66% of all respondents had a thin cap ratio (or New Zealand debt percentage) of 20% or less and only 8% recorded a ratio above 60%. This indicates that a thin cap ratio close to the 60% mark may be perceived as being at the aggressive end of the range as it appears that most New Zealand entities in the sample have relatively low levels of debt. Also of relevance is the application of the Restricted Transfer Pricing rules which apply to inbound debt and can be triggered by a thin cap level of 40%.

The USA, Japan and Australia continue to be the countries with the highest ultimate ownership of foreign-owned New Zealand companies. USA leads this category with 22% of New Zealand companies headquartered there.

An interesting trend is that ultimate ownership out of Australia is declining with 20% in 2017, 18% in 2019 and now only 16% in 2021. At the same time, we are also seeing more ownership out of Japan with 10% recorded to have Japanese head offices. Ultimate ownership out of China remains under the radar, although over time it is expected to increase. The location of both the direct and ultimate ownership of the NZ companies is important when considering the application of tax treaties for intercompany transactions.

The transactional net margin method (TNMM) remains the primary method (40%) used in setting transfer prices with the use of appropriate benchmarking studies becoming increasingly important. The use of the profit split method remains low at 3%.

As mentioned above, the data collected through the International Questionnaire could shape Inland Revenue’s view of “normal” and in this case, transfer pricing methods not commonly used in practice (in New Zealand and OECD member states) would naturally be under more scrutiny by Inland Revenue. It is important the transfer pricing method that is the most appropriate for the taxpayer’s facts and circumstances is applied and analysis is documented in support of the same. Any company not using a TNMM would be wise to review its transfer pricing documentation to ensure that it can defend the use of the alternative approach that has been taken. In many cases, an alternative method is a better method than the TNMM, so it is often a matter of documenting support for that.

Although no summary was given in 2021, based on the 2017 statistic that 67% of groups participated in country-by-country reporting (CbCR), it is considered this trend would continue.

Through the relevant information-sharing platforms, Inland Revenue holds a lot more information about taxpayers which they have made clear they would use for risk assessments. The ability to identify New Zealand outliers in global Group-wide data makes this a powerful platform for Inland Revenue to leverage.

Today a revenue authority questionnaire would not be complete without COVID-19 specific questions and the 2021 International Questionnaire recorded responses to such questions.

24% of Group entities indicated that COVID-19 impacted their financial performance during the year. Only 5 Groups (1%) experienced material changes to their transfer pricing due to COVID-19. Whether your transfer pricing model has changed or your profit margins were squeezed as a result of COVID-19 or any other relevant commercial factor, it is important the appropriate level of transfer pricing documentation is in place to support the positions taken in New Zealand. Not mentioned by the Inland Revenue in the questionnaire results is their particular focus on the interaction of wage subsidies and transfer pricing.

Inland Revenue added additional questions to the 2021 International Questionnaire, one of which required the taxpayer to disclose whether its cross-border associated party supplies (to or from) exceed 20% of gross revenue. Inland Revenue asked similar questions in its recent transfer pricing campaigns and went so far as to immediately ask for the transfer pricing documentation to be provided.

It is our understanding that Inland Revenue will continue to ask for relevant supporting documentation to support transfer pricing positions taken and therefore if you exceed the 20% threshold and have no defence documentation in place (i.e., more than just legal agreements / transfer pricing policies) or have been significantly impacted by / changed your cross-border associated party arrangements as a result of COVID-19 (or any other commercial factor), get in touch with your Deloitte advisor and the specialist transfer pricing team.

Inland Revenue has confirmed that these questionnaires remain a key part of its annual risk assessment process and the intelligence from the analysis continues to inform key policy and operational decisions, particularly if you are operating away from the so-called norm or perceived norm.

If you would like to discuss any of the above in more detail, please contact your usual Deloitte advisor.