Transfer pricing insights from Inland Revenue’s updated Multinational Enterprises Compliance Focus

Inland Revenue has bolstered the legislative landscape for MNEs operating in New Zealand over the past five years, adopting fundamental anti-base erosion and profit shifting (BEPS) measures including revised transfer pricing rules and the introduction of the restricted transfer pricing (or interest limitations) rule.

More recently the focus has been on the introduction of the 15% Global Minimum Effective Tax rate rules (referred to as Pillar Two) which will come into effect in New Zealand from 1 January 2025. This commitment to the Pillar Two rules reinforces the importance of getting transfer pricing positions right from the start. The Pillar Two rules effectively assume the underlying transfer pricing position is correct when assessing the effective tax rate position. As such, transfer pricing errors can lead to more complicated calculations and potential double tax under the Pillar Two rules.

Inland Revenue has ramped up its information exchange capabilities with other tax authorities around the world. New Zealand is a net importer of Country-by-Country Reports (CbCR), having received information on over 1,500 MNEs operating in New Zealand. 

The rich information in these CbCRs has strengthened Inland Revenue’s risk assessment capabilities, allowing them to better understand each MNEs New Zealand transfer pricing positions in the context of their wider groups and overall supply chain profitability.  Inland Revenue has noted that due to New Zealand’s geographic isolation, MNEs could be expected to return higher operating margins in New Zealand relative to other markets, reflecting reduced competition or increased functional intensity of local operations.   

Alongside recent questionnaires and campaigns, Inland Revenue has used the MCF 2024 to reiterate the importance of MNEs having established tax governance practices. Inland Revenue noted at the MCF 2024 launch that tax governance should represent a key priority of MNEs. The published Transfer Pricing Tax Governance Questions and ‘Tax Risk Barometer’ can be used to perform a ‘current state’ self-assessment. 

The key takeaway is that transfer pricing policies and supporting documentation must be customised to New Zealand circumstances, with local management fully involved in the process and responsible for signing off the final outcomes.  Inland Revenue has emphasised that the adequacy of MNEs’ tax governance directly impacts their risk ratings and potential penalties (in the event a transfer pricing adjustment is imposed).

Advanced Pricing Agreements (APAs) continue to provide a proactive and robust approach to achieving transfer pricing certainty, with Inland Revenue finalising 21 APAs in the year to 30 June 2024.  The MFC promotes the use of APAs and in an environment where Inland Revenue is focused on increasing levels of audit activity, an APA can represent a more cooperative solution to achieving transfer pricing compliance.

In the interest of proportionality and striking a balance in managing and identifying transfer pricing risks, Inland Revenue will continue to adopt its established transfer pricing simplification measures. Inland Revenue has also slightly refreshed the key risk indicators it encourages MNEs to use to self-assess transfer pricing risk.  

If one or more of the below risk indicators is triggered, don’t be surprised if Inland Revenue asks you for additional information. 

“You Do The Math”

Draw a high-level risk picture by using the following simple checklist. If any one (or more) of the risk indicators listed below is present then don’t be surprised if we ask you for additional information.

Over the past five years since the last MCF, Inland Revenue has run (and continues to run) targeted BEPS campaigns focused on particular sectors and issues which have informed their assessment of key risk areas for New Zealand operations of MNEs.

The key insights from these campaigns are broadly focused on the importance of MNEs applying a local lens and carefully considering the nuances of the New Zealand market. This goes hand in hand with Inland Revenue expectations around New Zealand specific transfer pricing documentation and more localised Australasian benchmarking data (instead of relying on wider regional benchmarking).

Alongside an increase in the use of resources for audit activity flagged at the time of the Budget 2024 announcement, Inland Revenue has also identified an increased number of Mutual Agreement Procedure (MAP) activity in the years, up from 13 in 2021 to 26 in 2022, and 24 in 2023.  Inland Revenue has been increasing its level of resources and internal capabilities in the lead up to greater audit activity both domestically and internationally.