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Global transfer pricing guide

Transfer pricing - New Zealand

29 Sep 2022

Please click on each section to expand further:

Introduction to New Zealand transfer pricing
Transfer pricing rules
  • New Zealand’s (NZ) transfer pricing (TP) legislation is mainly contained within section GC of the Income Tax Act 2007. Inland Revenue (IRD) acts as NZ’s tax authority.
  • NZ’s TP rules are based on the arm’s length principle and abide by the OECD transfer pricing guideline’s principles, establishing that the terms (including pricing) agreed on related-party transactions are in line with those that would be agreed upon by unrelated parties in reasonably similar circumstances.
  • NZ’s transfer pricing rules generally apply to cross border associated party transactions, with association based on a 50% or greater common shareholding or effective control.
  • The onus is on the taxpayers to demonstrate that the main terms of their cross border associated party transactions align to the arm’s length standard.
  • While there is no statutory requirement for the preparation of transfer pricing documents, New Zealand tax system operates under a self-assessment where taxpayers are expected to keep sufficient records to support the tax positions taken (including transfer pricing) in order to mitigate exposure to potential penalties.
  • The IRD endorses the OECD’s recommendation of adopting the Master File and Local File concept, regarding it as best practice. In addition, larger groups (over EUR750m) headquartered in NZ have implemented CbCR (Country by Country Reporting). 
OECD guidance
  • New Zealand being a member of the OECD has embedded the OECD guidelines within its legislation, forming transfer pricing rules almost entirely around the guidelines.
  • The IRD issued detailed TP guidelines in October 2000 which have since been rescinded, however may still be consulted as a form of commentary or for furthered understanding of NZ specific issues and context, alongside further commentary released July 2021. OECD TP guidelines have since been embedded within NZ legislation, see the Taxation (Neutralising BEPS) Act 2018.
  • As per the above, New Zealand local transfer pricing regime generally aligns with OECD’s guidance on this topic.
Transfer pricing methods
  • The most appropriate transfer pricing method(s) should be selected to provide the most reliable measure of an arm’s length result. New Zealand legislation includes five methods: comparable uncontrolled price, resale price, cost plus, profit split, and the comparable profits method (noting there is no reference to ‘other methods’).
  • New Zealand legislation does not impose a hierarchy on these methods. Taxpayers must use the most reliable method(s) based on the quality of available data and their specific circumstances.
Self-assessment
  • New Zealand has a self-assessment tax regime where the burden of proof is on the taxpayer to demonstrate that the main terms of any cross border associated party arrangement entered by them are consistent with the arm’s length principle. 
Transfer pricing documentation
Preparation of transfer pricing documentation
  • There is no statutory requirement for taxpayers to prepare transfer pricing documentation. However, the burden of proof is on the taxpayer to demonstrate that their transfer prices (and main terms agreed on their cross border associated party arrangements) align with the arm’s length principle. Inland Revenue expects taxpayers to document how their transfer prices have been determined, with the level of detail depending on the transfer pricing tax at risk.
  • Taxpayers who fail to prepare documentation in line with legislation and guidelines are exposed to penalties (in addition to any resulting tax adjustments) if the tax authority disputes the pricing.
  • If documentation inadequately explains why a taxpayer’s cross border associated party transactions are consistent with the arm’s length principle, the IRD is more likely to conduct a detailed audit. A lack of adequate documentation may make it difficult for the taxpayer to rebut an alternative arm’s length transfer price proposed by the tax authority.
  • Taxpayers are required to provide documentation on request, which may occur as part of an IRD risk review or audit.
Master and New Zealand local file
  • New Zealand endorses the OECD approach to transfer pricing documentation, including local and master files. To contain compliance costs, the IRD has not implemented specific rules for maintaining or filing these documents.
  • According to IRD guidance, good documentation should include company background, industry analysis, analysis of functions, risks and assets, key intercompany transactions, efforts to find internal comparables, reasoning for the best pricing methods, and details of the comparable search and analysis.
  • In NZ, business records must be kept for five years after the end of the income year they relate to, and for seven years in case of a dispute.
  • Country-by-country (CBC) reporting requirements apply to corporate groups headquartered in NZ with annual consolidated group revenue over EUR 750 million.
Some risk factors for challenge
  • The NZ IRD considers transfer pricing to be one of the most important issues arising in international tax and therefore actively focus on this area.  Audits or investigations may be performed specifically for transfer pricing issues or alternatively combined with normal tax audits. They maintain a special focus on:
    • Significant enterprises which target smaller subsidiary companies under the ownership of prominent multinational corporations.  The Inland Revenue are likely to do analysis of basic compliance packages (financial statements, tax reconciliations and corporate structures) supplemented by questionnaires.
    • Unexplained tax losses returned by foreign-owned groups (two consecutive years of tax losses)
    • Loans in excess of NZD 10million principal and guarantee fees
    • Payment of unsustainable levels of royalties and/or service charges (royalties greater than 33% EBITE)
    • Material associated party transactions with no or low tax jurisdictions, including the use of offshore hubs for marketing, logistics and procurement services.
    • Appropriate booking of income arising from e-commerce transactions.
    • Supply chain restructures involving the shifting of any major functions, assets or risks away from NZ.
    • Any unusual arrangements or outcomes that may be identified in controlled foreign company disclosures.
