The New Zealand Inland Revenue has released its Multinational Enterprises Compliance Focus document, detailing its strategy and priorities for audit and enforcement in respect of large multinational enterprises. Last released in 2016, the update comes at an interesting time.
Figures recently released by the Minister of Revenue confirm a reduction, in the past 12 months, in the time that Inland Revenue has spent on audit and investigation activities. However, the reduction is likely to be temporary, reflecting a diversion of resources within Inland Revenue to assist with the implementation of its ambitious business transformation.
At the same time, the past three years have seen significant reforms to tax rules affecting foreign-owned businesses operating in New Zealand (including amendments to the interest withholding tax, thin capitalisation and transfer pricing rules). New Zealand has also implemented comprehensive anti-hybrid mismatch rules, reflecting the recommendations in the OECD's BEPS Action 2 report. It became one of the first countries to ratify the multilateral instrument, and has elected to adopt as many of the optional provisions of the multilateral instrument as is possible (subject to treaty partner choices).
In announcing the release of the document, Inland Revenue signalled that large taxpayers could expect to see increased Inland Revenue interest in the regimes affected by these reforms. This could prove to be onerous for taxpayers, since the regimes in question are highly complex, and in many respects the legislation is not always clear.
Increased monitoring by Inland Revenue for significant enterprises
The compliance focus document will affect significant enterprises. Significant enterprises are foreign-owned New Zealand businesses with an annual turnover in excess of NZ$30 million ($19.7 million), and other New Zealand businesses with an annual turnover in excess of NZ$80 million.
Significant enterprises are already required to provide Inland Revenue with a group structure chart, financial statements and tax reconciliations. It is expected that Inland Revenue will soon also require a BEPS disclosure form to be submitted. The form will include questions relating to transfer pricing, thin capitalisation and hybrid mismatch arrangements.
Foreign-owned significant enterprises are also required to complete an annual international questionnaire, which is "designed to collect information about financing/debt and transfer pricing issues". Inland Revenue uses this information to inform its "strategic and operational risk assessment processes".
Certain cross-border financing arrangements are 'under watch' by Inland Revenue
Significant enterprises with cross-border cash pooling arrangements, guarantees or derivatives should note that such arrangements are 'under watch' by Inland Revenue:
1) Regarding cash pooling arrangements, Inland Revenue has warned that "if a negative balance in a cash pool extends beyond a short-term liquidity arrangement, it may be more appropriate to treat that participation as a term loan" with transfer pricing implications following from this;
2) In respect of guarantees, Inland Revenue "considers no fee is generally appropriate for a financial guarantee of debt between parties that are commonly owned unless it can be clearly shown that the guarantee provides benefit to the borrower beyond those that are obtained as a consequence of being part of a multinational group"; and
3) Inland Revenue is also "monitoring the use of cross-border derivatives between related parties" as it considers that "such derivatives should not only be priced in accordance with the arm's-length principle but also must be commercially explicable".
Further Inland Revenue compliance campaigns are expected
Inland Revenue has indicated that significant enterprises can expect a series of compliance campaigns, with Inland Revenue recently initiating such a campaign by issuing questionnaires to 375 distributors who were selected (at least in part) based on information that it received through the exchange of country-by-country reports. The document states that distributors with earnings before interest, tax and exceptional items of less than 3% of turnover should not be surprised if Inland Revenue requests additional information.
Inland Revenue has also indicated that in 2020 it intends to carry out further compliance campaigns focused on tax losses, royalties, debt and thin capitalisation. Significant enterprises should be alert to the potential for Inland Revenue interest in these matters.
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