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Inland Revenue

Tax Policy

Chapter 6 - Administrative measures

6.1 This chapter sets out some new administrative measures to make it easier to assess uncooperative multinationals in practice. The proposed measures mostly apply only to large multinationals (those with global turnover of more than EUR €750m).

6.2 Most of the proposed measures would not apply automatically. Instead they would generally be triggered if the multinational does not cooperate with Inland Revenue. It is not expected that the new measures would be applied often. This is partly because their existence should incentivise cooperation and partly because they require significant and persistent non-cooperation. The measures also would not prevent any multinational from challenging Inland Revenue’s assessments in Court. However they do attempt to remove current incentives to delay disputes.

6.3 The proposed measures would make it easier for Inland Revenue to collect information from multinationals. Further, Inland Revenue’s ability to assess multinationals would not be hampered by their refusal to provide the relevant information.

6.4 The amendments proposed in this chapter would apply from the date of enactment of the relevant legislation.


The problem

6.5 There are significant problems with the current rules for assessing and collecting tax from large multinationals in New Zealand.

6.6 It can be difficult to prove that a non-resident is subject to New Zealand tax as a practical matter. A non-resident that wishes to minimise or eliminate its New Zealand tax liability will typically structure its legal arrangements with a view to achieving this objective. Its internal processes and documentation are often also drafted to support this. Establishing that the non-resident is subject to New Zealand tax therefore often involves demonstrating, as a factual matter, that its legal arrangements do not reflect the reality of its operations and value creation in New Zealand. This is highly resource intensive.

6.7 This difficulty is compounded by the fact that Inland Revenue is at a significant evidential disadvantage, as the non-resident possesses all the information required to prove Inland Revenue’s case. Further, some of the information may be held by the non-resident offshore, making it difficult for Inland Revenue to obtain it. In addition, the non-resident is not required to pay any tax while it is in dispute with Inland Revenue. This can incentivise a non-resident to delay the progress of disputes.

International responses

6.8 The OECD’s BEPS measures generally would not address these issues. The OECD measures do require improved information sharing and reporting by taxpayers. However these are directed more at intelligence gathering than the assessment and collection of tax in relation to particular taxpayers. For example, they will not help Inland Revenue prove that a particular taxpayer’s legal arrangements do not reflect its actual operations.

6.9 The Australian and UK DPTs contain several measures to address these administrative issues.

6.10 The DPTs are significantly easier to assess and collect from multinationals than income tax. In the UK (but not Australia), taxpayers must advise within three months of the end of the accounting year if there is a “significant likelihood” of the DPT applying to them. In both countries, the tax office may raise an initial assessment of DPT, based on its knowledge at the time. Following a short period for limited representations by the taxpayer, the DPT is then formally assessed, and must be paid within 21 days (Australia) or 30 days (UK). There is no right to appeal or postpone payment at this stage.

6.11 The UK DPT can be collected from the non-resident, its deemed PE, or a related entity (meaning 51 per cent or more commonly owned).

6.12 Following assessment and payment of the DPT, there is a 12 month review period in which the taxpayer has to demonstrate why and by how much its DPT assessment is wrong. Alternatively the taxpayer can elect to return the diverted profits as income under normal income tax rules. The DPT may be appealed in Court, but only after it has been paid and the 12 month review period has ended.

Proposed rules for New Zealand

6.13 We do not consider it necessary to go as far as the DPTs in assessing multinationals. In particular, we consider that administrative problems generally only arise when multinationals do not cooperate with Inland Revenue. Consequently the proposed administrative remedies are generally targeted at non-cooperative multinationals. The intention is for cooperative multinationals to be generally unaffected by the new rules.

6.14 The proposed rules discussed below will only apply to large multinationals (unless stated otherwise). “Large multinationals” will be defined as multinationals with a greater than EUR €750m consolidated group turnover.

6.15 The EUR €750m has been chosen to align application of the new measures with the OECD’s threshold for requiring large multinationals to file country-by-country reports. The OECD’s measures have been widely adopted and will require multinationals to collect information and report on their global transfer pricing arrangements. Consequently, multinationals to whom the new measures apply should already possess much of the information that Inland Revenue will request from them.


6.16 The rules will need to specify when a taxpayer is to be regarded as non-co-operative. It is proposed that non-cooperation include:

  • Failure by the taxpayer to provide information within the possession or control of the taxpayer or its associated parties within a statutory time-frame. The taxpayer will also be deemed to be in possession of any information it is required to report under the OECD’s country-by-country reporting standards for this purpose.
  • Failure to respond to Inland Revenue correspondence.
  • Failure to comply within a statutory time-frame with Inland Revenue’s reasonable requests.
  • The provision of materially misleading information (including where the information is misleading by omission).
  • Failure to provide sufficient information to determine the arm’s length amount of a related party transaction, or to determine the amount of profit which should be attributed to a PE. This is to ensure there is no incentive for the taxpayer to fail to adequately document its related party transactions for transfer pricing purposes, or fail to retain the relevant information (or to argue that it does not have such information in its possession).

