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Inland Revenue’s compliance focus document for multinationals refreshed

October 2024 - Tax Alert

By Robyn Walker & Viola Trnksi

Inland Revenue has refreshed its Compliance Focus Document for Multinational Enterprises (“Document”).

Although the Document is targeted at multinational enterprises (MNEs), it will also have relevance for New Zealand-based enterprises expanding offshore and high-wealth individuals with complex affairs.

The Document was last updated in 2019, incorporating Base Erosion and Profit Shifting (BEPS) changes. This time around, the Commissioner acknowledges the impact of the global pandemic and Inland Revenue’s business transformation program, which has modernised the Inland Revenue’s services and increased analytical capabilities.

“Through our transformation programme we have also gained a wide suite of sophisticated analytical capabilities which enable us to work more in real-time and to be intelligence-led. These new capabilities coupled with human intelligence allow us to design and deploy effective compliance campaigns, with multi-faceted tailored interventions. This ability to target our interventions to the right customers means we should only be in the lives of those customers who are deserving of further inquiries and interventions.”

To read between the lines... Inland Revenue are back! In the broader context of increased audit activity, the Document serves as an excellent and timely reminder for MNEs to make sure their tax affairs are in order, including robust documentation and processes as well as an effective tax control framework.

The Document reinforces Inland Revenue’s “right from the start” approach, to collect the right amount of tax, at the right time, through the right channels. Inland Revenue is continuing to focus on prevention in the MNE landscape, which means prioritising their work based on tax risk and materiality and being pragmatic and proportionate in reaching solutions to problems.

The scene is set with an overview of New Zealand’s tax take and the last five years (since the last iteration of this Document was published) before detailing Inland Revenue’s compliance framework and outlining our international obligations, New Zealand’s international tax strategy, and the role of the Competent Authority.

There is also a summary of the results of last 10 years of international questionnaires completed by MNEs.

The Document is substantiated with discussion on 10 “key factors” that influence MNE compliance:

  1. Strengthening legislation
  2. Increasing tax transparency
  3. Improving corporate tax governance
  4. Providing practical guidance / increasing certainty
  5. Reducing compliance costs
  6. Enhancing intelligence and analytics
  7. Extensive monitoring and targeted enforcement (including audits and litigation)
  8. Expediting resolution of international tax disputes
  9. Building international tax capacity
  10. Expanding the tax treaty network

These 10 pillars reflect how Inland Revenue supports MNE compliance, while also setting expectations for MNEs around best practice for their tax affairs.

The Document also includes a number of helpful graphics and checklists, such as calculating top-up tax payable under the Pillar Two rules, a tax governance checklist and maturity model, a return of risk indicators which may prompt Inland Revenue to ask for additional information (including a new risk indicator around cross-border associated party transactions), Top 10 BEPS Risks, a Tax Risk Barometer, and specific Transfer Pricing tax governance questions.

Areas of focus

There are a number of issues on Inland Revenue’s radar. Some of the key focus areas, according to the Document, are outlined below.

For inbound MNEs

Inland Revenue will continue monitoring inbound MNEs (i.e., overseas headquartered with operations in New Zealand) via the International Questionnaire. It is currently issued to just over 800 foreign-owned MNEs with an annual turnover of more than NZD$30 million. This information is enhanced with CbC reports, summaries of cross-border tax rulings, and information from the Overseas Investment Office and New Zealand Customs.

Based on the intelligence gathered, Inland Revenue then develops campaigns based around specific issues and sector risks. This involves further in-depth reviews of certain MNEs which, in some cases, may lead to an audit.

The introduction of anti-BEPS measures has reduced some of the more aggressive tax arrangements, such as high levels of debt financing, favourable terms and conditions for loan agreements with associated parties, and the use of hybrid instruments and hybrid and branch mismatch arrangements. However, Inland Revenue will continue to monitor for these risks as well as compare aggregated and “average” data from other MNEs completing the International Questionnaire and doing business in New Zealand to identify any significant outliers. Continued BEPS risks include the avoidance of PE status, inappropriate apportionment of branch profits, mispricing debt instruments, circumventing withholding taxes, excessive interest deductions, profit stropping, and misuse of low and no tax jurisdictions.

Inland Revenue has outlined the focus areas of their BEPS campaigns to date, which include a focus on distributors and wholesalers, financing, and the Covid-19 wage subsidy.

For outbound MNEs (i.e., New Zealand headquartered MNEs with overseas operations)

New Zealand headquartered MNEs do not receive the International Questionnaire, however, Inland Revenue will continue to monitor transactions and financing arrangements, including through CbC reports. Inland Revenue will also look to support New Zealand outbound MNEs who are required to comply with Pillar Two requirements with the Domestic Income Inclusion Rule.

Areas all MNEs should focus on

There are a range of areas that all MNEs should ensure they address. These include transfer pricing and corporate tax governance and documentation, performance benchmarking, global mobility and permanent establishment issues, intangibles, cross-border related party transactions, and tax accounting.

Inland Revenue’s intelligence, analytics, and risk framework

An interesting addition to the Document is the section on “Enhancing intelligence and analytics” which outlines Inland Revenue’s key sources of intelligence and how risk is assigned and managed in an MNE context. The following diagrams are taken from the Document.

Takeaway

This refresh of the Document should put MNEs on notice that Inland Revenue is maintaining a focus on large corporations and cross-border activity, including transactions and financial arrangements.

More broadly, the Document serves as a helpful tool that summarises a range of important resources and issues in a user-friendly way. MNEs doing business in New Zealand should keep this Document handy for reference, and outbound companies will also find the updated Document useful for navigating the new Pillar Two rules and other changes coming up, as well as learning about the focus areas for Inland Revenue going forward, and what their expectations are around governance and documentation.

If you have any questions about the Document, the ever-changing international tax landscape, or how to strengthen your MNEs tax governance framework, please reach out to your usual Deloitte advisor.

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