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Inland Revenue

Tax Policy

Chapter 5 - Strengthening the transfer pricing rules

5.1 This chapter proposes strengthening New Zealand’s transfer pricing rules so they align with the OECD’s latest guidelines and BEPS recommendations and Australia’s new transfer pricing rules.

5.2 In particular, the proposed new rules would disregard legal form if it does not align with the actual economic substance of the transaction. They would also allow transactions to be reconstructed or disregarded if such arrangements would not be entered into by third parties operating at arm’s length.

5.3 To encourage better quality documentation by taxpayers and to bolster Inland Revenue’s investigative powers, it is proposed that the burden of proof for transfer pricing issues be shifted from Inland Revenue to the taxpayer and that the “time bar” for transfer pricing cases be increased to seven years.

5.4 Inland Revenue will collect the information required by the OECD’s country-by-country reporting initiative from multinational groups with EUR €750m of annual consolidated group revenue (large multinationals). Although large multinationals would not be required to annually file their master and local files, the Government proposes increasing Inland Revenue’s powers to access information and documents held by large multinationals offshore.

5.5 Finally, in addition to applying to dealings between associated parties, it is proposed that transfer pricing rules should also apply to investors that “act together”, such as private equity investors.

5.6 The amendments proposed in this chapter would apply to income years beginning on or after the date of enactment of the relevant legislation.

What is transfer pricing?

5.7 Multinationals can use a variety of strategies to shift profits out of New Zealand and reduce their worldwide tax bills. One of the major strategies is “transfer pricing” which involves the use of cross-border payments between associated entities such as a parent and a subsidiary.

5.8 Related parties may agree to pay an artificially high or low price for goods, services, funding or intangibles compared to the “arm’s length” price or conditions that an unrelated third party would be willing to pay or accept under a similar transaction. By manipulating these transfer prices or conditions, profits can be shifted out of New Zealand and into a lower-taxed country or entity.

5.9 Consider, for example, a New Zealand subsidiary that borrows money from its overseas parent. Under the terms of the lending agreement the New Zealand subsidiary pays a 10% interest rate to their parent. However, if the subsidiary had borrowed from an unrelated party, such as a bank, on similar terms, the bank would have only charged a 5% interest rate. The transfer pricing rules require the interest rate to be reduced to 5% to match the arm’s length rate.

Transfer pricing is becoming increasingly important

5.10 Many of New Zealand’s largest businesses are subsidiaries of foreign-owned multinationals. This increases the potential risk of the New Zealand tax base being eroded through aggressive transfer pricing arrangements.

5.11 New Zealand has relatively high levels of foreign direct investment. In 2015, FDI into New Zealand represented 39 per cent of New Zealand’s GDP, compared with 35 per cent for the OECD as a whole.[10]

5.12 Some of the largest transfer pricing transactions involve the use of debt or a licence to use intellectual property. In the year ending March 2016, related party debt ($64b) comprised 25 per cent of all of New Zealand’s external debt, while payments for the use of intellectual property ($1.2b) comprised seven per cent of New Zealand’s total services imports.[11]

5.13 Around half of New Zealand’s direct investment is from or into Australia (51 per cent of New Zealand’s FDI and 46 per cent of ODI in the year ending March 2016).[12] It is important that New Zealand’s transfer pricing rules are aligned with Australia’s in order to reduce business compliance costs and the risk of double taxation. Furthermore, if Australia’s transfer pricing rules are perceived as being more robust than New Zealand’s it could lead to a greater share of the profits being allocated to Australia, as taxpayers may perceive there is less risk of a transfer pricing adjustment in New Zealand relative to Australia.

New Zealand’s transfer pricing rules need to be updated

5.14 New Zealand’s transfer pricing legislation was sufficient when it was first introduced, but transfer pricing practices have evolved significantly in the 22 years since then. New Zealand will need to update the rules to reflect the OECD’s transfer pricing guidelines and the current tax environment.

