Skip to main navigation

2009 Global Transfer Pricing survey - New Zealand - EY - Global

2009 Global Transfer Pricing surveyNew Zealand - survey findings

Resources the taxing authority is devoting to transfer pricing

The Inland Revenue Department (IRD) administers taxes in New Zealand. Within the IRD, transfer pricing reviews are carried out by a centralized unit which acts as an advisor and provides assistance to the general IRD field audit operations. There has been an increase in the number of FTE resources involved in transfer pricing examinations, from approximately three and a half to five and a half over the last two years. This number is not expected to change over the next two years.

In terms of background, the transfer pricing resources of the IRD consist of one economist, while the other resources are accountants. All of these resources are specialists in transfer pricing.

Industry focus

New Zealand transfer pricing audits currently focus on the automotive, banking and capital markets, insurance, oil and gas, pharmaceuticals, technology, and telecommunication industries. Significant business activity in New Zealand, the importance of IP to the industry, and the predominance of foreign MNEs in that industry are the factors driving the selection of industries for particular focus.

The selection of industries currently under specific focus from a transfer pricing perspective is widely communicated to taxpayers. This list of industries is reviewed annually.

Geographic focus

The IRD does not target companies in certain jurisdictions for transfer pricing reviews.

In the current case load of transfer pricing reviews, the top five most prevalent jurisdictions of the relevant counterparties are:

  • Australia
  • The United States
  • The United Kingdom
  • Japan
  • Germany

Types of transactions under scrutiny

IP transactions and financial transactions are currently the focus of the IRD for transfer pricing review. Key transactions that make up the current caseload of transfer pricing reviews (ranked in order of prevalence) are:

  • IP-related transactions (e.g., royalties, licensing)
  • Financial transactions (e.g., loans, other debt instruments)
  • Intra-group services
  • Tangible goods
  • Cost sharing/cost pooling arrangements (although fairly uncommon in New Zealand)

Transfer pricing penalties

New Zealand does not have a specific transfer pricing penalty regime; the general penalty regime is applied. A consistency committee looks at the imposition of penalties across all tax types. Over the last two years, penalties were applied in up to 25% of cases where transfer pricing adjustments were issued. Where penalties were imposed, they generally ranged up to 20% of the transfer pricing adjustment — the average shortfall penalty rate applied for lack of reasonable care or an unacceptable tax position. The rate is reduced to 10% for a first offense. It is not anticipated that this approach to penalties will change in the next two years.

Audit triggers

Transfer pricing audits are instigated through a general audit, where transfer pricing questionnaires are sent to clients. The central Transfer Pricing Unit has input into the process. A variety of considerations are taken into account in determining which taxpayers to audit, including (ranked in order of prevalence):

  • The outcome of a risk-based assessment by the IRD
  • The profitability of the local taxpayer
  • Whether there is evidence of business restructurings
  • The volume of related-party transactions undertaken by the taxpayer
  • The nature of related-party transactions
  • A standard audit cycle or program
  • Previous tax audits of the taxpayer

Indirect and customs tax

The transfer pricing enforcement resources do not work in an integrated way with indirect tax specialists. However, the IRD has a close relationship with Customs. The IRD can ask Customs for information. Despite the exchange of information, there is no formal requirement that the same transfer price be used for corporate (direct) tax and indirect tax purposes.

Comparable data

The IRD has no strict requirement for local comparables. The data that is considered as the best comparable and exhibits the closest key economic characteristics is used. However, since the markets in New Zealand and Australia are considered to be similar, comparables from these locations are preferred. The IRD prefers comparables from the United States or the United Kingdom over comparables based on Asian companies. The IRD factors a risk margin (1% to 3%) into transfer pricing studies that rely wholly on overseas comparables, as New Zealand is a relatively small market. The IRD gives recognition to economies of scale, competition, higher cost of capital and higher distribution costs in New Zealand, when using US or European comparables.

In preparing and presenting comparable data, there are no strict requirements, and each case is evaluated on the basis of its own circumstances.

The IRD expects three to five years of financial data and emphasizes creating a reliable comparable set without strictly prescribing any particular acceptable points within a range. In terms of PLIs, the IRD generally accepts weighted averages and often uses the EBIT margin, Berry ratio, and other relevant PLIs.

The IRD views adjustments with some skepticism. With regard to working capital adjustments, the IRD considers that the complex algebra is “generally not worth the trouble as the resulting adjustments are very minor.” The IRD places greater emphasis on identifying if and why there are significant deviations between the working capital levels of the taxpayer and the suggested comparables, rather than prescribing standard adjustments.

Transfer pricing methods

There is no formal hierarchy between transfer pricing methods. Local legislation supports five methods (CUP, resale price, cost plus, profit split and CPM). The CPM is considered of no practical difference to the TNMM, and profit split includes full profit split or residual profit split. The IRD will, in practice, consider any method that provides the most reliable solution. Two interesting points of note in relation to transfer pricing methods in New Zealand are:

  1. The IRD does sanction cost contribution and cost sharing methods.
  2. The IRD has a practice note that talks of a rule of thumb for royalties being no more than 25% of EBITR.

Advance Pricing Agreements (APAs)

New Zealand has a formal APA program. A unilateral APA is obtained through the binding rulings process that prescribes certain general formalities as to applications. The IRD receives five to seven applications per year. The IRD has given open access to the APA program for taxpayers. There are five applications currently in process for the APA program, out of which three applications are for bilateral APAs and two applications are for unilateral APAs. The top two countries involved for bilateral APAs are Australia and the United States. It generally takes six to twelve months to complete an APA process. Approximately three competent authority cases are resolved annually, and it takes six months on an average to resolve these cases. There is currently one competent authority case unresolved.

Yield/performance of transfer pricing reviews

The IRD measures the effectiveness of transfer pricing review activities by coverage of the taxpayer base, particularly at the large enterprise level. It looks at how effectively it is monitoring transfer pricing policies and results on the taxpayer base. The IRD seeks to review all large taxpayers periodically as part of an ongoing review process.

Transfer pricing disputes

In the context of disputes, there is one ongoing case and one pending case in domestic appeals (preceding court action). No transfer pricing-specific case has proceeded to be heard by courts in New Zealand as yet.

Likely trends in transfer pricing activity

The IRD has stated their three areas of future focus to be:

  1. Arrangements which look to import losses into New Zealand, generally ensuring that loss-making companies justify their performance (i.e., that it is not as a result of pricing policies)
  2. Companies looking to take advantage of undue volatility of spreads in credit markets
  3. Adventurous pricing of hybrid debt instruments, such as mandatory convertible notes

In addition to these areas, the IRD will focus on intangibles, business restructurings and financial arrangements.


EY contact

Back to top