Inland Revenue’s Multinational Compliance Focus Document
Inland Revenue’s Multinational Compliance Focus Doc.
It focuses on the Base Erosion and Profit Shifting (BEPS) measures implemented since the previous document (in 2016) and how compliance with these will be monitored and enforced to ensure multinationals pay their “fair share” of New Zealand tax.
Inland Revenue has refreshed its Multinational Enterprises Compliance Focus document for 2019.
What are the highlights?
The document outlines:
- Inland Revenue’s compliance approach, which is to encourage a “right from the start” approach by working co-operatively with multinationals where possible.
- New Zealand’s BEPS implementation to date:
— A permanent establishment anti-avoidance rule;
— Anti-hybrids legislation;
— A restricted transfer pricing rule for setting interest rates and various modifications to transfer pricing and thin capitalisation generally;
— Withholding tax and approved issuer levy changes; and
— The entry into force of the Multilateral Instrument (MLI) for thirteen of New Zealand’s double tax agreements (DTAs), which implement various BEPS-related treaty changes.
with a “Top 10” list of recommended actions. This includes re-evaluating thin capitalisation ratio calculations, reviewing loan arrangements for the restricted transfer pricing rule interest rate, and structures for possible hybrid entities and payments.
- Transfer pricing “red flags”, such as persistent losses, profit margins below Inland Revenue’s expected levels for different functions (such as distribution and manufacturing), and interest cover or New Zealand debt ratios above threshold levels.
- Financing arrangements which will face closer scrutiny, including cash pooling arrangements, the payment of fees for guarantees or cross guarantees, and pricing of cross-border derivatives.
- The ongoing OECD work on taxing the digital economy, which is labelled “unfinished business” (read our taxmail on this here)
- Exchange of information, avenues for taxpayers to get greater assurance, and the use of the mutual agreement procedure (MAP) under DTAs to resolve disputes. (The aim is for MAP resolution within 12 months.)
- The importance of tax governance coming from the top down, with a checklist for boards.
What are the key takeaways?
New BEPS disclosures
There is a new BEPS disclosure form and guidance (available here). This will need to be completed with the 2019 tax returns for June to September balance dates and for the 2020 tax return for all others. The disclosure, which must be submitted via MyIR, is complicated. It has received little publicity, just a throwaway line in the document. Taxpayers must disclose the impact of the hybrids, restricted transfer pricing, and thin cap BEPS changes on their tax calculations.
These must all be considered well in advance of a tax position being taken. Affected taxpayers should make sure their supporting documentation (such as a New Zealand restricted transfer pricing interest rate analysis for related party inbound funding) is in order and up to date.
Inland Revenue will be paying special attention to the groups that it believes will be affected by the BEPS measures over the next 12 months. This means that they will be reviewing taxpayers where the BEPS disclosures made are not aligned with their expectations. These taxpayers can expect more detailed questions and risk activity as a result.
The ongoing risk of dual (Australian and New Zealand) tax residence for companies (read our taxmail) gets only a brief mention in the document. Inland Revenue suggests that strategic management of any New Zealand subsidiaries is undertaken locally, to avoid adverse tax consequences. This is unlikely to be a practical suggestion given the commercial realities of how trans-Tasman businesses operate.
Altough changes in the Australian interpretation of company residency is a key driver, the DTA's tie-breaker rule has changed from the place of effective management to Competent Authority determination. This has not helped. The effect of the DTA change was highlighted to Officials and ignored.
Transfer pricing simplification
On a positive note, the document notes some simplification to transfer pricing requirements, including “safe harbours” for:
- Mark-ups on cost for low value-add services (up to 5%) below NZ$1m;
- Calculating interest rates on outbound intercompany loans (the same approach for inbound loans under the restricted transfer pricing rule can be applied);
- Interest margins on loans less than NZ$10m (up to 325 basis points); and
- EBIT margins for small wholesale distributors (3% or higher).
While useful, these are mainly aimed at small and medium enterprises. For larger businesses (or those with complex cross-border transactions), contemporaneous benchmarking and documentation should be a focus. A “set and forget” attitude to transfer pricing is highly risky in the current BEPS environment.
Ultimately, responsibility for the company's tax strategy and how it is implemented sits with the board. Do they understand the tax profile of the group and are there controls and testing to ensuring alignment between the board and management’s views and expectations on tax? KPMG has a Tax Barometer which will be helpful to ensure that your tax governance measures up.
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