Five years living with the Restricted Transfer Pricing Rules
Tax Alert - November 2023
By Bart de Gouw, John Leightley and Young Jin Kim
New Zealand has now been living with the Restricted Transfer Pricing (“RTP”) rules for five years - a milestone that has its own relevance due to the construction of the rules themselves. During this time taxpayers have largely adapted to these unique rules, while Inland Revenue has brought itself up to speed and developed resources to monitor and manage the implementation.
As the RTP rules require loans to be priced as if they were five-year loans, many arrangements are coming to the end of their first pricing period. Given the highly dynamic interest rate environment and prevailing economic conditions, taxpayers need to carefully reconsider loan pricing and reassess compliance with the rules.
Recapping the RTP Rules
The RTP rules broadly require taxpayers with over NZD10 million of cross-border related party borrowings with high leverage or counterparties in low-tax jurisdictions to follow prescriptive conditions when setting terms on financing arrangements. Importantly, the RTP rules are not consistent with the OECD Transfer Pricing Guidelines and specific commentary in respect of financing arrangements.
Taxpayers who are considered “insuring or lending persons” have their own specific RTP rules, and taxpayers who are below the NZD10 million threshold can continue to price lending based on OECD transfer pricing principles or using Inland Revenue’s administrative guidance, if applicable.
If you have total cross-border related party loans over NZD10 million it's time to revisit them…
The RTP rules were brought in for income years commencing on or after 1 July 2018 – and after five years it’s time for taxpayers to revisit the analyses (five years was the longest term permitted by the rules). In particular, taxpayers who have structured their cross-border related party borrowing in compliance with the regime from the get-go may have loan contracts with five-year terms that have matured or are approaching maturity.
If loans have matured or will shortly, it is important to remember that where the related party borrowing is renewed, extended, or renegotiated, a ‘re-pricing event’ occurs such that the loan must be reassessed under the rules of the RTP regime. This re-pricing event is important given the current interest rate environment and current economic conditions.
Since the RTP rules were brought in interest rates have fluctuated significantly – falling very low during the pandemic and now at high levels due to persistent inflation. Rates that were agreed upon five years ago are unlikely to be appropriate in the current environment, and repricing provides an opportunity to reflect on the broader terms and conditions of the lending into New Zealand. Whether this results in reconsideration of capital structure or a change to the term structure of lending, new interest rate analyses will need to support the loan documentation.
Inland Revenue really is paying attention
We continue to see a growing focus from Inland Revenue on the calculation of interest rates under the RTP regime. Although other financing transactions are similarly being looked at, the RTP rules have driven significant Inland Revenue activity.
Inland Revenue has high expectations of taxpayers’ supporting documentation for tax positions taken in relation to the deductibility of interest expenditure and has been reviewing loans covered by RTP – particularly for taxpayers with significant cross-border related party debt (greater than NZD100 million).
The level of tax authority activity and the prescriptive pricing provisions mean that taxpayers need to ensure they have contemporaneous documentation in place for all loans.
Monitoring loans is a part of good taxpayer governance
Tax governance is a focus area for Inland Revenue, which is running an ongoing campaign to put it on taxpayers' priority lists.
Part of the tax governance agenda needs to include monitoring cross-border related party borrowing arrangements throughout their term – and not just at the start and end. Ensuring an appropriate connection between treasury, business, and tax stakeholders regarding the level and consequences of debt funding can help manage the direct risks under the RTP rules, as well as some of the other risks highlighted at the end of this article.
Furthermore, for taxpayers not already in the RTP rules, as the rules apply to cross-border related party borrowing that exceed NZD10 million in aggregate at any point during a year, taxpayers with loans close to this level need to monitor the level of debt on an ongoing basis – as exceeding the balance at any time will trigger the RTP rules. Unintended and unplanned breaches of the NZD10 million can occur simply through the capitalisation of interest or through changes in the exchange rate of a foreign currency denominated loan.
What else is impacted by the RTP rules?
Although most of the attention goes on the limitation on interest deductibility, there are several other issues for stakeholders to be aware of. Some of these points are still subject to ongoing global and local developments, but taxpayers should still take account of the following:
- Divergence from OECD position: the OECD has issued detailed guidance on the pricing of financing transactions – the RTP rules take a different approach. This divergence creates a double tax risk for taxpayers, especially where the RTP requirements mandate a change from group transfer pricing policy.
- Deemed dividends: to the extent there is a denial of a deduction through the RTP rules the recently amended dividend rules require the non-deductible amount to be treated as a dividend. The Inland Revenue is yet to provide guidance on the amended dividend rules and many uncertainties remain around these rules.
- Limitation on applying for Mutual Agreement Procedures (MAP): Despite the commonly used reference to a RTP regime, Inland Revenue considers RTP to be an interest limitation rule. This limits the ability of taxpayers to use MAPs under double tax agreements to prevent double taxation in respect of the amount of interest denied.
- BEPS Disclosures: Taxpayers and loans covered by the RTP rules need to ensure they complete their BEPS disclosures, as part of annual tax return packages.
- Pillar Two: For taxpayers that may be covered by the Pillar Two rules, an RTP unilateral adjustment may not comply with the arm’s length principle and could trigger adjustments to the GloBE income calculation for New Zealand entities.
Contact us
The RTP regime is unique to New Zealand, and compliance needs to be carefully managed to reduce the risk of interest deductions on significant lending. As we move into the next five years, it is important to leverage the experience of dealing with the rules and what opportunities may still exist within these prescriptive rules. By contacting your usual Deloitte advisor, we can share some of our recent experience in managing the process, as well as raising any opportunities to better manage financing transactions within your wider tax management framework.
November 2023 - Tax Alerts
