By Young Jin Kim & Bart de Gouw
It is widely accepted that cross-border related-party debt can be used by multinational enterprises (MNEs) to shift profits out of a country. In the New Zealand context this led to the introduction of the Restricted Transfer Pricing (RTP) rules and the requirement to disclose inbound cross-border intercompany loans with a value of more than NZD10M to Inland Revenue in the BEPS Disclosure Form (this disclosure requirement has since been amended effective from the 2025 income year with taxpayers just required to hold a copy of the necessary information).
In recent years, the International Revenue Strategy (IRS) team at Inland Revenue has observed considerable behavioural change by foreign-owned MNEs with the introduction of additional equity and/or reducing related-party debt financing. This behavioural change has been attributed to the introduction of the RTP rules and a greater focus on financing by the Inland Revenue (via targeted campaigns, risk reviews and audits).
The past five years has seen a highly volatile interest rate environment, with historic lows in the Official Cash Rate in the 2020 and 2021 years, a rapid increase in 2022 and 2023, and a declining rate since the middle of 2024. This level of volatility has meant that taxpayers should have been regularly reviewing intercompany financing arrangements to ensure that the behaviour of the parties to the loans, the terms and conditions of loans, and the interest rate have all remained arm’s length. With the increases in the interest rates applying to the most recently filed 2023 and 2024 tax returns coupled with the Inland Revenue stepping up its audit activity more generally, we are expecting intercompany loans and financing to become a key area of focus for Inland Revenue. This is starting to come to fruition with the number of risk reviews and audits focusing on intercompany financing increasing.
Now is an opportune time for taxpayers to reflect on their intercompany loans and key risk areas that could be challenged by Inland Revenue. To help with this, we have summarised 9 risk factors when it comes to intercompany loans.
Inland Revenue annually publishes an administrative guidance for small value loans (i.e., for cross-border associated party loans for up to NZD10M principal). This administrative guidance may be applied to cross-border associated party loans.
Inland Revenue has historically provided an interest rate margin (over a relevant base indicator) that it considers to be 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. The most recent change to the interest margin has also introduced (without explanation or consultation) a change in approach to make the interest rate margin backward looking only and in our view, reduces the practical application of this otherwise widely used administrative guidance. The current interest rate margin in the guidance is 250 basis points over the relevant base rate and applies for the period 1 July 2024 to 30 June 2025. There is now no equivalent guidance for interest rates for the year to 30 June 2026. We will continue to provide updates on any developments on the administrative guidance.
If any of the above risk factors concern you please contact your usual Deloitte advisor or one of our award winning transfer pricing team to help navigate the issues.