IRD Simplification Measures - Protecting the tax base at a limited compliance cost
Tax Alert - October 2019
By Bart de Gouw and Eleanor Yew
When establishing the boundaries for international taxpayers to adhere to, Inland Revenue aims to employ transfer pricing rules that strike a balance between protecting the tax base whilst limiting compliance costs. Inland Revenue has implemented a range of simplification measures that intend to lower compliance costs in situations perceived to have low transfer pricing risks.
Small value loans
Inland Revenue has recently revised its position on small value loans, that is, for cross-border associated party loans by groups of companies for up to NZ$10m principal in total. From 1 July 2019, in the absence of a readily available market rate for a debt instrument with similar terms and risk characteristics, Inland Revenue considers 325 basis points (3.25%) over the relevant base indicator as broadly indicative of an arm’s length rate. This is an increase of 25 basis points from the previous arm’s length rate of 3% (300 basis points). Transactions priced in accordance with this simplification measure are likely to be considered to qualify as a ‘low transfer pricing risk’ according to Inland Revenue and hence no further benchmarking is required. The next review by Inland Revenue for small value loans is scheduled for 30 June 2020.
In light of these revised measures (and the restricted transfer pricing regime applying to inbound loans over NZ$10m), taxpayers engaging in cross-border related party loans should review their current interest rates and pricing approach to ensure they are compliant in their transfer pricing positions.
Small wholesale distributors
Inland Revenue currently considers a weighted average earnings-before-interest-tax-and-exceptional-items (“EBITE”) ratio of 3% or greater as broadly indicative of arm’s length for foreign-owned wholesale distributors with an annual turnover of less than NZ$30m. Foreign-owned wholesale distributors are firms that purchase and on-sell goods to other firms without significant transformation. Examples would be the inbound distributor of goods or limited risk distributor whereby the goods are purchased from related foreign entities for resale.
Such distributors within the prescribed annual turnover are likely to present a low transfer pricing risk and no benchmarking support will be required to validate an arm’s length rate. Care will have to be taken to ensure that any changes in product pricing complies with the new Customs regime (see our article from last month).
Low value-adding intra-group services
Inland Revenue has adopted the Organisation for Economic Co-operation and Development’s (“OECD”) simplification measure for qualifying low value-adding intra-group services (“LVAIGS”) with a total value below NZ$1m per annum. This new approach replaces the previous “administrative practices for services” where a 7.5% mark up was applied on the costs of “non-core” services, or any services under a NZ$1 million de minimus threshold. This change in approach is more restricted for many taxpayers.
The OECD Transfer Pricing Guidelines state that ‘qualifying services’ may be priced at a cost plus a 5% mark up without having to provide benchmarking support. LVAIGS, for the purposes of the simplified approach, are services performed by one member or more than one member of a Multinational Enterprise (“MNE”) group which;
- are supportive in nature
- are not part of the core business activity of the multinational group
- do not require the use of unique and valuable intangibles and do not lead to the creation of unique and valuable intangibles
- do not involve the assumption of control, or give rise to substantial or significant risk by the service provider
Inland Revenue recognises that there are considerable benefits for taxpayers in aligning their methods with well-established international standards. The benefits include reducing compliance efforts by providing greater certainty for MNEs that the price charged for the qualifying activities will be accepted by jurisdictions that have adopted the approach (assuming all the aforementioned conditions are met), and also enabling efficient review of taxpayers’ compliance risks by providing targeted documentation enabling efficient review by tax administrations.
This approach will not apply where the same services are also provided to third parties.
LVAIGS will apply from income years commencing on or after 1 July 2018.
Our Transfer Pricing team can help assess whether any of the low compliance cost approaches are appropriate in a particular circumstance, including whether these increase the risk profile in other jurisdictions.
October 2019 Tax Alert contents
· Protecting the tax base at a limited compliance cost