NZ BEPS monster on the horizon
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NZ BEPS monster on the horizon

The New Zealand transfer pricing landscape has changed rapidly over the past year, explain Kim Jarrett, Kyle Finnerty and Nadia Fediaeva of KPMG. With new BEPS legislation enacted, increased tax enforcement efforts, the Inland Revenue restructuring and a new government promising an increase in spending on tax enforcement, what more could happen in a year?

BEPS legislation to be enacted

In May 2018, after over a year of proposals, submissions and consultations, a revised BEPS Bill was reported back to New Zealand Parliament. The revised BEPS Bill includes changes to New Zealand's TP, permanent establishment (PE) and thin capitalisation rules.

The new rules seek to align New Zealand with the prevailing position of many global tax authorities in relation to the ongoing BEPS developments; but they also go further, adopting many of the rules recently introduced in Australia such as re-characterisation and PE avoidance.

KPMG professionals expect increased disputes between taxpayers and Inland Revenue stemming from the new rules. It would therefore be prudent for multinationals operating in New Zealand to ensure that they have worked through the implications of the rules for their TP operating models as soon as possible.

The May 2018 version of the Bill was enacted on June 27 2018. It applies to income years commencing on or after July 1 2018.

The key points of the new rules are discussed below.

Transfer pricing

The new rules are intended to strengthen New Zealand's TP legislation as outlined below.

The introduction of a TP re-characterisation rule is aimed at commercially irrational arrangements that would not be entered into by third parties. Like the PE avoidance rule, New Zealand follows Australia in introducing such a rule. Unlike the Australian rule, arrangements can only be re-characterised in exceptional circumstances.

The onus of proof for TP disputes will shift from Inland Revenue to the taxpayer. KPMG professionals anticipate that this shift will create substantial challenges for taxpayers in the dispute resolution process. This change is less surprising given it aligns with the approach taken by many other OECD countries (including Australia) and has long been signalled by Inland Revenue as a likely change to the TP rules.

The decision to shift the TP 'statute bar' to seven years (from the existing four years) has been justified by Inland Revenue on the basis that TP issues can take longer to investigate (and other countries, notably Canada and Australia, having similar time frames).

The rules codify the OECD TP guidelines as the basis for applying the TP rules in accordance with New Zealand tax legislation. In the past, New Zealand has generally used the OECD TP guidelines as a guide for determining the TP of taxpayers, but the codification makes this an official position and requirement for taxpayers to follow in preparing their analyses.

New administrative rules increase Inland Revenue's powers to access information, including allowing it to issue an adjustment to large multinationals that are uncooperative based on the information available at the time. This will still be subject to the normal disputes process, although it is proposed that the disputed tax will need to be paid earlier in the process. The administrative rules also give Inland Revenue the power to require New Zealand taxpayers and offshore companies that are controlled by a New Zealand taxpayer to provide any requested information or documents. The new administrative rules will allow the commissioner to penalise or impute an uncooperative large multinational enterprise's (MNE) tax liability based on information it holds.

Throughout the proposal process for the new rules, Inland Revenue and the government considered policies such as contemporaneous documentation and a diverted profits tax. These policies were not considered necessary at this juncture because, in the mind of Inland Revenue, most multinationals are compliant with New Zealand's TP rules and therefore Inland Revenue did not want to levy an excessive burden on everyone. However, Inland Revenue and the government stopped short of dismissing these concepts altogether saying that they would adopt a 'wait and see' approach. The waiting period might not take long with a continuing tax working group review in New Zealand considering ways to improve the country's tax policies, and diverted profits tax being one policy embraced by the new Labour government during the election campaign.

All in all, the TP changes are meant to equip Inland Revenue with more extensive powers when it comes to TP disputes. The best defence for taxpayers is to ensure that they have robust TP documentation in place to support the positions taken.

Interest deductibility and thin capitalisation

The changes to the related party financing rules under the BEPS Bill are complex and may result in significant adverse tax consequences for many New Zealand entities holding cross-border related party debt. The new rules focus on limiting the interest rate charged on substantial cross-border loans for New Zealand borrowers that are considered a 'high BEPS risk'. From initial analyses undertaken, KPMG professionals have observed substantial discrepancies between an acceptable interest rate under the new rules and the arm's-length principle.

