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New Zealand Firms Missing Out Over Transfer Pricing

by Mary Swire,, Hong Kong

12 November 2003

Many of New Zealand’s multinational firms are “missing the boat” on the key international taxation issue of transfer pricing, and are consequently foregoing potential opportunities and benefits that come with sound management in this area, according to a tax expert with Ernst & Young.

Transfer pricing relates to how transactions between multi-national companies and/or branches are accounted for. These include transfers of products, treatment of property (tangible or intangible), services, loans, leases and other transactions.

“When transfer pricing is inter-linked with business strategy and planning, the benefits multinationals achieve include operational and financial efficiencies, improved management, enhanced processes and communication, reduced effective tax rates, defensibility of transfer pricing practices and a reduction of administrative burden,” explained Leslie Prescott-Haar, Ernst & Young’s New Zealand National Director of Transfer Pricing.

“While 25% of total parent organisations sampled adopting a proactive stance may seem low, alarmingly only 5% of New Zealand parent companies utilised transfer pricing as part of business planning. Not only are these entities missing out on clear commercial benefits, they are also susceptible to increased scrutiny, and pressure, from revenue authorities around the world,” she continued.

Ms Prescott-Haar illustrated further the contrast between the more proactive policies of multinationals based in other countries with those in New Zealand. “Internationally, just under 20% of those sampled have put in place Advance Pricing Arrangements for transfer pricing, as compared to 10% of New Zealand organisations.”

According to the The Transfer Pricing 2003 Global Survey undertaken by Ernst & Young, transfer pricing has become the most important international tax issue identified by multinational enterprises (MNE’s), and 86% of MNE parent companies and 93% of subsidiaries considered the issue the most pressing international tax matter they were currently dealing with. Many also reported that audits by the tax authorities are becoming increasingly common.

The E&Y survey revealed that 59% of all MNEs with revenues of more than $5 billion and 71% of all US-based MNEs regardless of revenues have been the subject of a transfer pricing audit at some point since 1999. Meanwhile, 76% of respondents envisaged being the subject of an audit within the next two years.

Ms Prescott-Haar has found that similar sentiments pervade amongst New Zealand’s firms, reporting that 75% of all New Zealand parent organisations revealing that they expect similar activity to take place within their own organisation in the next two years. “Our own Inland Revenue Department is no exception and in fact is gearing up, and committing resources, to take on more transfer pricing reviews and audits,” she said.

Prescott-Haar recommended that locally-based multinationals “should think globally but act locally particularly in implementing global or coordinated, multi-country support documentation.”

She added that firms should “make sure a pro-active stance is taken to align transfer pricing with overall business strategy. Based on the survey results, and local experience, New Zealand multi-nationals would gain considerably from having commercially-integrated transfer pricing strategies.”

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