The paper suggests measures to strengthen New Zealand's
transfer pricing rules and to prevent multinational enterprises
from avoiding permanent establishment (PE) status.
The paper discusses the diverted profits tax (DPT) measures
being implemented in Australia and the UK but recommends that,
instead of enacting a separate DPT, New Zealand should proceed
with a tailored package of amendments to its income tax laws.
The package is likely to include provisions countering the
avoidance of PE status along with amendments to the transfer
pricing rules. The paper, however, does not rule out the
introduction of a separate DPT at a later stage.
Three amendments to the transfer pricing rules are suggested
- Amendments to facilitate the collection of
- Amendments requiring Inland Revenue and
the courts to look to the economic substance of an
arrangement when applying the transfer pricing rules;
- An amendment to the onus of proof in
transfer pricing matters.
Whether the first two possible amendments are justifiable in
practice may be debatable. As to the first, Inland Revenue
already has wide-ranging powers to collect information. In
regards to the second, New Zealand's general anti-avoidance
rule (GAAR), which Inland Revenue and the courts have given a
broad application, is generally seen as the appropriate
mechanism for addressing aggressive tax-driven arrangements in
which the arrangement's form does not reflect its
The third possible amendment concerns the onus of proof in
transfer pricing matters. The law states that provided the
taxpayer has determined the arm's-length amount of
consideration under an arrangement in accordance with one or
more of the five methods recognised by OECD practice, the
amount determined is the arm's length amount unless either
Inland Revenue can demonstrate that another amount "is a more
reliable measure of the arm's-length amount", or if the
taxpayer has not cooperated with Inland Revenue and the
non-cooperation has materially affected Inland Revenue in the
administration of the transfer pricing provisions.
This rule (an exception to the usual rule that the taxpayer
bears the onus of proof) was intended to recognise that
determining an arm's-length amount is not an exact science and
that taxpayers should not be subject to re-assessment merely
because Inland Revenue arrives at a different arm's-length
amount in circumstances where reasonable minds may differ.
If the amendment to the onus of proof proceeds, Inland
Revenue and the tax profession will need to consider the
implications, including the possibility of more aggressive
positions being taken in the audit context, greater demand for
advance pricing agreements to protect against future
adjustments, and potentially increased scope for disputes.
The government expects to release a discussion document
early this year detailing its proposals and inviting
submissions from interested parties. New Zealand is due to hold
a general election later this year and it is unlikely the
measures would be passed into law until late this year or early
2018, after the election.
Brendan Brown (firstname.lastname@example.org)
and Joshua Aird (email@example.com)
Tel: +64 4 819 7748