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Taxation Neutralising Base Erosion and Profit Shifting Bill

Transfer pricing and country-by-country reporting

Transfer pricing

Country-by-Country reports

TRANSFER PRICING

Clauses 35 and 36

Overview

Some multinational companies are known to use payments between themselves and related parties to shift profits offshore. Transfer pricing rules guard against this type of profit-shifting by requiring these payments to be consistent with an arm’s length price and conditions that unrelated parties would agree to in comparable circumstances.

The Bill proposes amendments to strengthen the transfer pricing rules so they align with the OECD’s transfer pricing guidelines and Australia’s transfer pricing rules.

The OECD’s transfer pricing guidelines were substantially updated in 2017 as part of the OECD’s BEPS project. The updates to Chapter I of the Guidelines were designed to align transfer pricing outcomes with value creation (BEPS Actions 8–10). The proposed amendments to New Zealand’s transfer pricing legislation are intended to allow New Zealand to implement these BEPS recommendations.

The Bill proposes the following amendments to New Zealand’s existing transfer pricing legislation:

  • Including a reference 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 will 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 transfer pricing guidelines.
  • The ability for Inland Revenue to disregard or replace transfer pricing arrangements which are not commercially rational. For instance, because they include unrealistic terms that unrelated parties would not be willing to agree to. This is consistent with the guidance in section D.2 of chapter I of the new OECD guidelines.
  • Referring 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 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 investors “act together” to effectively control a New Zealand entity, such as through a private equity manager.

Submitters generally supported the proposals to align the transfer pricing legislation with the OECD Transfer Pricing Guidelines. They considered this would provide greater certainty for taxpayers and consistency with transfer pricing practices in other countries which also use the Guidelines.

Submitters considered that the legislation (and related guidance) needed to include greater detail on the circumstances in which commercially irrational transfer pricing arrangements can be disregarded or reconstructed as they wanted to ensure that this provision could not be misused beyond the intended scope.

However, submitters strongly opposed the administrative proposals to extend the time bar from four to seven years and to shift the onus of proof onto the taxpayer. Submitters considered these proposals would reduce certainty and place undue compliance costs on taxpayers.

Submissions were mixed on the proposal to apply the transfer pricing rules to a group of investors such as private equity structures which “act together” to control a New Zealand entity. Some supported it in principle, but others considered the proposed rules were unnecessary as they considered it was difficult to manipulate prices using such investment structures. Submitters also considered the proposed rules were unclear and could be better targeted.

Issue: Strengthening transfer pricing rules is not required

(Corporate Taxpayers Group)

The Group does not believe that further strengthening of the transfer pricing rules are required. Inland Revenue already has a number of tools available to it and these tools should be applied. Inland Revenue should simply ensure that it is appropriately resourced with transfer pricing expertise to allow it to apply the rules as they currently stand .

Comment

It is necessary to update New Zealand’s transfer pricing legislation as our existing legislation would not allow New Zealand to fully implement the OECD’s 2017 Transfer Pricing Guidelines that were developed to combat BEPS.

Recommendation

That the submission be declined.

Issue: Impacts on taxpayer and Inland Revenue resourcing of transfer pricing

Submissions

(Corporate Taxpayers Group, KPMG, Chartered Accountants Australia and New Zealand)

Reduction in resource use (including disputes) will not occur with these rules. More work will result for Inland Revenue and taxpayers. Inland Revenue’s transfer pricing and international tax capability is already stretched and the BEPS proposals will simply add to those pressures. (KPMG)

The new rules will increase compliance costs and require Inland Revenue to better resource its Transfer Pricing unit. In particular the economic substance criterion can be difficult to apply in practice and Inland Revenue should be given additional resources to administer this rule. (Chartered Accountants Australia and New Zealand)

Inland Revenue should ensure that it is appropriately resourced with transfer pricing expertise to allow it to apply the rules as they currently stand. (Corporate Taxpayers Group)

The added layer of complexity and compliance cost expected from the proposed legislation, certain groups of taxpayers (SMEs, and multinationals with low levels or “plain vanilla” cross border associated party transactions) may be disadvantaged without the requisite expertise or resources to comply with the new rules. (Deloitte)

Comment

Officials agree that the proposed rules may require some taxpayers and Inland Revenue to devote additional resources to transfer pricing issues. This reflects the fact that the new rules require a more substance-based analysis than the existing transfer pricing rules, which is consistent with the OECD’s recommendations on how transfer pricing rules should be strengthened to combat BEPS. However, even if New Zealand’s rules were not being updated, many taxpayers would still need to invest additional resources in transfer pricing in order to comply with similar transfer pricing requirements in foreign countries which follow the OECD’s new transfer pricing recommendations.

Recommendation

That the submissions be noted. These submissions do not require a change to the Bill.

Clause 35

Issue: That New Zealand’s transfer pricing legislation explicitly refer to the OECD transfer pricing guidelines

Submissions

(Chartered Accountants Australia and New Zealand, Corporate Taxpayers Group, Deloitte, EY)

Supports including a reference to the 2017 OECD transfer pricing guidelines in the transfer pricing legislation (Chartered Accountants Australia and New Zealand, Corporate Taxpayers Group)

Support the proposed approach that updates to the Guidelines be adopted in future taxation Bills, following a review by officials of the changes made. (Chartered Accountants Australia and New Zealand)

Updates to future versions of the Guidelines could be done through an Order in Council (Corporate Taxpayers Group)

It should be made clear at the time a revised version of the OECD Guidelines is adopted, how these revised guidelines apply both on a prospective or retrospective basis. This is because revisions to the Guidelines may provide guidance on a new topic, or may be purely interpretive, providing a new interpretation on existing issues. No changes to the guidelines should be applied retrospectively to the detriment of a taxpayer. (Corporate Taxpayers Group)

The Bill should clarify that the 2017 version of the OECD Transfer Pricing Guidelines will apply in New Zealand only to transactions occurring in income years commencing on or after 1 July 2018 once New Zealand transfer pricing rules are fully aligned to article 9 wording. For prior income years, the 2010 version of the OECD Guidelines should be applied, to the extent that applying the 2010 version is consistent with the existing legislation. (EY)

Support for updating the outdated names of pricing methods to conform to the OECD guidelines. (Chartered Accountants Australia and New Zealand, Deloitte)

Comment

Officials agree that when revisions are made to the Guidelines it should be made clear from what date each of the relevant revisions should be applied under New Zealand transfer pricing legislation. This could be achieved through making updated references to newer versions of the guidelines in future tax Bills as the new Bill provisions can be drafted with specific application dates.

