RSM New Zealand

Transfer pricing documentation - are you up to date?

The August release of the Inland Revenue Department’s (IRD’s) Large Enterprise Update provides some important reminders for New Zealand Multinational Enterprises (MNE’s) of all sizes. Aside from some more technical aspects, the key reminders are the documentation of intercompany loans and a revision of the small value loans safe harbour threshold.

Intercompany agreements are an important part of transfer pricing documentation for MNE’s of all sizes. Most commonly, intercompany agreements are in relation to management fees, royalties and intercompany loans. As intercompany agreements act as a legal contract between the related entities, the agreements provide supporting evidence that intercompany transactions have been conducted in accordance with the arm’s length principle. With that said, intercompany agreements should always supplement appropriate transfer pricing documentation.

The IRD’s August edition of the Large Enterprise Update has provided a timely reminder regarding the important areas to consider when preparing intercompany agreements for loan transactions. The update details the following 10 points to include in all intercompany loan agreements:

  1. Purpose or Intention – when the loan is working capital or term finance.
  2. The full names of the parties involved in the loan agreement.
  3. Value of the loan and the currency in which the loan is held.
  4. Interest rate payable and whether this is floating or fixed. There should also be an explanation to how this interest rate is determined to be reasonable, i.e. consistent with the arm’s length principle.
  5. Specific interest payment dates or narrative of periodical payment dates.
  6. The term and repayment of the loan.
  7. Narrative of any fees included in the loan agreement, e.g. guarantee fees.
  8. Whether the loan is unsecured or secured and which assets are being used as security.
  9. Whether the repayment obligation is guaranteed or indemnified.
  10. Any amendments to the loan agreement that have arisen from the commencement of the loan.

The IRD added a further reminder regarding their review of all intercompany loans over the value of NZ$10m in principal and guarantee fees. This is also stated in the IRD’s transfer pricing practice issues on the IRD’s website. The IRD does expect full transfer pricing documentation and intercompany loan agreements to be in place where intercompany loans are in excess of NZ$10m.

To reduce the compliance burden for smaller taxpayers, the IRD has had a long standing interest rate safe harbour threshold for loans with a principal value of under NZ$10m. This safe harbour threshold is annually reviewed by the IRD and the August Large Enterprise Update details the latest review by the IRD.

The threshold allows taxpayers with loans of a principal value below NZ$10m to apply a relevant base interest rate and the IRD prescribed fixed margin as a broadly indicative arm’s length rate for interest payments. The IRD has reviewed the fixed margin and has continued with 250 basis points (2.5%) as adequate for transfer pricing purposes. The important factor for MNE’s is ensuring that their base interest rate is accurate.

It would now be timely to review all intercompany loans payable below NZ$10m, to ensure that interest rates charged on these balances are not in excess of the IRD’s safe harbour threshold. Interest rates in excess of the IRD’s threshold could be viewed by the IRD as shifting profits out of New Zealand by way of excessive interest deductions.

Should you have any questions regarding how to set up intercompany loan documentation, how to accurately price interest payments or a review/update of transfer pricing documentation please feel free to contact the authors.


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Grant Hally