5.15 New Zealand’s current transfer pricing legislation largely focuses on the legal form of the transaction and adjusting the consideration that is paid to an arm’s length amount (which can be zero). This means that New Zealand’s existing transfer pricing rules may be unable to adequately address some types of profit-shifting.

5.16 Consider, for example, a subsidiary that distributes products that it buys from an associated offshore company to New Zealand customers. Under the terms of the contract for buying the goods, most of the risk is contractually assigned to an associated offshore company. As a consequence, the New Zealand subsidiary pays a relatively high price for the goods, which reduces their sales margin and the profits that they earn in New Zealand. This contract may be commercially unrealistic as, in practice, the New Zealand subsidiary controls and bears the economic risk of supplying the goods to New Zealand customers. If the multinational had engaged a third-party to sell their products in New Zealand, the third-party distributor would typically have assumed both the legal and economic risk of supplying the goods to New Zealand customers. (The described example is further illustrated in example 4 of the appendix.)

5.17 Australia’s transfer pricing rules and the OECD’s new transfer pricing guidelines address this type of profit-shifting by allowing for the conditions of the contract to be adjusted so that it aligns with the economic substance of the transaction.

5.18 The Government therefore proposes updating New Zealand’s transfer pricing rules to reflect the OECD’s BEPS actions (8–10) and recent policy developments in Australia.

Including an explicit reference to the OECD transfer pricing guidelines

5.19 Whilst New Zealand has contributed to and applied the OECD Transfer Pricing guidelines since they were first published in 1995, these guidelines were substantially updated in 2010. More recently, some major revisions to the guidelines were approved by the OECD in 2016 as part of their wider project to address BEPS (BEPS actions 8–10).

5.20 Australia’s transfer pricing rules are designed to align with the OECD’s transfer pricing guidelines. In fact, section 815.20 of Australia’s Income Tax Assessment Act 1997 explicitly instructs taxpayers to apply the 2010 OECD transfer pricing guidelines (to the extent that they are relevant and not contrary to Australia’s transfer pricing rules). In February 2016, Australia announced their intention to update their transfer pricing legislation so it refers to the latest OECD Guidelines (which address BEPS actions 8–10).

5.21 A major driver of Australia’s law changes was to remedy an adverse decision in Commissioner of Taxation v SNF (Australia) Pty Ltd [2011] FCAFC 74, where the Full Federal Court did not accept the Commissioner’s position that the OECD’s transfer pricing guidelines were relevant to that particular case.

5.22 The Government proposes that New Zealand’s transfer pricing legislation should include an explicit reference to the latest OECD Transfer Pricing guidelines (which incorporate the BEPS actions 8–10 revisions) in order to ensure that these guidelines will be given due consideration as relevant guidance material by New Zealand courts when interpreting the transfer pricing rules.

5.23 It is important to emphasise that New Zealand already applies the latest version of the OECD’s transfer pricing guidelines to aid with the application and interpretation of our existing transfer pricing rules. As transfer pricing has become more sophisticated the guidelines have evolved and been updated over time to represent international best practice. Inland Revenue and taxpayers routinely apply the latest versions of the guidelines to cases from earlier years, as the guidelines are generally consistent with our existing law. Adding a reference to the OECD guidelines into New Zealand’s transfer pricing legislation will simply clarify our existing practice of using the latest guidelines.

Aligning the transfer pricing rules with economic substance

5.24 Australia’s transfer pricing legislation was updated in 2012 and 2013 to focus on the economic substance of the relevant transactions.

5.25 Australia’s transfer pricing legislation requires taxpayers to have regard to both the legal form and economic substance of those relations (section 815.130(1) of the Income Tax Assessment Act 1997). It also requires taxpayers to disregard the form of the actual commercial or financial relations to the extent (if any) that it is inconsistent with the substance of those relations (section 815.130(2)).

5.26 We propose that New Zealand introduce transfer pricing provisions that have a similar purpose as Australia’s sections 815.130(1) and (2) on requiring transfer pricing practices to align with the economic substance.