A Bill process will also make it easier for taxpayers to identify if the relevant reference has been updated and will facilitate consultation on whether New Zealand should adopt the revisions and on application dates. New Zealand is involved in developing changes to the OECD transfer pricing guidelines and regularly introduces taxation Bills. Officials do not consider it necessary to allow for the reference to be updated through an Order in Council process (as an alternative to a Bill process).

Officials note that the legislative reference to the 2017 OECD Transfer Pricing Guidelines in the current Bill is already consistent with the submission from EY (it applies to income years commencing on or after 1 July 2018).

Recommendation

That the submission to include an Order in Council process to update the reference to the OECD transfer pricing Guidelines be declined and the other submissions (that do not require changes to the Bill), be accepted.

Clause 35

Issue: That the OECD transfer pricing guidelines should be annexed to the New Zealand Income Tax Act 2007 or otherwise made available free of charge to all taxpayers

Submissions

(Chartered Accountants Australia and New Zealand, Corporate Taxpayers Group)

To access the Guidelines in downloadable or print format incurs a charge of $185. (Chartered Accountants Australia and New Zealand)

If the Guidelines are going to become part of New Zealand law then they should be available for taxpayers to study in detail (not simply browse on screen) free of charge. The Guidelines are the property of the OECD so appropriate licensing arrangements would need to be agreed. (Chartered Accountants Australia and New Zealand)

Inland Revenue should have links to the OECD Guidelines (including those relevant to past periods, which may remain open to adjustment) available on its website so that taxpayers can easily access this information (Corporate Taxpayers Group)

Comment

The OECD guidelines are property of the OECD so cannot be reproduced by Inland Revenue. Inland Revenue will however, include links to the OECD Guidelines (including previous versions) on its transfer pricing website (www.ird.govt.nz/transfer-pricing).

The OECD Guidelines are already universally applied by transfer pricing practitioners as they are already applicable to transfer pricing positions that are taken under Double Tax Agreements. This means many of the affected taxpayers or their tax advisors will already be purchasing and using copies of the Guidelines. For those that are not already using them, the Guidelines can be read online for no charge.

If these taxpayers need to access a downloadable or hardcopy of the Guidelines, officials do not consider the $185 charge is overly burdensome. This represents a very small cost compared to the overall cost of specialist transfer pricing tax advice.

Recommendation

That the submission for Inland Revenue to provide free copies of the OECD Transfer Pricing Guidelines be declined.

Clause 35

Issue: Applying the transfer pricing rules to investors that act in concert

Submissions

(Chartered Accountants Australia and New Zealand, Corporate Taxpayers Group, OliverShaw, KPMG)

Support the proposal to extend the transfer pricing rules to investors who “act together”, provided it is limited to where there is a group of non-residents. (Chartered Accountants Australia and New Zealand)

The proposal should not proceed for the reasons outlined below. (Corporate Taxpayers Group)

Where the investors do not have the same economic interests, natural pricing tension will ensure pricing for goods or services by one shareholder is at an arm’s length rate. Treating a different group of persons as the one economic entity would not, therefore, reflect the economic reality unless all members of that group had the same proportional economic interests (for example, all were supplying the good or service in proportion to their shareholding). (Corporate Taxpayers Group)

It is arguably unnecessary to extend the transfer pricing rules to investors “acting together”. To the extent transactions are not priced correctly (i.e. not at arm’s length), there may be a transfer of value giving rise to a deemed dividend. For example, if a New Zealand subsidiary were to pay greater than market value for goods purchased from a shareholder, the dividend rules would likely apply to this arrangement as there has been a transfer of value caused by a shareholding relationship. (Corporate Taxpayers Group)

The proposed definition of acting together is inherently vague and will create uncertainty. The definition is very unclear and could conceivably apply to all entities with nominal non-resident shareholders and to any New Zealand entity with a shareholder’s agreement. This would extend the application of New Zealand’s transfer pricing rules well beyond the notion of control that underlies transfer pricing’s rationale. (Corporate Taxpayers Group, OliverShaw)

The proposal should be limited to a group of non-residents who act together. Shifting profits out of New Zealand is not a concern when the group is controlled by a New Zealand resident. (Chartered Accountants Australia and New Zealand, Corporate Taxpayers Group, OliverShaw)

The rules should not apply simply because two companies are consolidated for accounting purposes as accounting consolidation rules vary across countries and over time. (OliverShaw, Chartered Accountants Australia and New Zealand)

It is unclear why the transfer pricing rules use the control group test from the hybrids rules rather than the “non-resident owing body” concept from the thin-capitalisation rules. (KPMG)

Comment

As part of obtaining their return, some foreign investors acting together can and do use non-arm’s length pricing of debt, management fee and royalty arrangements to shift profits out of New Zealand, particularly in tax aggressive private equity structures. Commercial pricing tensions between the investors do not adequately address these risks, as it can be in all the investors’ interest to reduce the overall tax paid on their investment.

The deemed dividend rules also do not provide sufficient protection from profit-shifting. This is because the high-priced payment will still be fully deductible and reduce the profits that can be taxed in New Zealand.

For these reasons officials still consider it is necessary to apply the transfer pricing rules to non-resident investors who act together to effectively control a New Zealand business.

However, in response to the points raised by submitters, officials recommend the “acting together” rule be amended so it is better targeted at the policy concerns. In particular, the amendments should ensure:

  • The acting together test only applies to a group of non-residents rather than a group of non-residents and residents. This would be consistent with the existing acting together tests in the thin capitalisation and NRWT rules.
  • The transfer pricing rules do not apply simply because two companies are consolidated for accounting purposes.
  • The transfer pricing rules do not apply simply because a company has a shareholder’s agreement setting out how shareholders agree to exercise their individual shareholder rights (officials do not consider this is the case under the current provision, but this point can be clarified in the guidance materials).

Officials also recommend that the proposed “acting together” definition should be based on the existing “acting together” rules that already apply for the purposes of the thin-capitalisation and NRWT rules, rather than the control group definition in the proposed hybrid rules.

Recommendation

That the submission to remove the proposal from the Bill be declined, but that the rules for applying the acting together test be amended as per official’s comments.

Clause 36

Issue: Economic substance

Submission

(Chartered Accountants Australia and New Zealand, Deloitte)

The proposed change to take into account the economic substance of the transaction is appropriate. Most practitioners and revenue officials will take into account the economic substance of the transaction so it is sensible to include this change into legislation.

