, assets or risks away from New Zealand; and
  • Any unusual arrangement or outcomes that may be identified in controlled foreign company disclosures.

The IR’s new and updated focus areas are;

  • Cash pooling arrangements – the practice of pooling excess cash funds within the group to reduce 3rd party borrowing and interest expenses;
  • The use of offshore hubs for marketing, logistics and procurement services; and
  • Appropriate booking of income arising from e-commerce transactions

The time is now to assess the risks and discuss these with your tax advisor.

It should be noted that although some multinationals would fall under the IRD’s level of focus, transfer prices and policies should be actively managed and adequately documented. For taxpayers of this size the IRD does have administrative practices in place which reduces the taxpayer’s compliance burden. Taxpayers should therefore be able to fully comply with transfer pricing principles, with the assistance of their advisors, by preparing transfer pricing documentation with somewhat of a limited scope consistent with administrative practices.

Furthermore the IRD is welcoming multinationals to work with them in facilitating up-front compliance through the advanced pricing agreement (“APA”) programme. Expect to see an increase of APA applications as multinationals seek clarity in their transfer prices amid tax authorities implementing legislative changes to attack BEPS.

In addition to the update of their current focus, the IRD has also outlined a new standard for the exchange of cross-border information. Again this change is directly attributable to the BEPS project. The IRD has detailed all rulings, both past and present, issued on or after 1 January 2010 and still in effect from 1 January 2014 will be exchanged. The types of rulings to be exchanged are;

  • Preferential regime rulings;
  • Cross-border unilateral APA’s and any other cross-border unilateral tax ruling coving transfer pricing or the application of transfer pricing principles;
  • Cross-border rulings giving a downward adjustment to the taxpayer’s taxable profits in the country giving the ruling;
  • Permanent establishment rulings; and
  • Related party conduit rulings.

These changes are just the beginning of the IRD’s implementation of the OECD’s recommendations from the BEPS project.

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Authors

Craig Cooper
Partner - Auckland
Grant Hally
Partner - Auckland