6.17 However the proposed rules are not intended to impose unreasonable demands on multinationals. Accordingly, the threshold at which a multinational is treated as non-cooperative should be set above what could be regarded as reasonable in the circumstances.

6.18 In addition, the multinational will be warned that it is being non-cooperative and will be given a further opportunity to co-operate before Inland Revenue applies the new administrative measures. Furthermore, the Government expects that Inland Revenue would put in place internal processes so that a decision to treat a multinational as non-cooperative must be approved at a sufficiently high level within the organisation (similar to how section BG 1 is applied currently). This should give taxpayers assurance and certainty that the proposed administrative measures will not be imposed arbitrarily or inconsistently.


The following sets out an example of the circumstances in which the Government envisages that a taxpayer would be treated as non-cooperative.

Inland Revenue requests information from the local subsidiary of a multinational group in order to help determine the arm’s length price for a transaction between the subsidiary and a related non-resident member of the group.

The subsidiary fails to provide the information within the specified period of time. Inland Revenue reminds the non-resident of its information request and again asks for the information to be provided.

When the subsidiary fails to provide the information in response to the reminder, Inland Revenue repeats its request and sets a new date by which the information must be provided (in accordance with the guidance set out in the new legislation). Inland Revenue notes that failure to provide the information within this new period may result in the multinational being regarded as non-cooperative. Inland Revenue also explains the consequences of this (being the application of one or more of the proposed administrative measures discussed below).

When the subsidiary still fails to provide the requested information by the due date, the Inland Revenue investigator escalates the matter internally, and requests approval to treat the taxpayer as non-cooperative.

This request is considered at a senior level within Inland Revenue, with reference to the legislation and all the relevant circumstances (including the reasonableness of the original request). In this case approval is granted and one of the new administrative measures is applied in order to prevent the subsidiary’s non-compliance from frustrating the transfer pricing investigation. The taxpayer is then informed of this outcome and its options going forward.


6.19 If the large multinational does not cooperate with Inland Revenue, it is proposed that Inland Revenue may issue a NOPA or assessment based on the information available to Inland Revenue at the time. This is to ensure that Inland Revenue’s investigations are not unduly delayed by a taxpayer’s non-cooperation. This would be similar to Inland Revenue’s existing power to default assess taxpayers, but would apply in broader circumstances.

6.20 Inland Revenue will still be required to make reasonable efforts to obtain the requested information. It is also intended that this rule should only apply for the particular matter in respect of which the taxpayer has not cooperated. For example, if the taxpayer has cooperated for six tax issues but not the seventh, the rule would only apply for the seventh issue.

Payment of tax in dispute

6.21 Currently tax that is being disputed by the taxpayer is not payable until the dispute is resolved. This can delay the collection of tax for several years and provide an incentive for multinationals to prolong the dispute.

6.22 For large multinationals engaged in particular kinds of dispute, the Government proposes bringing forward the time at which the tax must be paid. There are two potential payment dates being considered for this purpose:

  • within 90 days of Inland Revenue issuing an assessment for the tax (which would only occur at the end of Inland Revenue’s current disputes process); or
  • within 12 months of Inland Revenue issuing a NOPA in respect of the tax, if Inland Revenue and the taxpayer have not been able to resolve the dispute.

6.23 We consider that either date is a reasonable compromise between tax being payable at the commencement of a dispute and tax not being payable until the very end. Either date would provide a reasonable period of time for Inland Revenue and the multinational to resolve the dispute. Feedback on the appropriate date to be included in legislation is welcomed.

6.24 The proposed rule would only apply for disputed tax in relation to transfer pricing, the amount of income with a NZ source, or the amount of tax payable under a DTA. Purchases from a tax pooling service would not be accepted as the payment of tax for this purpose.

6.25 Inland Revenue would repay the disputed tax if the multinational succeeded in a Court challenge.

6.26 The disputed tax would need to be paid earlier regardless of whether the multinational cooperated with Inland Revenue or not. This is because the rule is intended to remove any incentive for a taxpayer to prolong a dispute with Inland Revenue. In addition, refusing to resolve a dispute with Inland Revenue would not usually be regarded as non-cooperation.

Collection of tax

6.27 It is proposed that any tax payable by a member of a large multinational would be collectible from any wholly owned subsidiary of the multinational in New Zealand. The tax would also be collectible from the related New Zealand entity in a case where the income is attributed to a deemed PE of the non-resident under the proposed PE avoidance rule (discussed in chapter 3).