Recommendation

That the submissions be noted. These submissions require no changes to the Bill.

Clause 36

Issue: Definition of arm’s length conditions

Submission

(Chartered Accountants Australia and New Zealand, EY, KPMG)

The definition of arm’s length conditions in GC 13(4) should be amended to ensure it includes the profit-based methods. (EY, KPMG)

The definition of “arm’s length conditions” should be replaced with a concept of “actual conditions” which is based solely on the approach used in the Chapter I of the OECD Transfer Pricing Guidelines. The current position taken in the Bill is inconsistent with the OECD guidelines. (Corporate Taxpayers Group)

Section GC 13(4)(b)(ii) should be amended to replace “might” with “are about as likely as not” to be agreed upon by independent parties. The phrase “about as likely as not” is found in other parts of the New Zealand tax legislation and there is a body of case law concerning the phrase, so it will be familiar to officials and practitioners when looking to interpret the new rules. (Chartered Accountants Australia and New Zealand)

Care should be taken when drafting the New Zealand definition of “arm’s length conditions” such that it recognises: the availability of comparable company data; the fact that benchmarking does not necessarily allow for the identification and assessment of a number of the comparable circumstances; and that some legitimate associated party arrangements only exist because of the related nature of the parties and may not have identifiable analogues between independent parties. (Deloitte)

Comment

Officials do not consider that the current drafting of arm’s length conditions in section GC 13(4) is inconsistent with the OECD guidelines or that it excludes profit-based methods. This section is intended to be a statement of the overall goal of the arm’s length principle on which transfer pricing is based. It is not intended to be a prescriptive instruction that limits the approach and methods that taxpayers may have to actually use in practice to perform a transfer pricing analysis. Furthermore it is obvious from the list of methods in GC 13(2) that the profit based methods can be used.

Officials will consider if the drafting of “arm’s length conditions” can be improved to clarify these points, otherwise they will be clarified in the subsequent guidance materials on the new legislation.

The current drafting of section GC 13(4)(b) is based on the definition of arm’s length conditions in section 815.125 of Australia’s legislation which uses the term “might”. It is desirable to retain consistency with Australia’s definition of arm’s length conditions.

Recommendation

That the submissions be declined.

Clause 36

Issue: Requirements for not recognising a transfer pricing arrangement

Submissions

(Chartered Accountants Australia and New Zealand, Deloitte, EY, PwC)

There should be a high threshold for disregarding or replacing a transaction. (Chartered Accountants Australia and New Zealand)

It should be clear that the ability to disregard or replace transactions should be exercised only in exceptional circumstances. (Deloitte, EY, PwC)

The specific references to the OECD Guidelines should be replaced with specific provisions containing the appropriate legislation as the Guidelines are designed to provide broad guidance only, rather than a legislative framework. Section GC 13(5) should be redrafted to remove the references to the paragraphs in the OECD guidelines and to instead include the relevant requirements in the legislation (PwC)

Section GC 13(5) should explicitly refer to the “exceptional circumstances” requirement in the OECD transfer pricing guidelines as a prerequisite to any adjustment to not recognise or recharacterise a transaction. (EY)

The reference in GC 13(5) to paragraph 1.122 of the OECD Guidelines should refer to paragraphs 1.118 to 1.123 as otherwise the rule could be misconstrued (EY, KPMG)

IRD should provide more extensive guidelines and examples than that provided by the OECD Guidelines as to the circumstances and hallmarks that would need to be present for para 1.122 of the OECD Guidelines to be applied. The guidelines and examples should provide greater clarity as to when a transaction may be not recognised in its entirety (as opposed to being recharacterised into another transaction). (EY)

Adjustments proposed by IRD to not recognise or recharacterise a transaction should require a high level of sign-off internally within IRD in the same manner as the general anti-avoidance laws. (EY)

The concept is subjective and Inland Revenue should provide guidance as to when it will consider a transaction to be “commercially irrational”. (Chartered Accountants Australia and New Zealand)

Comment

The OECD’s 2017 transfer pricing guidelines define in paragraph 1.122, the exceptional circumstances in which a commercially irrational transaction can be disregarded or replaced with an alternative transaction. The proposed legislation for reconstructing an arrangement explicitly refers to the requirements described in paragraph 1.122 of the OECD’s transfer pricing guidelines.

This paragraph also emphasises that there is a high threshold for disregarding or replacing a transaction. It states “…every effort should be made to determine the actual nature of the transaction and apply arm’s length pricing to the accurately delineated transaction, and to ensure that non-recognition is not used simply because determining an arm’s length price is difficult.”

Officials do not consider it necessary to refer to “exceptional circumstances” in the legislation, as there is already an explicit reference to paragraph 1.122 that describes these circumstances. It is better to define these circumstances by reference to the relevant paragraph as the ordinary meaning of “exceptional circumstances” may lead to less precise interpretations.

Officials agree that before Inland Revenue uses the reconstruction power there should be a high level of sign-off within Inland Revenue (as is the case with our general anti-avoidance laws). This should also ensure the provision is applied consistently.

The examples of reconstructed and disregarded transactions provided in the OECD transfer pricing guidelines were developed and agreed amongst OECD member countries. Accordingly adding further guidance and examples for how countries should apply these guidelines would be best developed though the OECD’s existing Working Party 9 process for updating this relevant guidance. Aligning New Zealand’s rules with this OECD guidance also means that court cases and technical guidance prepared by other OECD tax authorities could be useful reference materials for taxpayers.

In addition the new rules are effectively anti-avoidance rules that apply to artificial and commercially irrational arrangements. This means it can be difficult to identify relevant examples until they are observed in actual taxpayer behaviour and that any examples are likely to be unique or very specific to circumstances so documenting them may be of limited usefulness when considering how the rule may apply to other scenarios with different facts.

Inland Revenue does however understand taxpayers’ desire to achieve certainty that their transfer pricing practices will not be challenged under these new rules. Inland Revenue’s transfer pricing team welcomes taxpayers to contact them to discuss any specific transfer pricing arrangements they are seriously considering. If further certainty is required, an advance pricing agreement can be sought. In officials’ view, this tailored approach to assisting taxpayer compliance is more useful for taxpayers than preparing more general guidance materials that may have only limited relevance for their particular situation.

Recommendation

That the submissions be declined.

