Duff & Phelps' Transfer Pricing Alliance Partner, TP EQuilibrium AustralAsia, contributed their insights, expertise and perspectives on this new development.
On April 29, 2019, New Zealand Inland Revenue ("IR") published final international tax and transfer pricing guidance, implementing the recently amended legislation, effective July 1, 2018, which aims to align the OECD base erosion and profit shifting (BEPS) actions with New Zealand law.
The guidance covers the following:
- Special transfer pricing interest limits for controlled inbound financing;
- Various amendments to the transfer pricing provisions;
- Administrative measures;
- Hybrid and branch mismatch rules; and
- Permanent Establishments.
A summary of the most significant changes is outlined below.
Interest Limits on Controlled Inbound Financing
New sections GC 15 – GC 19 of the Income Tax Act 2007 ("ITA") mandate a step-test to determine the interest rate applicable to controlled inbound financing transactions.
The key changes include a prescribed approach to borrower credit rating assessment, with four possible approaches; extension of the rules to foreign lenders that are not simple associated parties through shareholding; and the disregard of certain features for pricing purposes, such as tenors exceeding five years, subordination and other 'exotic' features (payment in kind, interest deferral, promissory notes, etc.), where such are not evidenced in the lender's third-party financing.
Transfer Pricing Guidance
Modified section GC 13 of the ITA implements some significant changes in transfer pricing obligations, which include:
- Identify and accurately delineate the tested transaction alongside the arm's length conditions and benchmarked amounts, that would have been agreed by independent parties;
- New discretionary powers given to IR to amend a tax assessment where the identified transaction does not align, in substance, with the determined arm's length transaction; and
- Extension of the time bar on transfer pricing matters to a 7-year period, where an audit or review has commenced.
Onus of Proof
Repeal of sections GC 13 (4) and (5) of the ITA has shifted the onus of proof in section 149A(2)(b) of the Tax Administration Act 1994 ("TAA") for transfer pricing issues onto the taxpayer commencing July 1, 2018.
New administrative rules contained in the TAA include the following:
- Enhanced powers for the IR to collect unpaid tax from New Zealand taxpayers, on behalf of their large multinational associated parties;
- Extension of IR's powers to request information on all members of a multinational group;
- Enhanced ability for IR to enforce compliance in requesting information; and
- New penalties of up to $100,000 for large multinational groups that do not co-operate.
The final guidance is available here.
The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.