5.27 The proposed economic substance test is intended to be consistent with conventional transfer pricing practices which involve a functional analysis to identify the economic activities that the related parties perform in relation to the cross-border transaction. As described in the OECD guidelines:

“this functional analysis seeks to identify the economically significant activities and responsibilities undertaken, assets used or contributed, and risks assumed by the parties to the transactions. The analysis focuses on what the parties actually do and the capabilities they provide.”

5.28 The use of a functional analysis has underpinned transfer pricing practices since the OECD’s 2010 Guidelines. However, the OECD guidelines are being updated as part of BEPS actions 8–10. The new guidelines will emphasise that multinationals cannot simply rely on legal contracts to shift profits into a lower-taxed entity. The transfer pricing rules will not respect such contracts if the economic ownership, risk or substance is unchanged. Australia’s transfer pricing legislation appears to be a good way to codify this approach into the legislation.

5.29 The recent BEPS-related revisions to the OECD guidelines are designed to ensure the outcomes (that is, allocation of profits) from transfer pricing are aligned with the value created through the underlying economic activities. This includes:

  • rules to prevent BEPS whereby multinationals transfer risks among, or allocate excessive capital to, group members. The new guidelines ensure that inappropriate returns will not accrue to an entity solely because it has contractually assumed risks or has provided capital. They require alignment of returns with value creation.
  • rules to prevent BEPS whereby multinationals engage in transactions which would not, or would only very rarely, occur between third parties. The new guidelines clarify the circumstances in which transactions can be reconstructed or not recognised for tax purposes.

5.30 The new OECD guidelines have a particular focus on funding, intangible assets and legal risk as these factors are particularly mobile – they can be shifted through contracts alone. By contrast, other factors such as the location of tangible assets and key staff cannot be easily shifted without also re-locating the actual economic activity.

5.31 On legal risk the new guidelines state that any:

“risks contractually assumed by a party that cannot in fact exercise meaningful and specifically defined control over the risks, or does not have the financial capacity to assume the risks, will be allocated to the party that does exercise control and does have the financial capacity to assume the risks.”

5.32 On intangibles they say:

“For intangibles legal ownership alone does not necessarily generate a right to all (or indeed any) of the return that is generated by the exploitation of the intangible.”

5.33 On funding arrangements the new guidelines state that if a “capital-rich” group member does not in fact control the financial risks associated with its funding, it will be entitled to no more than a risk-free return.

Reconstruction of transactions

5.34 The OECD guidelines recommend that “non-recognition” or reconstruction of transactions should only be used in exceptional circumstances where the related party dealings would not be commercially rational if they were between unrelated parties. The OECD guidelines state that:

“the key question in the analysis is whether the actual transaction possesses the commercial rationality of arrangements that would be agreed between unrelated parties under comparable economic circumstances, not whether the same transaction can be observed between independent parties.”

5.35 The reconstruction should make the related party dealing align with a commercially rational arrangement that would be agreed by independent businesses operating at arm’s length. If the commercially rational alternative is that an independent business would not enter into a similar arrangement, it may make sense to disregard (rather than reconstruct) the arrangement for tax purposes.

5.36 Australia’s reconstruction rules (sections 815.130(3) and (4) of the Income Tax Assessment Act 1997) apply when “independent entities dealing wholly independently with one another in comparable circumstances would not have entered into the actual commercial or financial relations.”

5.37 The ATO have interpreted this requirement as being consistent with the advice in the OECD transfer pricing guidelines that reconstruction should only apply in “exceptional circumstances” where the related party dealings would not be commercially rational if they were between unrelated parties (see paragraph 121 of ATO ruling TR 2014/6).

5.38 It is proposed that New Zealand introduce reconstruction rules based on those in Australia’s transfer pricing legislation.

