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How confident are you in your transfer pricing?

Tax Alert - September 2021

By Bart de Gouw, Will Dawson and Celia Brownlee


Transfer pricing - a new legislative landscape

Inland Revenue have high expectations in relation to transfer pricing and evidencing that transactions have been undertaken at arm’s length. Even diligent taxpayers could get tripped up by underestimating the level of work or support required. In recent years, we have seen an increasing level of focus from Inland Revenue on taxpayers’ cross border related party transactions. Neglecting your business’s transfer pricing policies and documentation carries significant risk.

Inland Revenue’s powers to investigate and adjust/reassess transfer prices have been enhanced. In addition to the burden of proof now being on the taxpayer to evidence transactions have been undertaken at arm’s length, Inland Revenue’s powers include:

  • the ability to request information held anywhere within a “large multinational group” from a New Zealand entity in the group, which can be enforced against the local taxpayer;
  • requiring New Zealand taxpayers to provide information held by offshore entities they control, regardless of whether they are part of a large multinational group;
  • an extended time bar of 7 years for transfer pricing matters; and
  • requesting information or documents for a purpose relating to the 7development of policy for the improvement or reform of the tax system.

These powers mean a greater ability to scrutinise taxpayers’ transfer pricing matters either individually, or at an aggregate level for policy development or targeted enforcement campaigns.

Another significant change to the legislative landscape is the adoption of the OECD Transfers Pricing Guidelines into domestic legislation, meaning a greater focus on economic analysis. For example, applying economic analysis of the cross border related party transactions to price the transactions based on the substance/actual conduct over just the legal form, where these differ.

Given the increased scrutiny and focus from Inland Revenue in respect of taxpayers’ transfer pricing matters, it is now more important than ever before to demonstrate that cross border associated party transactions are transacted at an arm’s length value (as determined by applying one or more of the methods prescribed in New Zealand legislation).

Taxpayers should have in place intercompany agreements that reflect the economic benefits conferred between group entities. The pricing of the transactions should be consistent with what is determined by applying the relevant prescribed method(s) and accounted for appropriately. Implementation should be reviewed regularly to sense check that the policy is resulting in the intended outcome and that the substance of the arrangement still aligns with the legal form. Depending on the characterisation of the transaction, consideration should also be given to other tax consequences, such as withholding tax and indirect taxes. Significant complexity can arise where there is a divergence between the conduct of the parties and the legal form of the arrangement both in pricing the transactions but also in how these are accounted for and the consequential tax impacts.

In addition, documentation should be prepared annually with benchmarking updated regularly (the OECD guidelines state a renewal of benchmarking every three years with an update annually). Any economic or other circumstances that impact upon the transactions or pricing should be identified and addressed in the transfer pricing documentation prepared.

While there is no explicit statutory requirement to prepare or file New Zealand transfer pricing documentation, as the burden of proof is on the taxpayer, documentation is (in effect) required. If Inland Revenue challenges a transfer price and documentation has not been prepared, or is inadequate, then the taxpayer will be at a significant risk of being reassessed for increased assessable income and/or loss of deductions being sustained.

Not preparing adequate documentation also exposes taxpayers to loss of penalty protection. This means that a reassessment could lead to tax shortfall penalties in addition to a tax shortfall payable.

Inland Revenue has stated that:

“A failure to prepare adequate transfer pricing documentation or acceptance of pricing that is clearly inappropriate could result in a 40% shortfall penalty for gross carelessness if apparent problems involving material associated party transactions are simply brushed over lightly or even ignored.”

It is common for New Zealand members of global groups to leverage transfer pricing documentation prepared by their overseas head office. However, care should be taken to ensure that any group policy and documentation will be sufficient for New Zealand tax purposes. The following is a non-exhaustive list of things to consider when leveraging documentation prepared by an overseas head office.

  • Does the documentation cover all the relevant New Zealand transactions?
  • Do global policies make sense when applied in a New Zealand context and have these been implemented as intended?
  • Have the transactions been accurately delineated (i.e. characterised by what they are in substance)?
  • Are there arrangements involving the New Zealand entity and third parties that may be used in evidencing an arm’s length amount for associated party transactions? Often these would not be considered in group documentation.
  • Is your benchmarking current?
  • Is your benchmarking appropriate for a New Zealand market (where relevant)?
  • Have you explained the impacts of COVID-19 and any resulting transfer pricing adjustments?
  • Have New Zealand specific rules been considered? For example, the Restricted Transfer Pricing rules.

If the answer to any of the above is no, further support may be required.

Caution should also be taken when implementing group transfer pricing policies. Taxpayers should consider whether the outcome of the policies is arm’s length from a New Zealand perspective in all the circumstances. This should include considering the overall profitability of the New Zealand entity.

In addition to the legislative changes mentioned above, we note that Inland Revenue has adopted a multinational compliance focus. Inland Revenue are actively seeking to obtain greater transparency over the tax affairs of multinational groups. This includes sending significant multinational enterprises annual questionnaires and using the data from those questionnaires to assess tax risks. Inland Revenue does not publish the threshold criteria for receiving these questionnaires, but it appears to be linked to New Zealand subsidiaries of multinational groups with revenue in excess of NZD 30 million. These questionnaires will assess risk against nine transfer pricing risk areas identified in the 2019 Multinational Enterprises Compliance Focus document.

The questionnaires we have seen issued so far are set out in the following table.
The questionnaires we have seen issued so far are set out in the following table.



Basic Compliance Package

Involves the provision of Group structure, financial statements and tax calculation. This will subject to a closer specialist review compared to the tax return.

International Questionnaire

This is a generalist questionnaire aimed at capturing financial, thin capitalisation and transfer pricing information and feeds into Inland Revenues risk assessments.

Loss Makers Questionnaire

Focuses on transfer pricing policies of entities in sustained loss positions.

Distributors Questionnaire

Focuses on transfer pricing policies of distributor and wholesaler entities.

Financing Questionnaire

Focuses on transfer pricing policies in relation to financing transactions in multinational groups. This questionnaire requests both intercompany agreements and transfer pricing documentation that covers the financing transactions.

Royalties Questionnaire

Focuses on transfer pricing policies associated with royalty transactions.

Wage Subsidy and Transfer Pricing Questionnaire

Inland Revenue’s expectation is that where the Wage Subsidy was received by a multinational operating in New Zealand, the benefit of that subsidy should generally be retained by that entity. This questionnaire is designed to help understand how the Wage Subsidy has been treated from a transfer pricing perspective. 



Given the inherit uncertainty in determining an arm’s length price it is vital that taxpayers adopt a high level of care to transfer pricing to ensure that tax positions are as protected as possible from challenge. Taxpayers that adopt a light touch approach will be doing themselves a disservice and could receive a large and unexpected tax bill should Inland Revenue come knocking, as well as unexpected costs of a detailed transfer pricing and tax audit.

If you have any questions about your transfer pricing policies and preparation of appropriate supporting documentation, please contact your usual Deloitte tax advisor.


September 2021 Tax Alert

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