Issue: Drafting of requirement for not recognising a transfer pricing arrangement

Submission

(Corporate Taxpayers Group)

The reference to “may” in the proposed reconstruction rule should be changed to “must”. This would mean that if the requirements of Chapter I, section D.2, of the OECD guidelines are met, the taxpayer must recognise the reconstructed or rejected transaction as being the relevant transaction for the purposes of determining its tax position. This is consistent with the proposed shift in the burden of proof, the emphasis on economic substance in transfer pricing rules, the broader self-assessment approach to tax compliance and subdivision 815.130 of the Australian transfer pricing regime. (Corporate Taxpayers Group)

Comment

Officials agree that the proposed change will clarify that where the reconstruction rule applies, the taxpayer must use that approach. In practice, the relevant reconstruction rule will nearly always be applied in the context of an investigation by Inland Revenue, so an alternative drafting option could be to provide an ability for the Commissioner to trigger the application of the reconstruction rule in those cases where the requirements of Chapter I, section D.2, of the OECD guidelines are met.

Recommendation

That the submission be accepted, subject to officials comment.

Clause 36

Issue: Onus of proof for transfer pricing issues should remain with Inland Revenue

Submissions

(Chartered Accountants Australia and New Zealand, Corporate Taxpayers Group)

The Onus of proof should not be shifted to the taxpayer.

The Commissioner has access to the tax records of every taxpayer in New Zealand, and has access to information from overseas tax authorities, so can be in the best position to determine whether the arrangement is similar to one that has been entered into elsewhere. (Chartered Accountants Australia and New Zealand)

The proposed change is inconsistent with other countries. The OECD states in its transfer pricing Guidelines at paragraph 4.11 “in most jurisdictions, the tax administration bears the burden of proof” (Chartered Accountants Australia and New Zealand)

The shift in the burden of proof, coupled with an increase in the time bar and other transfer pricing proposals, significantly increases compliance costs imposed on taxpayers without a sufficient trade off. The Group’s primary submission is that the onus of proof should remain with the Commissioner where the taxpayer has regularly prepared compliant documentation and has been open and transparent with the Commissioner. Further, the Group submits that this proposal should not proceed in addition to the extension to the time bar. At most, only one of those two proposals should proceed. (Corporate Taxpayers Group)

Comment

This proposal is consistent with the fact that burden of proof is already on the taxpayer for other tax matters. Self-assessment is at the heart of how New Zealand’s tax system works and helps encourage taxpayers to comply with the law and get it right from the start rather than having to subsequently amend their tax position as a result of an Inland Revenue investigation.

Shifting the onus of proof is necessary because transfer pricing has become increasingly complex and fact specific (for example, there is now a need to analyse economic substance as well as the legal contracts). Multinationals will have better information than Inland Revenue about their own economic activities, on market prices in their industry and on their supply chains. For this reason they are better placed to identify a relevant uncontrolled comparable and apply the arm’s length principle.

The comment in the OECD transfer pricing guidelines has not been updated since 2010 to reflect the fact that many OECD and G20 countries have shifted the burden of proof for transfer pricing onto the taxpayer. The burden of proof is on the taxpayer for transfer pricing matters in Australia, the US, Canada, China, Hong Kong, Singapore, the UK, Ireland, France and Germany. This means most multinationals already prepare transfer pricing documentation that satisfies the burden of proof for other countries. 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.

The proposal in the Bill will effectively require multinationals to analyse and prepare transfer pricing documentation for their related party transactions that involve their New Zealand group members. This will make it easier for Inland Revenue to investigate (and if necessary adjust) transfer pricing positions as the onus will on the multinational to provide documentation to justify that their position is correct (within the arm’s length range).

Recommendation

That the submissions be declined.

Clause 36

Issue: Consequential changes if the onus of proof for transfer pricing issues is shifted to the taxpayer

Submissions

(ASB, Chartered Accountants Australia and New Zealand, Corporate Taxpayers Group, Deloitte, Russell McVeagh, KPMG, PwC)

If the burden were placed on the taxpayer then it should shift to the Commissioner in situations where she is using data that is not available to the taxpayer. (Corporate Taxpayers Group)

Inland Revenue should only use information which is available to the taxpayer in asserting a transfer pricing adjustment. This requirement should be legislated. (Russell McVeagh, KPMG)

If the burden is shifted to the taxpayer, the legislation should shift the burden back to the Commissioner where the taxpayer has adequate documentation. (Chartered Accountants Australia and New Zealand)

The onus of proof creates significant uncertainty as no guidance is provided on what level of documentation is required. Legislation should be introduced that allows taxpayers to prepare a defined level of documentation that would shift the burden of proof back to Inland Revenue and/or provide the taxpayer with penalty protection. (PwC)

Placing the burden on the taxpayer should not, of itself, give the Commissioner the right to assess where there is little or no information provided – unless she were to use the default assessment process (which is available to her under current law). (Corporate Taxpayers Group)

If a taxpayer has sufficient proof that a transaction is within a range that can be considered arm’s length, then Inland Revenue should not be able to tell a taxpayer that the transaction should have been completed at a different point within that range. (ASB, Corporate Taxpayers Group, Deloitte)

Comment

It is common practice for multinationals and Inland Revenue to access commercially available databases to identify comparable arm’s length transactions to support their analysis. In particular, Inland Revenue does not use taxpayer secret information that cannot be shared with taxpayers to support transfer pricing adjustments. We do not consider it is necessary to codify this practice in the legislation as New Zealand’s legislation already includes a requirement that it is applied consistently with the OECD transfer pricing Guidelines. These guidelines advise that such information should not be used by tax authorities when it cannot be provided to the taxpayer.

Inland Revenue’s administrative practice and the OECD transfer pricing Guidelines both acknowledge that there is a range of conditions that can be considered to be arm’s length conditions. In particular, the OECD guidelines state that “If the relevant condition of the controlled transaction (e.g. price or margin) is within the arm’s length range, no adjustment should be made.”

The OECD has recently issued extensive international guidance on transfer pricing documentation, which New Zealand endorses, and Inland Revenue has issued some short supplementary guidance as well.

In practice, the actual level of documentation required to demonstrate compliance with the transfer pricing rules will 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 considers that taxpayers are best-placed to exercise their own judgement and prepare documentation that manages their associated transfer pricing tax risks.

Officials do not agree that the legislation should shift the onus of proof back to the Commissioner in cases where the taxpayer has adequate or a prescribed level of documentation for their transfer pricing positions. Firstly, the existence of transfer pricing documentation does not in itself mean that Inland Revenue has been provided with copies of the relevant documentation on which to base its own assessment prior to the court proceedings.