5.39 Consistent with Australia’s rules, the proposed reconstruction rules would not be explicitly limited to “exceptional circumstances”. This is because “exceptional circumstances” is a fairly subjective concept with several possible meanings which could lead to disputes. For example, there could be instances where several different multinationals adopt essentially the same type of aggressive related party arrangement. Even though these arrangements would not be “exceptional” in the sense of being unique, it may still be appropriate to reconstruct these arrangements if independent entities dealing wholly independently with one another would not have entered into such arrangements.

5.40 The proposed reconstruction rules will reduce certainty for taxpayers, but this should only be the case where the arrangement is aggressive and commercially irrational. Inland Revenue already operates a co-operative approach to transfer pricing compliance, with strong encouragement of taxpayers to seek Advance Pricing Agreements and to raise complex transfer pricing matters with Inland Revenue in a timely and transparent manner in order to increase certainty and compliance.

Arm’s length conditions

5.41 New Zealand’s legislation currently refers to an arm’s length amount of “consideration”. The transfer pricing rules could be amended to refer to arm’s length “conditions” to clarify that the transfer pricing rules require taxpayers, when determining an arm’s length price, to take into account the relevant conditions that a third party would be willing to accept. The proposed change would be consistent with the proposed approach of considering the economic substance of the transaction and also consistent with Australia’s new transfer pricing rules which refer to arm’s length conditions. Australia also defines the term “arm’s length conditions” in section 815.125 of the Income Tax Assessment Act 1997. A similar definition is proposed for New Zealand.

5.42 The Federal Court in Chevron Australia Holdings Pty Ltd v Commissioner of Taxation [2015] FCA 1092 found that the term “consideration”, which was used in Australia’s transfer pricing rules at the time the disputed transaction took place, had a broader meaning than just the price (interest rate). The Federal Court agreed that the Commissioner could make adjustments to other conditions (security and loan covenants in the Chevron case), that could have an impact on the price. This case is currently under appeal.

Burden of proof

5.43 When New Zealand’s transfer pricing rules were introduced in 1995 they placed the burden of proof on the Commissioner of Inland Revenue. That is, the arm’s length amount of consideration is generally determined by the taxpayer. There are two exceptions to this:

  • where the Commissioner is able to demonstrate that another amount is a more reliable measure of the arm’s length amount; and
  • where the taxpayer has not co-operated with the Commissioner and this has materially affected the Commissioner’s administration of the transfer pricing rules, the Commissioner is also able to determine the arm’s length amount.

5.44 At that time, there was much closer alignment between multinational behaviour and market behaviour. This made it feasible for Inland Revenue to obtain relevant information and determine an appropriate arm’s length price for most transactions.

5.45 Over the last 22 years, however, multinational structures and transactions have become vastly more complex and are less aligned with typically observed market behaviours. Information asymmetry, whereby the multinational has much better information than Inland Revenue, has increased. Pertinent information is often held outside New Zealand, which can be difficult for the Commissioner to obtain.

5.46 Unlike New Zealand, in the majority of OECD and G20 member countries, the burden of proof for transfer pricing is on the taxpayer. This creates an implicit bias for allocating profits to countries other than New Zealand, as taxpayers may perceive there is less risk of a transfer pricing adjustment in New Zealand relative to another country.

5.47 It is proposed that the burden of proof should be shifted onto the taxpayer rather than the Commissioner of Inland Revenue. This would align the burden of proof in transfer pricing cases with the standard for other tax matters. As transfer pricing is driven by specific facts and circumstances and involves comparisons with similar arm’s length transactions, the taxpayer is far more likely to hold the relevant information to support its pricing than Inland Revenue or any other party.

5.48 Multinationals are already required to prepare transfer pricing documentation that satisfies the burden of proof in many other countries. Such compliance efforts are routine for most multinationals and are managed on a global basis. For this reason, the additional compliance costs that would be imposed under New Zealand’s transfer pricing rules from shifting the burden of proof onto taxpayers is not expected to be substantial.

