New Zealand Government opts out of Pillar One, Amount B

• New Zealand has decided not to adopt the OECD's recently published simplified and streamlined approach to in-country baseline marketing and distribution activities.
  
  
• Existing transfer pricing rules and practice will continue to apply to determine arm's-length outcomes for both foreign-owned distributors operating in New Zealand and New Zealand-owned distributors operating in foreign jurisdictions.
  
  
• Taxpayers, including multinationals, with a touch point to New Zealand that adopt the simplified and streamlined approach should be aware they face exposure to penalties and double taxation.

Executive summary

New Zealand will not be adopting the Organisation for Economic Co-operation and Development's (OECD) recently published simplified and streamlined approach to in-country baseline marketing and distribution activities — formerly referred to as Amount B under the OECD's Pillar One initiative. Inland Revenue has confirmed that the simplified and streamlined approach, which is optional for jurisdictions to implement, will have no bearing on existing New Zealand transfer pricing rules and will not alter any existing New Zealand guidance.

Existing transfer pricing rules and practice will continue to apply to determine arm's-length outcomes for foreign-owned distributors operating in New Zealand. Small foreign-owned wholesale distributors with revenue under NZ$30m may continue to apply an existing domestic simplification measure.

New Zealand-owned distributors operating in foreign jurisdictions will equally need to continue to apply New Zealand transfer pricing rules in respect of their New Zealand tax obligations, regardless of whether the foreign jurisdiction has opted to apply the streamlined and simplified approach.

OECD's new simplified and streamlined approach

On 19 February 2024, the OECD/G20 Inclusive Framework on BEPS published its simplified and streamlined approach to in-country baseline marketing and distribution activities (formerly referred to as the Amount B "Optional Approach.")

The simplified and streamlined approach provides jurisdictions with an alternative pricing framework to determine a return on sales for eligible distributors. New Zealand's Inland Revenue has confirmed that New Zealand will exercise its discretion not to adopt the approach. This means that New Zealand's existing transfer pricing rules and practice will continue to apply to baseline distributors, unaltered by the simplified and streamlined approach and accompanying guidance.

Specifically, any reliance on the simplified and streamlined approach by either New Zealand-owned offshore based distributors or foreign-owned distributors operating in New Zealand, will not be treated as providing an arm's-length outcome.

Taxpayers that elect to rely on the simplified and streamlined approach will not comply with New Zealand's domestic transfer pricing rules. Further, reliance on the approach will not discharge the taxpayer's burden of proof in respect of the New Zealand transfer pricing rules and could expose taxpayers to shortfall penalties. Where this results in double taxation, relief will not be provided under New Zealand's double tax agreements.

Detailed discussion

The OECD's simplified and streamlined approach provides jurisdictions with an alternative pricing framework to determine a return on sales for eligible distributors. This simplified approach was designed with a particular focus on the needs of low-capacity jurisdictions (i.e., those with limited resources and data availability).

The new approach is intended to allow jurisdictions that apply bright-line rules to covered activities to secure revenue while preserving tax administration resources. In developing the framework, the OECD aimed to reduce transfer pricing disputes and associated costs as well as enhance tax certainty. Questions remain, however, on whether this objective has been achieved.

The OECD Inclusive Framework notes that the design of the simplified and streamlined approach was strongly focused on the specific needs of low-capacity jurisdictions that were unable to apply, or experienced extreme difficulties in applying, existing transfer pricing approaches. Given this, the OECD accepts that the approach will not be appropriate in all jurisdictions.

By choosing not to adopt the simplified and streamlined approach in New Zealand, Inland Revenue is signaling to taxpayers that its existing transfer pricing regime will continue to apply unaltered. This decision makes any reliance on the simplified and streamlined approach essentially ineffective for New Zealand tax purposes.

New Zealand's decision not to adopt the simplified and streamlined approach means that:

• Foreign-owned distributors operating in New Zealand must continue to apply existing New Zealand transfer pricing rules. The simplified and streamlined approach must not be applied for New Zealand tax purposes.
  
