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Transfer Pricing Regime Changes Also In NZ BEPS Bill

by Mary Swire,, Hong Kong

14 December 2017

The New Zealand Government has released an explanatory memorandum on the technical provisions to counter base erosion and profit shifting in the Taxation (Neutralising Base Erosion and Profit Shifting) Bill, which was recently tabled in parliament.

The memorandum explains that the proposed measures in the Bill aim to prevent multinationals from using:

  • artificially high interest rates on loans from related parties to shift profits out of New Zealand (interest limitation rules);
  • artificial arrangements to avoid having a taxable presence (a permanent establishment) in New Zealand;
  • transfer pricing payments to shift profits into their offshore group members in a manner that does not reflect the actual economic activities undertaken in New Zealand and offshore; and
  • hybrid and branch mismatches that exploit differences between countries' tax rules to achieve an advantageous tax position.

Many of the measures introduced in the bill are in line with those that were proposed by the OECD as part of its BEPS Action Plan. However, other changes are also made in the Bill to strengthen the transfer pricing rules so they align with the OECD's transfer pricing guidelines and Australia's transfer pricing rules.

According to the explanatory memorandum, this involves amending New Zealand's transfer pricing rules so that:

  • they refer to using the 2017 OECD transfer pricing guidelines as guidance for how the rules are applied;
  • the economic substance and actual conduct of the parties have priority over the terms of the legal contract. This is achieved by requiring the transfer pricing transaction to be "accurately delineated" consistent with section D.1 of chapter I of the new OECD guidelines;
  • transfer pricing arrangements which are not commercially rational because they include unrealistic terms that third parties would not be willing to agree to can be disregarded or replaced. This is consistent with the chapter I, section D.2 of the new OECD guidelines;
  • the legislation specifically refers to arm's length conditions (as per Australia's legislation) to clarify that the transfer pricing rules can be used to adjust conditions other than the price;
  • the onus of proof for demonstrating that a taxpayer's transfer pricing position aligns with arm's length conditions is shifted from Inland Revenue to the taxpayer (consistent with the onus of proof being on the taxpayer for other tax matters);
  • the time bar that limits Inland Revenue's ability to adjust a taxpayer's transfer pricing position is increased from four to seven years (in line with Australia);
  • in addition to applying to transactions between related parties, the transfer pricing rules will also apply when non-resident investors "act in concert" to effectively control a New Zealand entity, such as through a private equity manager; and
  • the new legislation codifies the requirement for large multinationals to provide Inland Revenue with the information required to comply with the OECD's Country-by-Country reporting initiative.

It also includes administrative measures for investigating large multinational groups.

The memorandum explains that it can be difficult and resource intensive for Inland Revenue to assess and engage in disputes with multinationals in practice. This is partly due to the difficulties Inland Revenue faces in obtaining the relevant information.

To address these issues, the Bill proposes strengthening Inland Revenue's powers to investigate large multinationals (with at least EUR750m (USD853m) of global revenues) that do not cooperate with a tax investigation. This involves amending the Tax Administration Act 1994 to allow Inland Revenue to:

  • collect any tax owed by a member of a large multinational group from any wholly-owned group member, provided the non-resident fails to pay the tax itself;
  • use section 17 of the Tax Administration Act 1994 to request information that is held offshore by another group member of the large multinational group;
  • more readily assess a large multinational group's tax position based on the information available to Inland Revenue in cases where the group has failed to adequately respond to an information request. A failure to provide the requested information to Inland Revenue can also prevent the information from being subsequently admitted as evidence in court proceedings. These proposals are based on an existing provision in section 21 of the Tax Administration Act 1994 which currently applies to deductible payments; and
  • impose a new civil penalty of up to NZD100,000 (USD69,820) for large multinational groups which fail to provide requested information (which replaces the current NZD12,000 maximum criminal penalty).

TAGS: court | tax | private equity | interest | Australia | offshore | multinationals | legislation | transfer pricing | New Zealand | Tax | BEPS

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