Transfer pricing documentation

5.49 The proposal to shift the burden of proof to the taxpayer will increase the importance of taxpayers ensuring that they adequately document and explain their transfer pricing practices.

5.50 Each taxpayer is responsible for developing their own transfer pricing documentation. This has led to a wide range of different documentation standards depending on the taxpayer’s own standards or the standards expected by different tax authorities. It has also resulted in tax authorities having an incomplete view of transfer pricing arrangements, for example they may only see the leg of a transaction that connects to their country and not the other steps in the supply chain.

5.51 To address these issues, the OECD has developed a three-tier standardised approach to transfer pricing documentation comprising a master file, local files and country-by-country reporting (BEPS Action 13) as explained below.

  • Master file. Multinational enterprises will provide tax administrations with high-level information regarding their global business operations and transfer pricing policies in a “master file” that is to be available to all relevant tax administrations.
  • Local file. Detailed transactional transfer pricing documentation will be provided in a “local file” specific to each country, identifying material related party transactions, the amounts involved in those transactions, and the company’s analysis of the transfer pricing determinations they have made with regard to those transactions.
  • Country-by-Country reporting. Large multinationals (with EUR €750m of annual consolidated group revenue) are required to file an annual country-by-country report. For each tax jurisdiction in which they do business the report lists the amount of revenue, profit before income tax and income tax paid and accrued. The country-by-country report will also report on the number of employees, stated capital, retained earnings and tangible assets in each tax jurisdiction. They will identify each entity within the group doing business in a particular tax jurisdiction and provide an indication of the business activities that each entity engages in.

Large multinationals are already required to do country-by-country reporting

5.52 Implementing country-by-country reporting is one of the minimum standards for OECD countries and other countries that endorse the BEPS Action Plan.

5.53 Accordingly, New Zealand has signed the multilateral competent authority agreement on exchanging country-by-country reports with other tax authorities and Inland Revenue is already requiring New Zealand headquartered multinationals with annual consolidated group revenue of EUR €750m or more in the previous financial year[13] to file a country-by-country report for all income years beginning on or after 1 January 2016. This requirement applies to about 20 multinational groups, who have been notified by Inland Revenue.

5.54 A specific legislative provision for country-by-country reporting is not strictly necessary as Inland Revenue is already able to use sections 17 and 35 of the Tax Administration Act 1994 to enforce these requirements, if necessary. However, it may be useful to codify the country-by-country reporting requirements in legislation to provide a more explicit signal to multinationals and other countries of New Zealand’s commitment to country-by-country reporting.

Master file and local file documentation

5.55 New Zealand endorses the OECD recommendations on transfer pricing documentation and considers that the master file/local file approach provides a useful platform on which taxpayers with material transfer pricing risks can meaningfully describe their compliance with the arm’s length standard.

5.56 Some countries such as Australia and Japan are requiring large multinationals to provide a master file and a local file to the national tax authority each year in an approved form. Other countries only require this type of transfer pricing documentation to be provided upon a request or audit by the tax authority.

5.57 At this time, it is not considered necessary to require multinationals to routinely provide Inland Revenue with their master file and local file transfer pricing documentation each year. Mandatory requirements for multinationals to update and file their transfer pricing documentation each year could impose undue compliance costs, particularly for lower-risk transactions. Mandatory reporting of New Zealand documentation is also of limited usefulness for Inland Revenue as in many cases the pertinent information is held by an offshore group member (for example, in the local file for an offshore country or the master file of a non-resident head office).

5.58 The Government is proposing that New Zealand only require master and local file transfer pricing documentation to be provided upon a request or audit by the tax authority.

5.59 Chapter 6 of this discussion document proposes that the Commissioner’s powers to request offshore information could be expanded (see paragraphs 6.29 to 6.37 of chapter 6). These proposals will improve Inland Revenue’s ability to investigate transactions where the relevant transfer pricing information or documentation is held by a related offshore group member.