Assuming that the onus would only shift in cases where adequate documentation had been filed or provided to Inland Revenue, there would still be subjectivity and disputes around what level of documentation was considered “adequate”. This is because the level of evidence and analysis required to be “adequate” will vary depending on the specific features of each particular transaction. Requiring a minimum standard of documentation could also lead to some taxpayers incurring additional compliance costs from preparing unnecessary detail for low-risk transactions whilst others may prepare inadequate documentation for higher risk transactions which require a higher standard of analysis and evidence.

Finally, the burden of proof remains on the taxpayer for all other tax issues, regardless of how much evidence they have provided to Inland Revenue to support their tax position.

Recommendation

That the submissions be declined.

Clause 36

Issue: Transfer pricing documentation requirements and timeframe

Submission

(Chartered Accountants Australia and New Zealand, Deloitte)

Inland Revenue’s apparent position that contemporaneous documentation is required to avoid penalties should be prescribed in the legislation. (Deloitte)

It would be useful for taxpayers if Government were to give guidance as to the timeframe required for preparation of transfer pricing documentation. If the timeframe is to be legislated this should be done in conjunction with appropriate reduction in penalties or a shift of the burden of proof where taxpayers have complied. (Chartered Accountants Australia and New Zealand)

Comment

Inland Revenue will generally 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.

This administrative practice was noted in the May 2017 discussion document. Officials do not consider it is necessary to codify this administrative practice in the legislation and note that including such rules in the legislation could disadvantage taxpayers by providing less flexibility for Inland Revenue to consider the taxpayer’s particular circumstances. Inland Revenue’s expectations for the timeframe by which transfer pricing documentation should be prepared will be further explained in the guidance materials on the transfer pricing rules.

Recommendation

That the submissions be declined.

Clauses 35 and 36

Issue: Guidance materials for transfer pricing documentation and investigations

Submissions

(Deloitte, EY, PwC)

There should be a legislative de minimis that would exempt smaller taxpayers from preparing documentation based on New Zealand revenue or the quantum of cross-border associated party transactions. (Deloitte)

Inland Revenue should develop and publish administrative practice statements to provide simplification safe harbours to reduce compliance costs on low-risk transactions. This could be similar to the transfer pricing guidance and safe harbours that the Australian Tax Office provides to taxpayers. (PwC, Deloitte)

Practical guidance should be developed and published to help taxpayers navigate the new rules, while providing a case for a reduced documentation threshold where certain criteria are met. This guidance must also clearly and unambiguously establish what the taxpayer is required to do to evidence eligibility for the simplified documentation option, and compliance with the arm’s length principle. (Deloitte)

Internal guidelines need to be put in place setting out what taxpayers can expect in an IRD transfer pricing audit, including the timing of various stages. These guidelines could be co-developed with practitioners. (EY)

IRD should provide robust guidelines covering:

  • The expectations for New Zealand companies to prepare transfer pricing documentation and various supporting documentation; and
  • Benchmarking searches and the use of comparability adjustments.

The Australian Tax Office has issued extensive guidance to taxpayers on various aspects of the transfer pricing rules in the form of taxation rulings and practice statement (EY)

Comment

New Zealand’s proposed transfer pricing legislation has been designed to align with the OECD’s 2017 transfer pricing guidelines and includes a new requirement that New Zealand’s legislation should be applied consistently with these Guidelines. The OECD Guidelines provide 600 pages of extensive guidance on how key aspects of transfer pricing should be applied by multinationals and tax authorities. The 2017 update to these guidelines includes some new guidance on what information should be included in taxpayer’s transfer pricing documentation.

To supplement the OECD guidelines, Inland Revenue publishes some short guidance on certain transfer pricing topics on its website (www.ird.govt.nz/transfer-pricing/transfer-pricing-index.html). This includes a topic on Inland Revenue’s expectations for transfer pricing documentation.

Officials agree that Inland Revenue’s transfer pricing specialists should work with their counterparts in the private sector to identify and prioritise the topics which would most benefit from additional guidance materials and to develop guidance on the agreed priority topics. These guidance materials could potentially include some further simplification de minimis or safe harbours to provide certainty and reduce compliance costs for low-risk transactions (such as some of the common transactions entered into by SMEs). In officials’ view such simplification measures are best provided through administrative statements (rather than legislation) as this provides more flexibility to update and add to the measures over time.

Inland Revenue already publishes some transfer pricing simplification de minimis to reduce taxpayer’s compliance costs. These provide a de minimis for related party services valued below $1m and an acceptable margin for pricing smaller related party loans of up to $10m of principal.

Inland Revenue’s transfer pricing team also welcomes taxpayers to contact them to discuss any specific transfer pricing arrangements they are seriously considering. If further certainty is required, an advance pricing agreement can be sought. In officials’ view, this tailored approach to assisting taxpayer compliance is more useful for taxpayers than preparing more general guidance materials that may have only limited relevance for their particular situation.

Recommendation

That the submission to include a legislative de minimis be declined, and the other submissions on Inland Revenue developing further guidance and administrative safe harbours be noted.

Issue: A consistency committee should be established within Inland Revenue

Submission

(Deloitte)

The new rules will be complex for both taxpayers and the Inland Revenue to get right. In particular, the transfer pricing changes are the biggest changes to transfer pricing since the regime was developed and we are concerned there will be inconsistent application of the rules between different investigators and principal advisors. We recommend that a “Consistency Committee” be established within Inland Revenue to ensure there is consistency in application of the new rules. In order to provide further guidance to taxpayers on how the transfer pricing provisions operate, the committee should be required to publish on a regular and confidential basis, the decisions in matters referred to it under escalation.

Comment

Officials do not consider a consistency committee is necessary as Inland Revenue’s team of Transfer pricing experts form a small team working closely together. This helps ensure the rules will be applied consistently.

Recommendation

That the submission be declined.

