The document begins by noting that most corporate groups with over NZ$80 million ($65 million) in annual turnover will be subject to a specific compliance management programme. For example, such groups are expected to provide copies of their financial statements, tax reconciliations and group structures to the Inland Revenue concurrently with their annual income tax returns.
The document then lists ten red flags or issues that frequently attract Inland Revenue attention and the questions that will typically be asked of multinational entities in relation to those issues. These include:
- Effective tax rate: Is the group's effective tax rate substantially less than the corporate tax rate of 28%?
- Differing accounting treatments: Are there material differences in the treatment of major items for financial reporting and tax purposes?
- Large tax benefits: Has the group taken part in any transactions where the anticipated net return is predominantly due to projected tax benefits?
- Cross-border mismatches: Are there any differences in tax treatment of a transaction or an entity between countries?
Not surprisingly, the document identifies international financing arrangements and transfer pricing as being key issues for the Inland Revenue.
In relation to international financing arrangements, the pricing of interest rates and guarantee fees for associated party arrangements is noted as being a key focus. The document goes on to state that close attention will be paid to hybrid instruments (such as convertible notes), hybrid entities (such as limited partnerships) and structured or "novel" financing arrangements. It is also noted that financing arrangements which give rise to an interest deduction in New Zealand but with no corresponding withholding tax imposition will be questioned.
In relation to transfer pricing, the key issue is whether a corporate group is reporting sufficient profit locally and has applied correct transfer pricing principles to related party transactions. The document promotes an approach based on transparency whereby complex issues are dealt with between the Inland Revenue and the taxpayer up front rather than through the disputes process. Multinational groups operating in New Zealand will need to ensure that they have appropriate documentation in place to support transfer prices and will need to be in a position to explain any discrepancies between the profitability of the group's New Zealand operations compared with those of the wider group. The document also notes that advance pricing agreements (APAs) between the Inland Revenue and foreign tax authorities are becoming increasingly common with a record 21 APAs being finalised in the year to July 31 2013.
The document states that controlled foreign companies, goods and services tax and executive remuneration will also form part of Inland Revenue's ongoing compliance focus.
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