General requirements to document transfer pricing practices

5.60 There is currently no explicit statutory requirement in New Zealand to prepare and maintain transfer pricing documentation. Inland Revenue’s International Questionnaire of 292 foreign owned groups found that 79 per cent of these groups produced transfer pricing documentation.

5.61 In Inland Revenue’s experience transfer pricing documentation has been prepared for the arrangements they are interested in investigating, but the quality of the documentation can vary and it can be difficult to access documentation that is held by a related offshore company. Therefore, rather than making it mandatory for all arrangements to be documented, the Government proposes shifting the burden of proof onto the taxpayer to encourage higher quality documentation and empowering Inland Revenue to request information and documents from related overseas entities.

5.62 In practice, the actual level of documentation required to demonstrate compliance with the transfer pricing rules should depend on the complexity and risk profile of the relevant transactions. Some transfer pricing practices can be easily shown to align with comparable arm’s length arrangements whilst others require more evidence. Inland Revenue expects taxpayers to exercise their own judgement and prepare documentation that manages their associated transfer pricing tax risks.

5.63 However, if a company’s documentation inadequately explains why its transfer prices are considered to be consistent with the arm’s length principle, Inland Revenue is more likely to audit those transfer prices in detail. The lack of adequate documentation may also make it difficult for the company to rebut an alternative arm’s length transfer price proposed by Inland Revenue and is likely to result in penalties in the event of an adjustment to taxable income.

Penalties for lack of transfer pricing documentation

5.64 Rather than mandating for all taxpayers with cross-border transactions to prepare transfer pricing documentation, Australia uses penalties to encourage contemporaneous transfer pricing documentation. Australian taxpayers must have prepared their transfer pricing documentation by the time their relevant tax return is filed in order to reduce the potential penalty rate from 25% (the standard penalty) to 10% (the penalty for an incorrect, but “reasonably arguable” position, which also requires the taxpayer’s position to be “about as likely as not” to be correct).

5.65 It should be noted that Inland Revenue would already apply a “lack of reasonable care” penalty to incorrect transfer pricing positions taken by taxpayers who have failed to adequately document their transfer pricing positions at the time those tax positions were taken. Whilst Australia has codified their approach to penalties for undocumented transfer pricing positions in their legislation, we do not consider this approach to be necessary or particularly useful in the New Zealand context. As mentioned above, in Inland Revenue’s experience, transfer pricing documentation is usually available for the arrangements they are interested in investigating, but it can be difficult to get high quality documentation.

5.66 Failure by a large multinational to provide Inland Revenue with adequate transfer pricing documentation in response to a request for this documentation, could lead to Inland Revenue applying the proposed new administrative measures for uncooperative taxpayers that are discussed in chapter 6.

Time bar for transfer pricing tax positions

5.67 When a taxpayer makes an assessment that is incorrect, Inland Revenue can amend the assessment to increase the amount of tax, but only within the statutory “time bar”. The time bar is currently four years from the end of the tax year in which the relevant tax return was provided to Inland Revenue. The time bar recognises there is a trade-off between allowing Inland Revenue to investigate and challenge incorrect tax positions and providing taxpayers with certainty that their tax is final.

5.68 Unlike many other tax disputes, where the facts are often agreed, and the dispute typically centres on differing interpretations of the law, transfer pricing assessments are very dependent on the facts and circumstances of each specific case. Assessing compliance with the arm’s length principle requires very detailed and specific information and analysis of how a comparable transaction between unrelated parties would have been conducted. Some transfer pricing transactions are difficult to assess as they involve “hard to value” intangibles while others involve arrangements that appear reasonable to begin with but only subsequently result in conditions that are not arm’s length.

5.69 For these reasons, it can be difficult for tax authorities to adequately identify the risk, apply the arm’s length principle and amend the relevant tax return within four years.

