By Leslie Prescott-Haar & Sophie Day, TP EQuilibrium | AustralAsia LP, New Zealand
New Zealand’s Inland Revenue has released high-level transfer pricing guidance for businesses affected by Covid-19.
This guidance recognises that Covid-19 related commercial and transfer pricing issues may vary considerably between businesses and across jurisdictions and that practical difficulties in applying the arm’s length principle may arise during this time.
The guidance emphasises the importance of developing contemporaneous documentation around specific facts and circumstances that businesses encounter and compliance with the arm’s length principle. Such documentation should describe the impact of the pandemic on the profitability of the global group and New Zealand operations, as well as the rationale for any group changes implemented in response thereto. The guidance does not address whether Covid-19 related changes to intercompany arrangements may be regarded as arm’s length.
New Zealand Inland Revenue’s guidance is general. It does not address technical matters associated with the application of the transfer pricing methods and the determination of arm’s length conditions related to the pandemic and economic contraction. Database data lags and extensions of filing requirements for financial statements will likely further complicate such matters. As a pragmatic approach, however, the Inland Revenue has indicated that, in the absence of comparable data, taxpayers should refer to pre Covid-19 expectations and analyse variances that have arisen, both positive and negative, in respect of sales revenues, operating costs, unusual expenditures, government financial support, intercompany charges and adjustments, etc.
Although the guidance does not cover this, New Zealand taxpayers with an existing advance pricing agreement should consider whether a breach/es of a critical assumption/s may have occurred in connection with the pandemic. In the authors’ experience, the revenue authorities are often hesitant to ‘open’ previously-agreed advance pricing agreements unless highly material changes have occurred.
For advance pricing agreements under current negotiation, the matters addressed in the Inland Revenue’s guidance would likely be relevant. Given advance pricing agreements are intended to address difficult transfer pricing issues, a “wait and see” approach may not be helpful to taxpayers.
New Zealand Inland Revenue is currently participating in the OECD’s project to produce global guidance on transfer pricing issues during Covid-19 based on the arm’s length principle. Hence, further international guidance will be forthcoming.
— Leslie Prescott-Haar and Sophie Day are affiliated with TP EQuilibrium | AustralAsia LP .
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