Taxing authority and tax law
Tax authority: Inland Revenue Department (IRD)
Tax law:
- Sections YD 5, GB 2 and GC 6 to GC 14 of the Income Tax Act 2007
- Relevant double-tax agreements
Relevant regulations and rulings
The final version of Transfer Pricing Guidelines issued in October 2000
OECD guidelines treatment
The IRD fully endorses the positions set out in chapters one to eight of the OECD guidelines and proposes to follow those positions in administering New Zealand’s transfer pricing rules. Consequently, New Zealand’s guidelines should be read as supplementing the OECD guidelines, rather than superseding them. This applies for the domestic application of the New Zealand rules, as well as in relation to issues raised under New Zealand’s double tax agreements. On business restructuring, IRD’s approach seems to be largely in line with the recently published OECD paper. The IRD are cognizant of the fact that multinational enterprises undergo restructuring activities during the course of their existence and lifecycle. In addressing the restructuring issues, IRD will be seeking to ensure that there is a commercial case for effecting any restructure and that the economic substance aligns with the legal form of the arrangement. The IRD has released some high-level guidance in the form of the following ten questions that should be addressed by companies undertaking cross-border business restructures. These questions aim to help ascertain the commercial viability of the restructuring.
Priorities/pricing methods
The IRD accepts the most reliable method chosen from CUP, Resale Price, Cost Plus, Profit Split and CPM (TNMM).
Transfer pricing penalties
Penalties are imposed under §141A-K of the Tax Administration Act 1994: 20% penalty for not taking reasonable care, 20% penalty for an unacceptable tax position, 40% penalty for gross carelessness, 100% penalty for an abusive tax position and 150% penalty for an evasive or similar act.
Penalty relief
Shortfall penalties may be reduced upon voluntary disclosure to the Commissioner of the details of the shortfall. If the disclosure occurs before notification of an investigation, the penalty may be reduced by 100% (only for lack of reasonable care or unacceptable tax position categories) or 75% for other shortfall penalties. If disclosure occurs after notification of an investigation, but before the investigation commences, the penalty may be reduced by 40%. Shortfall penalties may be reduced by a further 50% if a taxpayer has a past record of “good behavior.”
Documentation requirements
There are no explicit requirements in New Zealand’s transfer pricing legislation (§§GC 6 to GC 14 of the Income Tax Act 2007) for any particular category of information to be included in transfer pricing documentation. Section GC 13 requires taxpayers to select and apply an appropriate transfer pricing method for tax return purposes. The New Zealand Transfer Pricing Guidelines indicate that a taxpayer’s main purpose in preparing and maintaining documentation should be to place the taxpayer in the position where they can readily demonstrate to the IRD that a transfer pricing method has been used to determine whether the taxpayer’s transfer prices are consistent with the arm’s length principle in light of the facts and circumstances.
Documentation deadlines
There is no express legislative requirement for a taxpayer to document its transfer pricing policies and practices in New Zealand. However, the New Zealand Transfer Pricing Guidelines indicate that taxpayers who prepare and maintain transfer pricing documentation are more likely to ensure the burden of proof (that prices are not arm’s length) remains with the Commissioner.
Statute of limitations on transfer pricing assessments
The Commissioner’s power to issue amended assessments is subject to a four-year time limit. A taxpayer has the ability to extend the applicable time bar by up to an additional six months by signing a waiver, which generally arises when a dispute is not resolved, and more time would allow completion of the dispute process by mutual agreement of both parties or where another case before the court is likely to resolve the issue in current dispute.
Return disclosures/related-party disclosures
A company’s income tax return requires disclosure of:
- Payments to non-residents such as dividends, interest, management fees, “know-how” payments, royalties or contract payments made
- Whether the company is controlled or owned by non-residents
- Whether the company holds an interest in a controlled foreign company (“CFC”)
More detailed disclosure of various financial information and other data is now required for interests held in CFCs.
Audit risk/transfer pricing scrutiny
The risk of transfer pricing scrutiny during a tax audit is high. Risk Assessment Review questionnaires relating to transfer pricing and thin capitalization are typically issued to companies during general income tax audits or risk reviews and as part of the IRD’s specific transfer pricing review process. The IRD also uses questionnaires in respect of interest, guarantee fees and royalties. In addition, there is a separate transfer pricing questionnaire for branches.
APA opportunity
Section 91E of the Tax Administration Act 1994 allows a unilateral APA to be issued in the form of a binding ruling. Bilateral or multilateral APAs may be entered into pursuant to New Zealand’s double tax agreements under the mutual agreement procedure provisions. The IRD has not established any formal guidelines for APAs, as each case is considered to be different, depending on a taxpayer’s specific facts and circumstances. The IRD has suggested pre-application conferences to make the APA application process less time consuming.
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