    • Negative EBIT
    • Greater than 5% cost plus margin on service charges
    • Interest greater than 20% EBITDA
    • Debt greater than 40% (being assets less non-debt liabilities)
    • Purchases and other operating expenses of more than $20 million involving low and no tax jurisdictions.
    • Small wholesale distributors with EBITE ratio of less than 3%
    • Retailers with EBITE less than 5%
    • Manufacturers with lower than 7% EBITE
  • Refer to the Multinational Enterprises Compliance Focus 2024, for further detail on the matter.
Penalties
  • Penalties may be applied to adjustments arising from transfer pricing issues, including incomplete documentation, failure to submit, and late or incorrect disclosures.
  • Although not specific to transfer pricing, penalties can range from 20% to 150% of the tax shortfall. Interest will also be charged on any tax shortfall, and late tax payments will incur penalties. For example:
    • 20% penalty for not taking reasonable care
    • 20% penalty for an unacceptable tax position
    • 40% penalty for gross carelessness
    • 100% penalty for an inappropriate tax position
    • 150% penalty for evasion or a similar act
  • The level of cooperation by the taxpayer may influence the determination of penalties.
  • Transfer pricing adjustments can be assessed up to four years after the end of the tax year in which the tax return was filed, but this period can be extended to seven years if an audit begins within the four-year statutory period.
  • Relief:
    • Tax disputes are often initiated by the IRD following thorough reviews and audits, although taxpayers can also start a dispute. The process is formal and intricate, consisting of seven steps. If unresolved, litigation may be pursued.
    • Voluntary disclosure to the IRD may reduce shortfall penalties as follows:
      • Up to 100% reduction if disclosure occurs before the notification of an investigation, but only for lack of reasonable care or unacceptable tax position categories: otherwise, 75% for other shortfall penalties.
      •  40% reduction if disclosure occurs after the notification of an investigation but before it begins.
    • Good compliance records may result in an additional 50% reduction in shortfall penalties.
Economic analysis and how to demonstrate an arm’s length result
  • New Zealand’s transfer pricing rules are to be applied consistently with the OECD’s Transfer Pricing Guidelines.
  • The IRD expects efforts to find reliable internal comparables before resorting to external searches. Local benchmarking is preferable, but reliable benchmarks based on jurisdiction are acceptable alternatives.
  • The IRD endorses the use of ranges (i.e., interquartile) when applying transfer pricing methods relying on independent benchmarks, noting that weighted average results are used to construct an arm’s length range, while pooled results are typically not accepted.
  • It is noted that IRD endorses an approach where the commerciality of the tested arrangements is assessed using a limited set of highly reliable benchmarks, rather than relying on broad and generic samples.
  • Under simplification measures, there are situations where benchmarking analysis is not required, such as for low value-adding intra-group services.
Advance Pricing Agreements (APAs), dispute avoidance and resolution
  • Advanced pricing agreements (APAs) are a reasonable means to achieve certainty when dealing with complex transfer pricing risks.
  • An APA is a written agreement between Inland Revenue and the taxpayer, confirming the basis for their international pricing. Taxpayers with an APA must submit annual reports and supporting evidence to the IRD to demonstrate compliance.
  • Unilateral APAs have been successful in both inbound and outbound scenarios, especially when the amounts at stake are small or most of the transfer pricing risk lies in NZ.
  • The IRD aims to complete unilateral APAs within six months of accepting a formal application. Bilateral negotiations might take considerably longer.
  • NZ has adopted the Multilateral Instrument, introducing arbitration for dispute resolution. If a solution cannot be reached under MAP, taxpayers may request arbitration for unresolved issues.
Exemptions
  • Note that there are no exemptions in New Zealand transfer pricing rules; however, IRD endorses a cost-risk approach when analysing transfer pricing matters.
Related developments
Transfer pricing simplification measures
  • NZ’s transfer pricing rules aim to balance protecting the tax base and containing compliance costs. The IRD has implemented various measures to reduce compliance costs in low-risk situations.
  • These measures include:
    • Low value-added intra-group services: The OECD's simplified approach allows these services to be priced at cost plus a 5% mark-up without benchmarking. Initially, a $1 million threshold was applied, but this was removed for income years starting on or after 1 April 2021. Detailed guidance is in the OECD Transfer Pricing Guidelines 2022, Chapter VII, Section D.
    • Restricted transfer pricing approach to outbound loans: New Zealand's interest limitation rules restrict interest deductions on cross-border related party borrowings. Certain loans between a non-resident lender and a New Zealand-resident borrower must use a restricted pricing approach. Detailed guidance is in Tax Information Bulletin Vol 31 No 3 (April 2019). If correctly applied, the interest rate is considered arm's length, provided the deduction by the non-resident borrower does not exceed the income returned by the New Zealand-resident lender.
    • Small value loans: For cross-border associated party loans up to $10 million, a rate of 1.75% over the base indicator is considered arm's length. Transactions using this rate present a low transfer pricing risk and do not require further benchmarking. Indicative rates are available through the IRD.
    • Small wholesale distributors: Foreign-owned wholesale distributors in New Zealand with an annual turnover under $30 million should aim for a weighted average EBITE ratio of 3% or greater. This ratio is considered arm's length and presents a low transfer pricing risk, so no further benchmarking is needed.

For further information on transfer pricing in New Zealand please contact:

 

Sam O’Connor
T +64 4 495 1722
M +64 27 421 8550
E sam.oconnor@nz.gt.com

 

Greg Thompson
T +64 4 495 3775
M +64 21 281 7332
E greg.thompson@nz.gt.com

 

 

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