NZ Inland Revenue Warns ICT Firms Over Transfer Pricing Concerns

by Mary Swire, Tax-News.com, Hong Kong

07 January 2003

New Zealand's Inland Revenue department has warned that some international technology companies with New Zealand-based subsidiaries may be charging unjustifiably high royalties in order to make them appear unprofitable and thus dodge a substantial proportion of New Zealand taxes.

Although the tax authority found no evidence during its year-long investigation into transfer pricing practices that information technology and communications (ICT) companies operating from New Zealand have attempted to siphon off profits to jurisdictions with lower corporate tax rates, the IR department's chief adviser for international audit, John Nash expressed concern that certain multinational organisations are applying the same royalty rates to all of their subsidiaries, regardless of the size of the market in which they are operating.

Speaking to national news service, Stuff.co.nz, Mr Nash observed that: 'There may be a basis for stepped royalties, which start low and escalate as certain sales targets are met in New Zealand'.

However, he stressed that the Inland Revenue will not be taking an unreasonable stance on the issue, and is merely asking that losses posted by New Zealand subsidiaries of otherwise profitable companies be adequately explained and documented:

'If New Zealand is merely an end-seller carrying no research and development costs, for example, then super profits will not generally belong here,' he concluded.

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