The new rules are extremely complex. Below is a summary of how they will take effect:

  • The rules apply to related-party debt inbound to New Zealand that has an aggregate principal greater than NZ$10 million ($6.7 million);

  • Optionally the terms of significant local third-party debt can be used to determine the credit rating for the purposes of the related-party debt analysis;

  • Borrowers who are considered insuring or lending entities will have their credit rating made equal to that of the highest indebted member of the global group for the purposes of the TP analysis;

  • Two tests are applied to consider whether New Zealand borrowers are high or low BEPS risk. Where an entity is a high BEPS risk, its credit rating is subject to a capping mechanism. Where it is a low BEPS risk, it can determine its own standalone credit rating under the arm's-length principle; and

  • Exotic terms or features of applicable related-party debt are also disregarded for the purposes of pricing a related-party loan where those terms are not present in the multinational group's third-party borrowing. This includes capping the length of an inter-company loan for pricing purposes to five years.

The implementation of these new interest limitation rules makes New Zealand unique around the world. The standard approach for interest rate benchmarking focuses on the creditworthiness of the borrower whereas under the limitation rules certain instances base the analysis wholly on the creditworthiness of the multinational group. Initial calculations done by KPMG professionals are yielding substantially lower allowable interest deductions for many New Zealand members of multinational groups as compared to the approach using the arm's-length principle.

It is expected that Inland Revenue will ramp up its enforcement efforts in the area of inter-company financing once these rules come into effect. This will likely lead to more cross-border disputes between the acceptable rate under New Zealand law and the acceptable rate based on an application of the arm's-length principle. Ultimately this is creating more uncertainty and risk for New Zealand taxpayers.

The BEPS Bill also includes changes to New Zealand's standard thin capitalisation rules by now requiring an adjustment to assets in the calculations so that they are net-off against non-debt liabilities. The change to net rather than gross assets has the potential to shift the thin capitalisation 'safe harbour' more substantially and create much less predictably. Its effect will vary compared to the existing 60% safe harbour, depending on the role and size of non-debt liabilities held by the entity. KPMG professionals expect this will push up thin capitalisation ratios, thereby increasing the incidence of interest deductions being denied for New Zealand members of multinational groups. Many of the preliminary thin capitalisation calculations that have been prepared under the new rules are demonstrating this expected limiting outcome to be a harsh reality.

Permanent establishment

The new rules largely aim to prevent large multinationals, i.e. those with global turnover greater than €750 million from avoiding a New Zealand PE by using a New Zealand related party to support local sales activities. The rules will apply where:

  • There are sales to New Zealand consumers or businesses by a non-resident supplier;

  • A related entity in New Zealand (e.g. a subsidiary or dependent agent) carries out activities in New Zealand using local employees to bring about those sales that are more than preparatory or ancillary;

  • There is an existing double tax agreement (DTA) applicable to the arrangement that does not include the OECD's new definition of PE;

  • Some or all of the sales are not attributed to a New Zealand PE;

  • The arrangement is designed or has an effect of defeating the intention of New Zealand's DTAs; and

  • The purpose of the arrangement is more than merely incidental.

The changes will result in the taxation of both the deemed PE's profits as well as potential withholding tax on the PE's payments that are considered to have a New Zealand source.

Where the activities by the related New Zealand entity are carried out remotely (e.g. online from offshore), these activities are exempt from consideration as being carried out in New Zealand for the purposes of the deemed PE rules.

This PE avoidance rule is broadly based on elements of the diverted profits tax in the UK and Australia's Multinational Anti-Avoidance Law. This is aimed at what the government considers are in-country sales that should be taxed in New Zealand, rather than sales to consumers in New Zealand.

Where sales are attributed to a New Zealand PE, TP concepts will be required to allocate the correct level of income and expenditure to this PE.

Implementing the multilateral instrument (MLI) in New Zealand

The government signed the Multilateral Instrument (MLI) on June 8 2017 and further signed the DTAs (Multilateral Convention to Implement Tax Treaty Related Measures to Prevent Base Erosion and Profit Shifting) Order 2018 on May 14 2018. The MLI was incorporated into New Zealand domestic law on June 14 2018 and now needs to be deposited with the OECD in order for it to become effective – an effective status is achieved three months from the deposit date. In addition to the requirement of being deposited with the OECD, the counterparty jurisdictions to the MLI will also need to undertake similar steps before there are enforceable, two-way agreements in place across New Zealand's DTA network.

Release of new administrative guidance by Inland Revenue

In late 2017, Inland Revenue announced a change to its administrative policy mark-up for low value-added intra-group services. The new policy is to allow a mark-up on costs of 5% on qualifying services and align the rules with the OECD TP guidelines. This is a change from Inland Revenue's existing administrative policy for non-core services being a mark-up of 7.5%. This administrative policy is for income years beginning on or after July 1 2018. Where the administrative policy is not applied, benchmarking would be needed to support the mark-up on services, consistent with existing TP rules.

