By Leslie Prescott-Haar, Stefan Sunde, & Sophie Day of TP EQuilibrium | AustralAsia LP
The New Zealand Inland Revenue in October 2019 commenced issuing wholesaler and distributor information requests to foreign-owned New Zealand entities that may be considered a wholesaler and/or distributor.
These information requests are being issued on the basis of taxpayers’ responses to the annual international questionnaire completed by foreign-owned New Zealand residents.
It appears however that the Inland Revenue is not just targeting New Zealand entities whose primary activity is distribution, as these requests may also be issued more broadly to companies with primarily manufacturing or service functions, together with distribution functions.
The information request is in relation to the 2016 to 2018 income tax years and aims to assess whether the distributor’s transfer pricing is in line with the arm’s length principle. The Inland Revenue has also indicated the information provided will help to assist in the design of additional future simplification measures.
We presume that this information gathering may also relate to BEPS 2.0 proposals and/or deemed PE provisions recently enacted.
Various items of descriptive and financial information are typically being requested by the Inland Revenue, including but not limited to a description of the principal activities of the group, including product types; the customer category in which direct sales are predominantly made; an indication of the extent of ‘ancillary’ service activities provided in connection with the distribution; a summary of the New Zealand entity’s financial accounting results during the covered period; sales and marketing expenses during the covered period; and information in relation to transactions by the New Zealand group with non-resident associated persons, including transactions with specific countries (i.e. Hong Kong, Ireland, Luxembourg, the Netherlands, Singapore or Switzerland).
Off the back of the Neutralising Base Erosion and Profit Shifting Act 2018, the Inland Revenue has also introduced a new disclosure form to be completed and filed alongside the income tax return for income years beginning on or after 1 July 2018.
There are three distinct parts to this disclosure each of which relate to the 2018 legislative amendments: (i) hybrid and branch mismatches, (ii) thin capitalisation Group information, and (iii) restricted transfer pricing rules relating to the pricing of inbound financial transactions. Taxpayers should commence preparation of these standardised disclosures moving forward.
The Inland Revenue in November also updated its ‘key areas of focus’ for large multinational entities, being those domestically-owned groups with at least NZ $80 million (US $51.4 million) in annual turnover, and foreign-owned groups with at least NZ $30 million (US $19.3 million) in New Zealand turnover. The current focus areas, substantially similar to prior years, include unexplained tax losses returned by foreign-owned groups; loans in excess of NZ $10m (US $6.4 million) principal and guarantee fees; payment of unsustainable levels of royalties and/or service charges; material associated party transactions with no or low tax jurisdictions; the use of offshore hubs for marketing, logistics and procurement services; appropriate booking of income arising from e-commerce transactions; supply chain restructures; and any unusual arrangements or outcomes that may be identified in controlled foreign company disclosures.
Collectively, the measures being implemented by the Inland Revenue indicate a broad-based review of the profit results for distributors, as well as signaling the increased focus on combating base erosion and profit shifting.
— Leslie Prescott-Haar, Stefan Sunde, & Sophie Day are associated with TP EQuilibrium | AustralAsia LP
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