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Welcome to 2026, where transfer pricing (“TP”) in New Zealand is anything but business as usual. Stick with me as we break down some of the technical details into insights you can actually use – focused on how we understand and apply “comparability” in TP.
In a year of geopolitical shocks, it might be a step too far to suggest the same existential impacts are being felt in cross-border tax planning, but an evolution is certainly underway. One key area of focus is the application of comparability, which underpins the pricing of intercompany transactions within multinational groups (i.e., controlled transactions).
For example, let’s take the NZ subsidiary of a foreign multinational that buys cars from its offshore parent, then sells these to independent car retailers in NZ. The purchase and sale arrangement between the NZ subsidiary and its offshore parent is a “controlled transaction” as these two parties are not independent of each other.
The appropriate (arm’s length) pricing and profitability that should be split between the controlled parties is often determined with reference to the profits earned by independent car distributors, which we call a “benchmark”. Where independent car distributors earn profits of 3-5%, we might deem 3-5% as an arm’s length range for our NZ subsidiary.
In doing so, we need to satisfy ourselves that the independent car distributors are sufficiently comparable to the controlled distributor as only the financial performance of comparable car distributors should be included in the benchmark.
But, before we use comparability, how should we assess comparability?
As you might expect, the OECD TP Guidelines provide extensive guidance on how to assess the concept of comparability, starting with a ‘broad based analysis’ of the tested party’s macro and micro circumstances. This can include “an analysis of the industry, competition, economic and regulatory factors and other elements that affect the taxpayer and its environment”. [Para. 3.7]
The second step (again, big picture!) is to establish an understanding of functions performed, assets contributed, and risks assumed in relation to the controlled transactions, so that we can qualitatively assess the independent car distributors’ comparability against these.
This might seem simple, after all, how hard can it be to find car distributors? In reality, several factors quickly eliminate potential sources of transaction and profit data. In our car distributor example, companies that perform other activities like retail sales and customer advertising, light manufacturing and/or repairs may need to be rejected. Likewise, unless the independent companies are listed or required to have their financial statements publicly available, lack of information often proves critical.
Thankfully, the OECD has anticipated the challenges of comparability, setting out the following:
The identification of potential comparables has to be made with the objective of finding the most reliable data, recognising that they will not always be perfect. For instance, independent transactions may be scarce in certain markets and industries. A pragmatic solution may need to be found, on a case-by-case basis, such as broadening the search and using information on uncontrolled transactions taking place in the same industry and a comparable geographical market, but performed by third parties that may have different business strategies, business models or other slightly different economic circumstances... [Para. 3.38]
This is instructive regarding the need for practical judgement and the use of pragmatism.
But, how is this playing out in practice in New Zealand?
Comparability has also been on Inland Revenue’s (IR) mind, as evidenced the updated Multinational Compliance Guideline released in November 2024. Like other advisors, I shared comments on this at the time so it’s not my intention to recycle those here.
First, and most noticeably in its enforcement activity, IR is actively challenging the use of Asia-Pacific (APAC) company financial data in benchmarking studies and taxpayers should be prepared for pushback where attempts are not made to obtain Oceania data. In its absence, North American and European data should be sought.
Where benchmarks apply a mix of Oceania and wider APAC data, IR may narrow the set to focus only on the Oceania company subset. Where there is no Oceania data, IR may disregard the taxpayer’s analysis entirely.
Second, and perhaps surprisingly, we’ve seen instances of IR teams radically narrowing the set of accepted comparables – even to as small as one ‘most comparable’ company. While this runs contrary to OECD guidance and industry norms on what constitutes sufficient financial data, it’s an interesting method that reflects a more interventionist approach in all areas of taxpayer analysis.
Third, and controversially, IR has formed a view that New Zealand’s global geographic distance provides reasonable basis for higher profit returns locally. A similar view prevails in some circles of the Chinese enforcement activity in relation to location-based savings arising for foreign-owned manufacturers in China.
While most multinationals would argue, if anything, New Zealand’s distance puts upward pressure on costs (logistics, freight, etc.) and downward pressure on profit, IR’s evolving view is yet to be substantively tested in most review activity.
So, let’s imagine you’re a foreign-owned company in New Zealand, probably operating in a mid-market environment from a global perspective. How should IR’s evolving approach inform your compliance response and appetite for risk?
Here are my three takeaways:
- 1. More profit, less risk. Less profit, more risk. This is still the most effective tool in risk management. The best way to minimise the likelihood of IR enquiry is to ensure the company is highly profitable. It’s unprincipled, but it works, and whether it creates risk in another market is often a function of materiality, which New Zealand often isn’t in a global context.
But, for principled taxpayers, most of whom haven’t had the luxury of excess profits to move around in recent years, my next two takeaways are probably more practical.
- 2. The era of benchmarks as window-dressing is gone. In New Zealand, we have entered (or re-entered) an era of enforcement where benchmarks are more likely to be tested, scrutinised, and challenged. Off the shelf benchmarking studies don’t work and more thought needs to be given to the comparability of each selected company. Window-dressing benchmarks will, if anything, inadvertently become a time and cost drag in a review as they are ripe for challenge.
- 3. No benchmarking study might be the ‘right’ answer. And, before recoiling in horror at this suggestion, let’s refocus on the OECD’s guidance already quoted: A pragmatic solution may need to be found. For mid-market taxpayers, in an era where benchmarking studies require more customisation (making them more expensive to prepare and defend), the ‘pragmatic’ solution might mean adopting a cost/risk approach. Simplification measures and industry norms may be a better benchmark to determine an arm’s length profit and that benchmarking study might only be needed in the event of enforcement activity or to support a lower return in a bad year... Think about it.
Is comparability being redefined in New Zealand transfer pricing? On balance, not quite. However, from the IR’s perspective, the historically accepted tactical and strategic approaches to comparability are clearly undergoing a period of refresh and refocus.