6.28 This will assist New Zealand in recovering tax payable by non-residents.

Collection of information

6.29 To effectively monitor and enforce New Zealand’s international tax rules, Inland Revenue may need to request information from the taxpayer about their functions and the functions of their offshore group members. As the OECD notes in their guidelines on transfer pricing documentation:

“It may often be the case that the documents and other information required for a transfer pricing audit will be in the possession of members of the MNE group other than the local affiliate under examination. Often the necessary documents will be located outside the country whose tax administration is conducting the audit. It is therefore important that the tax administration is able to obtain directly or through information sharing, such as exchange of information mechanisms, information that extends beyond the country’s borders.”

6.30 In addition to transfer pricing, there are other areas of tax where offshore information may be pertinent, such as the attribution of business profits to a PE.

6.31 The Commissioner of Inland Revenue has an existing power under section 17 of the Tax Administration Act 1994 to request any information or documents that the Commissioner considers necessary to administer or enforce Inland Revenue’s functions. Section 17 is typically used to access information and documents held by a New Zealand entity. However, in many cases, the relevant information is held by an offshore group member. Section 17 can be applied to non-residents that are controlled by a New Zealand resident.[15] However, it does not apply to non-residents that are related to, but not controlled by the New Zealand resident (such as an offshore parent or sister company).

6.32 Recent improvements to the exchange of information between tax authorities are making it easier for Inland Revenue to request and exchange information that is held by offshore tax authorities. However, relying on an ability to request information indirectly from other tax authorities is not always adequate. In some cases, the relevant information is not held by the offshore tax authority and in other cases the foreign tax authority may be slow or unhelpful in responding to reasonable requests for information.

6.33 For these reasons it is proposed that the Commissioner be provided with a direct power to request information or documents that are held by, or accessible to, a group member that is located outside New Zealand. The proposed rule would only apply in respect of multinational groups with EUR €750m of global revenues and would allow the Commissioner to use her existing power under section 17 of the Tax Administration Act 1994 to request information or documents that are held by or accessible to any offshore group members who are associated with the relevant New Zealand group member or permanent establishment. The information would first be passed on to the relevant New Zealand taxpayer who would then supply this information to the Commissioner.

6.34 This change would align New Zealand’s offshore information powers with other countries’ such as Australia[16] and Canada[17] which have specific provisions that enable their tax authorities to directly request information or documents from offshore.

6.35 A consequential change would also be required to amend section 143(2) of the Tax Administration Act 1994, to allow a person to be convicted of an offence if they failed to provide information which was held by an associated offshore group member. Again, this change would only apply in respect of multinational groups with EUR €750m of global revenues.

6.36 Currently, section 21 of the Tax Administration Act 1994 allows the Commissioner to deny deductions for taxpayers which fail to adequately respond to information requests regarding payments by them to an offshore entity. Taxpayers who fail to provide, on a timely basis, information about an offshore payment under a section 21 information request are also unable to use any information that is later provided as admissible evidence in any subsequent court case.

6.37 In many BEPS arrangements the New Zealand entity does not make a deductible payment but instead the arrangement results in income being allocated to an offshore group member when the income was actually generated as a result of economic activity carried out by a New Zealand company or permanent establishment. It is therefore proposed that section 21 be expanded so that it can also be applied to deem an amount of income to be allocated to a New Zealand group member or permanent establishment of a multinational group with EUR €750m of global revenues in cases where they have failed to adequately respond to an information request in relation to New Zealand-sourced income.

Penalties for not providing information

6.38 Currently, there are criminal penalties for not complying with a request for information under section 17 or section 21 of the Tax Administration Act 1994. This means that in order to apply these penalties, Inland Revenue has to take court proceedings against the person. If the person is convicted of an offence of not providing the information they are then liable for a fine of up to $4,000 (for a first offence), $8,000 for a second offence, or $12,000 for three or more offences.

6.39 It is resource-intensive to take court proceedings against a person who fails to co-operate with a request for information. It is therefore proposed that the Commissioner be able to impose fines under section 17 and section 21 as civil penalties, rather than as criminal penalties.

6.40 In addition, the modest size of the fine may be an insufficient deterrent for large multinationals. A larger fine of up to $100,000 is therefore proposed for information offences committed by multinational groups with EUR €750m of global revenues where that multinational has failed to comply with information requests made under section 17 or section 21. Australia has announced similar plans to increase their penalties for globally significant multinationals that fail to provide certain information from AU$4,500 to AU$450,000.


15 Under section 17(1) Inland Revenue may require a New Zealand resident to provide information in circumstances where the resident’s non-resident employees or agents hold the information/documents for the resident. Section 17(1B) gives Inland Revenue the power to require a New Zealand resident to provide information held by a non-resident entity controlled directly or indirectly by the New Zealand resident.

16 Section 264A of the Income Tax Assessment Act 1936. Australia issued 79 formal offshore notices in 2014–15.

17 Section 231.6 of the Income Tax Act.