Clause 36

Issue: Extending the time bar for transfer pricing issues from four to seven years

Submissions

(Chapman Tripp, Corporate Taxpayers Group, EY, Russell McVeagh, PwC, Powerco, Chartered Accountants Australia and New Zealand, Corporate Taxpayers Group, KPMG)

The proposed extension of the time bar from four to seven years should not proceed. (ASB, Chapman Tripp, Corporate Taxpayers Group, Russell McVeagh, PwC, Powerco, KPMG)

The increased time bar will increase uncertainty, prolong disputes and disadvantage small to medium sized businesses. The introduction of the new administrative measures for large multinationals will be more than sufficient to address the policy reasons for the increased time bar. (PwC)

A longer time bar period is likely to exacerbate the expediency of transfer pricing audits. Lengthy audits are costly for taxpayers, create more uncertainty, and pose a greater risk for taxpayers where employees may have left the company. (EY)

There are significant costs involved in a transfer pricing dispute and extending the time bar to seven years will only increase these costs. (Corporate Taxpayers Group)

Only Australia and Canada have a four year / seven year time bar split; most other OECD nations have the same or a similar time bar for transfer pricing matters as for other tax matters. (Chartered Accountants Australia and New Zealand, KPMG)

The selection of seven years is an example of “cherry picking” the worst option as this is the longest time bar in a sample of other countries (excluding China who applies a 10 year time bar across all taxes, not just transfer pricing). (Corporate Taxpayers Group)

The concern that modern commercial arrangements are becoming increasingly complex can be addressed by increasing resource to investigate and deal with arrangements at the time they occur. (Chartered Accountants Australia and New Zealand)

In practical terms, it is often more difficult to investigate transactions once several years have passed. There will likely have been changes in taxpayer personnel and institutional knowledge will no longer be there. (Chartered Accountants Australia and New Zealand)

Increasing the time bar is inconsistent with the direction Inland Revenue is heading in its customer-centric approach. Inland Revenue’s compliance management approach for multinational enterprises has been to move to resolving any issues with commercial transactions in real time. The time bar has remained at four years but many taxpayers are now able to achieve practical certainty within one year. (Chartered Accountants Australia and New Zealand)

Transfer pricing arrangements are typically not one-off events (like many other tax disputes) and there will be an impact year after year. To have tax years open for seven years leaves taxpayers open to far too much risk and uncertainty. (Corporate Taxpayers Group)

Increasing the time bar puts New Zealand at risk of transfer pricing reassessments. In particular, other jurisdictions will have longer to claim a larger share of revenue which has been taxed in New Zealand. New Zealand businesses who find themselves subject to transfer pricing adjustments in New Zealand will not have the benefit of obtaining offsetting reassessments in the other jurisdiction if that country’s time bar period is shorter (Corporate Taxpayers Group, PwC)

If the time bar is extended it should be raised by one or two years and then only for taxpayers who repeatedly do not comply with Inland Revenue information requests or who mislead Inland Revenue in some way. For example, in the UK the four year time bar is extended to six years if the taxpayer has acted carelessly and in the US the three year time bar is extended to six where there are substantial omissions of income. (Corporate Taxpayers Group)

Any time bar extension should only arise where a taxpayer is being uncooperative and is put on notice of a possible extension and still fails to provide information in a timely way. (ASB)

The proposed extension is inconsistent with the need to provide certainty to taxpayers and unnecessary in light of the timely information gathering mechanisms at the disposal of Inland Revenue. (KPMG)

There are other complex tax arrangements for which an increase in the time bar is not proposed. (KPMG)

Comment

Officials consider there is a good justification for extending the time bar to seven years for transfer pricing issues.

The 2017 OECD Transfer Pricing Guidelines state that “Transfer Pricing cases are fact-intensive and may involve difficult evaluations of comparability, markets, and financial and industry information. Consequently, a number of tax administrations have examiners who specialise in transfer pricing, and transfer pricing examinations may take longer than other examinations and follow separate procedures.”

There are a number of reasons why transfer pricing issues can take more time to resolve than other types of tax investigations:

  • The factual review for transfer pricing cases is typically much more detailed than other tax issues and may involve discussions with numerous staff and the taxpayer, in addition to the usual review of legal documents etc. It may also involve wider industry interviews, e.g. with regulators, competitors, customers etc. to provide the necessary market context. The relevant documentation or information may be held outside New Zealand which can delay when this information is provided to Inland Revenue.
  • 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. This means there are effectively two parallel investigations – determining the facts of the actual related party transaction and identifying a comparable arm’s length arrangement.
  • Certain complex transactions require input from market experts typically based overseas. Vetting, engaging, and briefing an overseas expert takes time. Depending on the nature of the issues, the expert’s opinion may also take some time to prepare.
  • There is usually a range of possible answers in transfer pricing cases and this leads to more frequent and extensive discussions and negotiations throughout the process. Taxpayers generally wish to engage in discussions and negotiations (and exchange issues papers) prior to entering the disputes process. There are also often settlement discussions during the disputes process that can go on for many months at a time.
  • There may also be numerous and lengthy discussions with treaty partners in the course of a transfer pricing investigation to not only obtain additional information but also endeavour to resolve differences without double taxation arising.

Submitters have suggested that a longer time bar will create an incentive for Inland Revenue to prolong investigations and disputes. Officials disagree. Inland Revenue has strong incentives to efficiently resolve investigations as there is a high cost from allocating staff resource that could be better used on another investigation.

Furthermore, in many cases the delay may be due to the actions of the taxpayer, rather than Inland Revenue. Taxpayers may delay providing the information needed by Inland Revenue to make an assessment and often want more time to negotiate and exchange issues papers with Inland Revenue.

In fact, the current four year time bar can provide taxpayers with an incentive to not co-operate with an investigation. If the investigation is nearing the four year limit, Inland Revenue may need to abandon the investigation, or the taxpayer may be able to achieve significant tax savings by having fewer years that can be challenged by Inland Revenue. For some cases or income years there can be insufficient time to make an assessment and then go through the 18 month dispute process. This 18 month dispute process effectively means Inland Revenue only has 2.5 years (rather than 4 years) in which to obtain the information and expert advice needed to make an initial assessment.

New Zealand is adopting Article 17 of the multilateral instrument which will update our DTAs so that they require New Zealand to make corresponding adjustments in transfer pricing cases even if these are adjustments beyond New Zealand’s time bar. This means that if New Zealand has a shorter time bar than other countries, we could be disadvantaged as we would be required to provide tax relief under our treaties, but would not be able to make tax positive adjustments in respect of those same years. In particular, Australia has a seven year time bar for transfer pricing so New Zealand must provide up to seven years of tax relief to Australian businesses, whereas New Zealand can only currently go back four years when adjusting the transfer prices of taxpayers that owe tax to New Zealand. Our DTA with Australia provides that both countries are allowed to propose transfer pricing adjustments up to seven years after tax returns have been filed.

As shown in the table many other jurisdictions have a more than four year time-bar for transfer pricing assessments.

