New Zealand transfer pricing update – spring 2024

By Bart de Gouw, Liam O'Brien, Tayla Wheeler & Cristy Yun

Spring is here, the weather is warming up (or is supposed to be, at least) and so is New Zealand's transfer pricing landscape.

Inland Revenue is gearing up for renewed engagement with taxpayers, Country-by-Country Reports (CbC) are receiving increased attention, small value loan guidance has been updated, the Australian landscape and its impact on New Zealand taxpayers continues to evolve, and as the OECD Pillar One negotiations continue to stutter could New Zealand progress its digital services tax (DST)?

This article summarises key developments that have occurred over the New Zealand winter – the key message here being that the transfer pricing world is not standing still and New Zealand taxpayers should continue to monitor the developments and the potential impact they might have on their businesses.

Additional Inland Revenue transfer pricing resources

As flagged in our August 2024 Tax Alert, the additional Inland Revenue funding for “investment in compliance activities” in Budget 2024 should leave taxpayers and their advisors with little doubt that Inland Revenue is going to become considerably more active in reviewing and auditing taxpayers.

As part of this Inland Revenue has added additional resources to its specialist transfer pricing team. In June 2024, Inland Revenue announced the appointment of four new transfer pricing case leads and is also currently recruiting for another Technical Specialist, to join the existing two Technical Specialists. The inference is that Inland Revenue is clearly gearing up for renewed and increasing engagement with taxpayers. The glass half full view of this additional resourcing in Inland Revenue is that taxpayers can expect existing cases to move towards resolution faster. The glass half empty view is that taxpayers can expect further scrutiny of their transfer pricing arrangements by Inland Revenue and New Zealand taxpayers should be proactively preparing for this additional scrutiny.

Country-by-Country Reports – compliance penalty

A recent change that has flown under the radar relates to revisions to the Tax Administration Act 1994, which have tightened the compliance framework regarding filing of CbC Reports in New Zealand. New Zealand-domiciled large multinational enterprises (i.e., over EUR750 million revenue) (MNEs) must, for income years commencing after 1 January 2025, ensure their CbC Reports are electronically filed in the prescribed electronic format within twelve months after the end of the relevant financial reporting period. Failure to comply means the report may be considered to be not filed or filed late. Higher penalties of up to NZD 100,000 may also be imposed on New Zealand headquartered MNEs for non-compliance with these new requirements.

Inland Revenue is not alone in taking greater interest in the content and format of the CbC Report, given the roll out of the Pillar Two rules globally. The content of a MNE Group’s CbC Report will form the basis for the transitional safe harbour calculations under Pillar Two. Therefore, the objective of the CbC Report has expanded from originally being for ‘high-level transfer pricing risk assessment purposes’ to potentially impacting the amount of tax paid in a particular jurisdiction (i.e., under the Pillar Two Rules).

It is therefore essential for in-scope MNE Group to review their CbC Report preparation processes, to ensure adherence with the Pillar Two transitional safe harbour rules and the new New Zealand legislative requirement.

Guidance for small value loans

On 18 July 2024, Inland Revenue published guidance for small-value loans (cross-border associated party loans by groups of companies for up to NZD 10 million principal in total). Inland Revenue considers that 175 basis points (1.75%) over the relevant base indicator is broadly indicative of an arm’s length rate in the absence of a readily available market rate for a debt instrument with similar terms and risk characteristics.

It is important that taxpayers consider if there are any readily available market rates for loans within the group before applying the guidance. Similarly, the ATO has also published guidance and the interaction of these with the New Zealand guidance should be considered by taxpayers before locking in an interest rate.

Australian transfer pricing developments (PepsiCo and TR 2024/D1)

Regular readers of Deloitte’s Tax Alerts will have noted our previous articles regarding Australia’s PepsiCo case and the Australian Taxation Office (ATO) draft taxation ruling ‘TR 2024/D1’ and the potential impact of these on New Zealand businesses (see Same old Aussies, always taxing (March 2024) and Australia’s PepsiCo case. What does it mean for New Zealand? (July 2024)).

On 9 August 2024 the ATO released a statement stating that it has applied for special leave to appeal to the High Court of Australia in respect of the decision of the Full Federal Court in the PepsiCo case. The ATO statement also noted that it will defer finalising TR 2024/D1 (Income tax: royalties – character of payments in respect of software and intellectual property rights) pending the outcome of the High Court proceedings in PepsiCo, but has indicated that the view in the draft ruling remains the ATO’s considered view in relation to software arrangements. Of note is that the ATO is progressing the development of practical guidance on how TR 2024/D1 may affect taxpayers, and draft guidance is expected to be released late 2024 for public consultation.

OECD Pillar One and impact on potential NZ digital services tax

In October 2021, the OECD/G20 Inclusive Framework on Base Erosion and Profit Shifting (Inclusive Framework) agreed to the ‘Statement on a Two-Pillar Solution to Address the Tax Challenges Arising from the Digitalisation of the Economy’. As part of that statement, in respect of Pillar One, the Inclusive Framework agreed that no newly enacted DSTs or other relevant similar measures will be imposed on any company from 8 October 2021 and until the earlier of 31 December 2023 or the coming into force of the Multilateral Convention. This deadline was subsequently extended to 30 June 2024.

The extended deadline of 30 June 2024 for the Inclusive Framework to achieve consensus on Pillar One has been and gone without agreement. Due to the lack of global consensus, DSTs are back on the agenda in many jurisdictions, with Canada authorising the implementation of a DST as at 28 June 2024 with retrospective effect to 1 January 2022.

As flagged in our earlier article on this issue (Digital Services Tax (June 2024)), the continued lack of consensus on Pillar One between the Inclusive Framework means that the proposed New Zealand DST moves closer to becoming a reality.

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