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New Zealand: Inland Revenue’s focus on BEPS and MNE tax compliance includes transfer pricing

New Zealand: Inland Revenue’s focus on BEPS and MNE

Inland Revenue has “refreshed” a document that focuses on tax compliance by multinational enterprises (MNEs).

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The Inland Revenue document—Multinational Enterprises Compliance Focus (2019) [PDF 919 KB]—focuses on the base erosion and profit shifting (BEPS) measures implemented since the previous version of the document (2016) was released, and explains how compliance with these measures will be monitored and enforced to determine that MNEs pay their “fair share” of New Zealand tax.

Overview of Inland Revenue’s position

In general, Inland Revenue’s stated compliance approach is to encourage a “right from the start” approach by working co-operatively with MNEs when possible.

BEPS, a key focus

New Zealand’s implementation of BEPS measures have, to date, included:

  • A permanent establishment anti-avoidance rule
  • Anti-hybrid legislation
  • A restricted transfer pricing rule for setting interest rates (and various modifications to transfer pricing and thin capitalisation generally)

There is a new BEPS disclosure form and guidance (available on the Inland Revenue’s website) accompanying these developments. The BEPS disclosure form will need to be completed with the 2019 tax returns having June to September balance dates and for the 2020 tax return for all others.

KPMG observation

The BEPS disclosure requirement has received little publicity, only a single mention in the document. Taxpayers must disclose the implications of the BEPS changes on their tax calculations, and need to consider all of these implications well in advance of a tax position being taken. Affected taxpayers need to determine that their supporting documentation is in order and up to date. Inland Revenue will be reviewing taxpayers filings when the BEPS disclosures made are not aligned with their expectations, and these taxpayers can expect more detailed questions and risk activity as a result.

Dual residence risk

The ongoing risk of dual (Australian and New Zealand) tax residence for companies receives a brief mention in the document. Inland Revenue has suggested that strategic management of any New Zealand subsidiaries be undertaken locally, to avoid adverse tax consequences. 

KPMG observation

Some believe that this suggestion may be impractical given the commercial realities of how trans-Tasman businesses operate.

Transfer pricing simplification

The Inland Revenue’s 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$1 million
  • 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$10 million (up to 325 basis points)
  • Earnings before interest and tax (EBIT) margins for small wholesale distributors (3% or higher)

KPMG observation

Tax professionals note that while these measures are useful, they are mainly aimed at small and medium enterprises. For larger businesses (or those with complex cross-border transactions), contemporaneous benchmarking and documentation would need to be a focus. A “set and forget” attitude to transfer pricing is viewed as being highly risky in the current BEPS environment.

Tax governance

The importance of tax governance coming from the top-down is emphasized in the Inland Revenue’s document, and a checklist for boards of directors is provided. Ultimately, responsibility for the company’s tax strategy and how it is implemented sits with the board.

Read a November 2019 report prepared by the KPMG member firm in New Zealand

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