Developments in relation to country-by-country reporting (including local file and master file)

Despite Inland Revenue's previous position that no legislation was necessary to require country-by-country reporting (CbCR) for New Zealand members of multinationals in New Zealand, specific reporting requirements have been formalised in the BEPS Bill. The new CbCR requirements are consistent with the OECD recommendations in applying to corporate groups headquartered in New Zealand with consolidated group revenues of more than €750 million. Approximately 20 multinational groups headquartered in New Zealand are impacted by the requirements.

There are no local filing requirements in New Zealand for subsidiaries of foreign headquartered multinationals aside from local notification being made to Inland Revenue on request.

Transfer pricing compliance activities by local tax administration (including APAs)

Inland Revenue's business transformation programme is focused on improving and streamlining the income tax compliance process in New Zealand, with the final, fourth stage of the programme due to be completed in 2021. As part of this transformation, Inland Revenue teams are meant to become leaner with the overall workforce expected to reduce by 25% to 30%. This reorganisation process commenced in early 2018.

Meanwhile, the new Labour government has earmarked in the 2018 budget additional funding for Inland Revenue's tax enforcement efforts. While there has been no specific increase in resourcing to date, Inland Revenue now has access to a range of risk assessment tools to better identify and target TP matters such as the basic compliance package and international questionnaire. These risk assessment tools have been supplemented with greater access to information from foreign tax authorities under wider information sharing powers and the first wave of country-by-country reports being shared between tax authorities. This is expected to lead to a higher volume of Inland Revenue dispute activity which spells trouble for taxpayers when coupled with the additional power being allotted to Inland Revenue through the BEPS Bill.

KPMG professionals continue to observe a number of instances where Inland Revenue appears to be following on closely from the audit activity being undertaken by the Australian Taxation Office (ATO) and these are leading to lengthy disputes. In particular, we have seen audit activity focus on foreign-owned multinationals (as opposed to New Zealand-owned multinationals), with close attention on service providers across the technology (and related) industries, where revenue generated from local New Zealand customers is being contracted for and recorded by an offshore entity within that multinational group (i.e. targeting perceived PE avoidance, or insufficient compensation for New Zealand value-adding functions).


The past 12 months has been a period of transition with extensive consultations on the new BEPS rules, reorganisation at Inland Revenue and a new Labour-led coalition government in New Zealand. The next 12 months should see a continued incidence of lengthy TP disputes, driven by a more focused risk assessment approach in conjunction with greater information sharing between overseas tax authorities and new TP rules. This will lead to a much greater need for multinationals to consider the unique aspects of New Zealand TP. Multinationals are well advised to consider any immediate impacts of the BEPS Bill and ensure that their documentation and pricing models are sufficiently robust and detailed in order to navigate this increased complexity.

Kim Jarrett



KPMG in New Zealand

18 Viaduct Harbour Avenue, Auckland

+64 9 363 3532

Kim Jarrett leads KPMG in New Zealand's transfer pricing (TP) team, with experience advising on TP issues, advance pricing agreements (APA), documentation and dispute resolution.

Kim has guided many foreign-based multinationals investing into New Zealand, assisting them with establishing appropriate TP policies.

Kim has the ability to communicate at the highest level and has experience presenting to directors, senior executives and Inland Revenue. She has chaired and presented at many TP seminars both in New Zealand and overseas.

Kyle Finnerty


Senior manager

KPMG in New Zealand

18 Viaduct Harbour Avenue, Auckland

+64 9 367 5353

Kyle Finnerty commenced his transfer pricing (TP) career with KPMG in Canada in 2011. Since then, Kyle has split his time between the TP practices of KPMG in Canada and KPMG in New Zealand.

Kyle's experience covers advising clients on a range of TP, supply chain and commercial issues. He has advised clients at various stages throughout the supply chain across a number of industries.

Nadia Fediaeva


Senior consultant

KPMG in New Zealand

18 Viaduct Harbour Avenue, Auckland

+64 9 363 3620

Nadia Fediaeva joined KPMG four years ago and worked in the Canada office before transferring to New Zealand.

She has worked with clients across a broad range of industries. Many of her clients have an international presence, including New Zealand headquartered multinationals and New Zealand based subsidiaries of foreign-owned multinationals.

Nadia has a strong corporate tax background and growing experience in international tax, supplemented by her Canadian tax knowledge. This experience includes providing advice and training on international taxation issues.

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