Time bars for other jurisdictions
Country Transfer pricing time bar Standard time bar for other tax matters
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

The proposed seven year time bar for transfer pricing is consistent with Inland Revenue’s customer-centric objectives as it does not preclude using other administrative measures such as the compliance management approach or advance pricing agreements to provide compliant taxpayers with certainty.

Two submitters suggested the extended time bar should only apply to those taxpayers who are not co-operating with the relevant Inland Revenue investigation. However, officials consider that this option is likely to lead to further disputes with these taxpayers as to whether their co-operation could be considered adequate or reasonable.

Many submitters have suggested that as an alternative to extending the time bar, Inland Revenue should look to better resource its transfer pricing team. Inland Revenue may need to recruit a larger team of transfer pricing specialists to investigate transfer pricing issues. However, officials do not agree that additional transfer pricing specialists would eliminate the need for a longer time bar. The longer time bar will only be necessary in a small number of complex cases. These cases require commissioning of overseas experts and multiple rounds of site visits, interviews and negotiations with taxpayers. These tasks are best performed by a small project team working in a logical sequence. Trying to use a larger team to simultaneously perform each task would be unlikely to shorten the overall time needed to resolve the dispute. Finally, it can be difficult for Inland Revenue to recruit or retain the relevant expertise as there is high global demand for transfer pricing experts.

Recommendation

That the submissions be declined.

Clause 36

Issue: Deadlines for investigation of transfer pricing matters and responding to Advance Pricing Agreement applications

Submissions

(PwC)

If the 7 year time bar is extended, legislation should be introduced to require Inland Revenue to conclude an audit within a certain timeframe.

Strict timeframes should be introduced for Inland Revenue to respond to Advance Pricing Agreement applications to ensure taxpayers can obtain certainty.

Comment

Currently, most transfer pricing investigations take less than four years and Inland Revenue expects this will continue under the proposed new rules. The longer time bar is therefore only expected to be relevant in a handful of complex cases. However, it is important to have more time available to identify, investigate and resolve these cases as they can involve very large sums of tax.

Inland Revenue aims to conclude unilateral Advance Pricing Agreements within 6 months. However, more time may be required to reach an agreement in some cases due to the uniqueness or complexity of the arrangement. For example, additional information or international expertise may need to be obtained to support the analysis. A strict deadline would likely lead to fewer Advance Pricing Agreements being agreed between Inland Revenue and taxpayers, particularly in complex or high-risk cases where concluding an Advance Pricing Agreement would provide the greatest benefits.

Recommendation

That the submissions be declined.

Clause 36

Issue: Seven year time bar should not apply to the restricted transfer pricing rules for related party debt

Submission

(Corporate Taxpayers Group, KPMG)

The restricted transfer pricing approach in section GC 15 – GC 18 is not a transfer pricing approach and therefore the seven year time bar should not apply to it. (Corporate Taxpayers Group)

The restricted transfer pricing rule is aimed at reducing the scope for disputes about loan pricing. This should mean less, not more time is required by Inland Revenue to challenge arrangements. (KPMG)

Comment

The restricted transfer pricing approach was included in the transfer pricing rules, rather than the thin capitalisation rules as was previously suggested, as it supports and adds onto the existing transfer pricing rules. Where the restricted transfer pricing rule applies this effectively modifies the facts of an arrangement before the standard transfer pricing rules are applied. Applying the same time bar for transfer pricing and restricted transfer pricing provides certainty to both taxpayers and the Commissioner as to how the time bar applies.

Applying a shorter time bar to restricted transfer pricing could result in an audit which included transfer pricing and non-transfer pricing adjustments changing whether a borrower was a high BEPS risk which would result in the restricted transfer pricing rules applying and a position that was previously well within time bar becoming time barred or being sufficiently close to time bar that assessments could not be raised. This could result in the perverse outcome that a higher risk multinational that was subject to the restricted transfer pricing rules for debt could only be audited by Inland Revenue on the last four years whereas a lower risk multinational that was subject to the general transfer pricing rules (for debt or other arrangements) could be audited on the last seven years.

Recommendation

That the submissions be declined.

Clause 36

Issue: Refund provision should match the proposed seven year time bar and drafting of the time bar

Submissions

If the statute bar is to be extended for transfer pricing matters, the refund rule in section RM 2 should also be extended to seven years for transfer pricing matters. (Corporate Taxpayers Group, EY, New Zealand Law Society, PwC)

Comment

Officials agree that the refund rule in section RM 2 should also be extended to seven years for transfer pricing matters.

Recommendation

That the submission be accepted.

Clause 36

Issue: Drafting of the transfer pricing time bar

Submissions

(EY, New Zealand Law Society, Corporate Taxpayers Group)

The terminology used in s GC 13(6) should be consistent with the terminology used in the time bar provision in s 108 of the Tax Administration Act 1994. For example, section 108(1) refers to “tax return” whereas s GC 13(6) refers to “return of income”. (EY, New Zealand Law Society)

It would be more appropriate to amend the time bar by amending section 108 of the Tax Administration Act 1994 (Corporate Taxpayers Group)

Comment

Officials agree that using consistent terminology is desirable. As currently drafted the transfer pricing time bar is in the same sections as the other transfer pricing rules. Officials consider this is the best place for the transfer pricing time bar but will consider if it would be useful to include a cross-reference in section 108 of the Tax Administration Act.

Recommendation

That the submissions be accepted, subject to officials’ comments.

Clause 36

Issue: Drafting structure of the transfer pricing rules

Submission

(Corporate Taxpayers Group)

The concepts of arm’s length conditions and reconstruction should be shifted from section GC 13 (which relates to the amount of consideration) to section GC 6 (which relates to the identifying transaction which is subject to the transfer pricing rules). (Corporate Taxpayers Group)

Comment

Section GC 6 is currently used to determine when the transfer pricing rules need to be applied. Officials do not consider it would be sensible to include in section GC 6 the concepts of arm’s length conditions and reconstruction as these provisions are about identifying the relevant economic conditions of the transaction.

However, it may be logical to re-order some of the provisions in the Bill, so that the provisions for identifying the relevant conditions of the transaction, precede the provisions for determining the arm’s length consideration. This ordering would align with the logical sequence for conducting a transfer pricing analysis and the order that these topics appear in the OECD transfer pricing guidelines.

Recommendation

That the submission be declined.

Clause 36

Issue: Redrafting of existing transfer pricing rules

Submission

(EY)

Sections GC 7 and GC 8 should be redrafted to clarify they are not limited to situations where there is an increased assessment of New Zealand tax.