5.70 As shown in the table many other jurisdictions have a longer time-bar for transfer pricing assessments.

Country Transfer pricing time bar Standard time bar for other tax matters
Time bars for other jurisdictions
China 10 years 10 years
Australia 7 years 4 years
Canada 7 years for publicly listed or foreign owned firms, 6 years for private Canadian-owned firms 4 years
Malaysia 7 years 5 years
Hong Kong 6 years 6 years
Japan 6 years 5 years
Ireland 4 years 4 years
Germany 4 years 4 years
UK 4 years extended to 6 if the taxpayer has acted carelessly or up to 20 for a deliberate misstatement 4 years extended to 6 if the taxpayer has acted carelessly or up to 20 for a deliberate misstatement
US 3 years extended to 6 for substantial omissions of income 3 years extended to 6 for substantial omissions of income

5.71 In particular, Australia and Canada both have a seven year time bar for transfer pricing, which is three years longer than their four year time bars for other tax matters. The Government proposes increasing New Zealand’s time bar for transfer pricing matters to seven years.

5.72 A longer time bar will decrease certainty for taxpayers. However, this can be mitigated by engaging with Inland Revenue. Taxpayers are already encouraged to seek Advance Pricing Agreements and to discuss complex transfer pricing matters with Inland Revenue ahead of committing to the arrangements.

Applying the transfer pricing rules to investors acting in concert

5.73 The existing transfer pricing rules only apply to cross-border transactions between associated persons, for example companies with at least 50 per cent common ownership. However, there is a specific anti-avoidance rule in section GB 2 that applies if an arrangement has a purpose or effect of defeating the intent and application of the transfer pricing rules. That arrangement then becomes subject to the transfer pricing rules.

5.74 Inland Revenue is aware of a number of cross-border investments where two or more non-associated investors, each own less than 50 per cent of a New Zealand company but act in concert to make decisions about the investment collectively. Because none of the investors are associated with the New Zealand company or each other, the transfer pricing rules would not typically apply to such investment arrangements, even though the economic substance of the investment is that the investors operate in a similar manner as if they were a single owner. This creates opportunities to use aggressive transfer pricing arrangements to shift profits offshore.

5.75 The transfer pricing rules are intended to apply in conjunction with the thin capitalisation rules.[14] The transfer pricing rules are designed to address BEPS from cross-border payments between associated entities (including interest payments), whereas the thin-capitalisation rules are designed to prevent BEPS through loading excessively high levels of debt funding into a multinational group member.

5.76 The thin capitalisation rules were amended from the 2015–16 income year so that they also apply when non-residents act in concert and collectively own 50 per cent or more of a company. Non-residents are treated as acting in concert if they hold debt in a company in proportion to their equity, have entered into an arrangement setting out how to fund the company with related-party debt, or act on the instructions of another person (such as a private equity manager) in funding the company with related-party debt. Similar amendments are being made to the NRWT rules so that if investors act together they can be treated as receiving “related party” interest payments.

5.77 The Government proposes introducing a similar provision to the transfer pricing rules, so that the interests of non-resident investors acting in concert can be aggregated in determining whether they are associated with a company, and so whether the transfer pricing rules would apply. Under the proposed rule, non-resident investors into a New Zealand business would be treated as “acting together” if they hold debt in a company in proportion to their equity, have entered into an agreement that effectively produces a controlled arrangement, or act on the instructions of another person (such as a private equity manager) in a way that would effectively produce a controlled arrangement.


10 OECD Data FDI stocks as a percentage of GDP.

11 Statistics New Zealand, Balance of Payments Statistics.

12 Ibid.

13 EUR €750m is equivalent to $1,164.5m New Zealand dollars using the NZD to Euro exchange rate of 31 December 2014.

14 The BEPS – Strengthening our interest limitation rules discussion document describes a detailed proposal for a potential interest rate cap on related-party debt, which if implemented, would apply instead of the transfer pricing rules to limit interest rates. The proposed cap would apply to companies that are subject to the thin-cap rules. Although interest payments are one way to shift profits to a group of unrelated offshore investors, other types of payments could also be used such as service fees paid to a private equity manager.