  
• New Zealand-owned distributors operating offshore must also continue to apply existing New Zealand transfer pricing rules= with respect to transactions triggering New Zealand tax obligations. This is the case even if the relevant offshore jurisdiction has chosen to adopt the simplified and streamlined approach. This stance may eventually be moderated by a political commitment to respect the application of the simplified and streamlined approach by specified low-capacity jurisdictions, which is currently under development by the OECD.
  
  
• Double tax could arise from any differences resulting from the application of these two approaches (namely the simplified and streamlined approach and the New Zealand transfer pricing rules). At this stage, New Zealand's Inland Revenue has taken the position that there would not be any relief under New Zealand's existing tax treaties.
  
  
• Penalties could arise, as Inland Revenue has confirmed that any reliance on the simplified and streamlined approach would not be seen as "compliant" for New Zealand tax purposes. If taxpayers relying on the simplified and streamlined approach conclude an amount of compensation different from the amount that would arise under New Zealand's existing transfer pricing rules, they could risk shortfall penalties applying to any difference resulting from the two approaches.

The introduction to the Amount B guidance notes that Inclusive Framework members commit to respect the outcomes under the simplified and streamlined approach for "low-capacity jurisdictions." The list of these jurisdictions will be made available on the OECD website in the coming months. As an Inclusive Framework member, it is possible New Zealand will issue further guidance in respect of its position on low-capacity jurisdictions.

Implications

At first glance, New Zealand's decision not to adopt the simplified and streamlined approach for inbound distributors appears somewhat unusual, given the country's general alignment to OECD standards. However, there have been other instances in which New Zealand has dissented from the OECD approach where the approach was considered be detrimental to New Zealand's interests.

In this instance, the messaging from Inland Revenue clearly indicates that taxpayers who adopt the simplified and streamlined approach will face exposure to penalties and double taxation. Multinationals operating with a touch point to New Zealand should be aware of this to help ensure that any application of the simplified and streamlined approach in their group does not have adverse tax implications for their New Zealand tax position.

The decision may reflect a perception of the enforcement effort required to ensure that taxpayers meet the requirements to rely upon the simplified and streamlined approach. New Zealand does also have an existing simplification measure available to small foreign-owned wholesale distributors (refer to "Simplification measures for transfer pricing" on Inland Revenue's website).

It is interesting to see Inland Revenue take the position that the simplified and streamlined approach should broadly be disregarded for New Zealand tax purposes, including for taxpayers operating in jurisdictions that have chosen to adopt the approach. This will almost inevitably lead to more complexity and, potentially, to tax disputes where there is a mismatch in approach.

It remains to be seen how many jurisdictions choose to adopt the simplified and streamlined approach and the extent to which the risk of double taxation is realized. Nevertheless, the application of different approaches to the same transactions not only increases compliance costs for impacted taxpayers, but also undermines the OECD's broader objective of reducing the risk of transfer pricing disputes and associated compliance costs.

For further information regarding the OECD's release refer to EY Global Tax Alert, OECD releases final guidance on Pillar One Amount B on baseline distribution, dated 22 February 2024.

Contact Information

For additional information concerning this Alert, please contact:

Ernst & Young Limited (New Zealand), Auckland

• Kim Atwill, International Tax and Transfer Pricing Services
  
  
• Tanmoy Chakrabarti, International Tax and Transfer Pricing Services
  
  
• Anna Hawken, International Tax and Transfer Pricing Services
  
  
• Dean Madsen, New Zealand Tax and Law Leader
  
  
• Paul Dunne, New Zealand Tax Policy Leader

Published by NTD’s Tax Technical Knowledge Services group; Carolyn Wright, legal editor

For a full listing of contacts and email addresses, please click on the Tax News Update: Global Edition (GTNU) version of this Alert.