Comment

The current Bill does not include any amendments to the existing transfer pricing rules in sections GC 7 and GC 8 as it was considered desirable to only change the existing legislation to the extent required to achieve the policy decisions (as opposed to a complete rewrite or replacement of the existing legislation). To respond to the submission would require new provisions to replace the existing sections GC 7 and GC 8. This would have significant policy and drafting implications that would be best considered and consulted on as part of a future taxation Bill.

Recommendation

That the submissions be declined.

COUNTRY-BY-COUNTRY REPORTS

Overview

One of the OECD’s BEPS recommendations was to require large multinational groups (those with annual consolidated group revenue of EUR €750m or more in the previous financial year) to provide a Country-by-Country report which contains certain high-level information on the groups’ global activities to tax authorities who would then exchange this information with each other.

Inland Revenue already requires New Zealand headquartered multinational groups with annual consolidated group revenue of EUR €750m or more in the previous financial year to file a Country-by-Country report using the IR 1032 prescribed form for all income years beginning on or after 1 January 2016. The Bill proposes inserting a specific provision in the Tax Administration Act which will codify the requirement for large multinationals to file a Country-by-Country report.

Submitters supported the proposal to codify these requirements. Because the information could be commercially sensitive, Chartered Accountants Australia and New Zealand wanted to ensure the information was protected by tax authorities. In contrast, Oxfam wanted to require multinationals to publish their information as they consider transparency and public scrutiny will provide incentives for multinationals to pay taxes. The Corporate Taxpayers Group submitted that the application date for the provision should be prospective and that existing processes continue to be used to obtain the information prior to the Bill’s enactment.

Clause 52

Issue: Protection of information provided in Country-by-Country reports

Submission

It is sensible and logical to codify the specific requirement. Some of the information provided through this process will be commercially sensitive. Government should share with affected companies its rules about when the information may be provided to other government departments or New Zealand organisations and when it may be provided to overseas agencies. (Chartered Accountants Australia and New Zealand)

Comment

The information provided through the Country-by-Country reports is subject to the general tax secrecy rules in the Tax Administration Act 1994. It will be shared with other tax authorities under the Multilateral Competent Authority Agreement on the Exchange of CbC Reports and through a bilateral agreement with the United States. These agreements require the information to be protected so it is only available to tax authorities.

Recommendation

That the submission be noted.

Clause 52

Issue: Publication of Country-by-Country reports

Submission

The legislation should require multinationals to publish their Country-by-Country reports (Oxfam).

Comment

Officials do not consider it appropriate to require multinationals to publish their Country-by-Country reports as:

  • The reports can contain commercially sensitive information.
  • The raw information can be easily misinterpreted. For example a multinational may have reported a low amount of tax paid in a country due to commercial reasons that are unrelated to BEPS such as costs related to a new investment or the use of tax losses from prior years.
  • Country-by-Country reporting is a multilateral measure and the multilateral agreement for sharing the information requires the information to be protected so it is only available to tax authorities. Any changes to this requirement would be best achieved through changes to this multilateral agreement.
  • New Zealand could only require New Zealand-headquartered large multinationals to publish their reports. This represents only about 20 of the approximately 6,000 large multinationals in the world so there would be only a small gain in overall transparency, but New Zealand-headquartered multinationals could be disadvantaged by revealing commercial information that their competitors do not need to reveal.

Recommendation

That the submission be declined.

Clause 52

Issue: Application date of Country-by-Country reports provision

Submission

It is inappropriate for a filing obligation to be retrospectively created, which will have the effect of making some taxpayers non-compliant. The provision should be prospective only, as this will not remove the obligation of notified taxpayers to file the Country-by-Country report for the relevant periods, as the notifications were made under Inland Revenue’s existing information gathering powers. (Corporate Taxpayers Group)

Comment

Officials agree that the proposed provision codifying the requirement to provide Country-by-Country reports should only apply from the date of enactment.

Inland Revenue will continue to use sections 17 (which allows the Commissioner to request information) and 35 (which allows the Commissioner to prescribe a form) of the Tax Administration Act 1994 to require Country-by-Country reports to be filed for periods prior to the date of enactment.

Recommendation

That the submission be accepted.

Clause 52

Issue: Drafting uses incorrect definition of “ultimate parent”

Submission

(Officials)

Comment

The current drafting in the Bill incorrectly refers to the definition of ultimate parent used in “subpart FE” which is is limited to banking groups. The reference to subpart FE should be removed to ensure that country-by-country reporting is not limited to banks.

Recommendation

That the submission be accepted.

Clause 43

Issue: Definition of large multinational group

Submission

(Corporate Taxpayers Group)

A NZD denominated threshold would provide greater certainty for New Zealand taxpayers, rather than having their Country-by-Country reporting obligations subject to foreign exchange fluctuations.

The threshold should be measured based on the consolidated group revenue earned in the preceding year, consistent with OECD Guidelines.

The Bill incorrectly references the threshold in paragraph 5.53 of the OECD Guidelines, this should be 5.52.

Comment

The requirement to file Country-by-Country reports, the application of the permanent establishment avoidance rule and most of the administrative measures in the Bill will only apply to large multinational groups. This is defined as a multinational group with annual consolidated revenues of more than €750m in the previous income year. This €750m threshold aligns with the OECD’s suggested threshold for requiring large multinationals to file Country-by-Country reports with tax authorities.

The EU has estimated that there may be up to 6,000 large multinationals groups with annual consolidated revenues of more than €750m. Only about 20 of these large multinational groups are headquartered in New Zealand and would already report their revenues in New Zealand dollars.

Furthermore, many of these New Zealand headquartered groups will have operations in European countries, in which case they would still need to consider if they are above the €750m threshold that applies for the purposes of some European tax laws.

For these reasons officials consider that that denominating the threshold in New Zealand dollars would not reduce the need to perform an exchange rate calculation, and would in fact lead to a greater number of multinationals needing to convert their reporting currency to consider if the rules are applicable.

The policy intention was that the definition of large multinational group would be measured using the consolidated group revenue from the preceding year, consistent with OECD Guidelines. Officials will ensure that the drafting achieves this.

The reference to paragraph 5.53 in the Bill is correct. The €750m threshold is stated in both paragraphs 5.52 and 5.53, although 5.52 also includes a reference to an equivalent amount in local currency.

Recommendation

That the submission to use the preceding year to measure consolidated group revenue be accepted, and the other submissions be declined.