December Tax Alert


Restricted transfer pricing – evolving complexities

Tax Alert - December 2020

By Bart de Gouw & William Dawson

By introducing restricted transfer pricing rules, New Zealand broke away from commonly applied methods of dealing with base erosion and profit shifting (“BEPS”) through excessive interest deductions, creating its own unique solution. New Zealand’s restricted transfer pricing rules have now been in place for over two years, so it’s time to reflect on its effectiveness and consider the top issues that have arisen from its implementation. A summary of the restricted transfer pricing rules and key technical issues is available here.

General impressions

In our experience to-date, taxpayers are taking the restricted transfer pricing rules seriously. Taxpayers introducing new related-party debt into New Zealand are seeking advice on pricing the relevant instrument to comply with the restricted transfer pricing rules. In addition, taxpayers with existing debt instruments that are subject to restricted transfer pricing are, at a minimum, undertaking a high-level analysis of their debt instruments and applicable thin capitalisation/debt percentages to understand whether an alternative credit rating analysis and/or loan terms need to be applied to comply with the rules. Where risks have been identified, further work has led to loan agreements being amended for the interest rate, more fully renegotiated, or interest deductions denied in taking a tax position. In some instances, our analysis has shown interest rates applied to be conservative from a New Zealand restricted transfer pricing perspective. We consider that this outcome is likely due to changes in multinational group’s behaviour as part of the wider global BEPS program, including a greater focus on the impact of passive association on a borrower’s credit rating.

Compliance with the restricted transfer pricing rules has been facilitated by the requirement for taxpayers with more than NZD 10 million of related party cross-border debt to file a separate online disclosure form with Inland Revenue. This form includes the need to disclose the amount (if any) of interest denied due to the application of restricted transfer pricing. Inland Revenue has published guidance on the rules, and you can also read our related article.

Outcomes under restricted transfer pricing

For plain vanilla funding arrangements, restricted transfer pricing has somewhat simplified the debt pricing process through its prescribed approach to determining a credit rating for the borrower. This usually results in an outcome that is largely consistent with the arm’s length principle (although this is not always the case).

In contrast, we are finding that for more complex group funding structures, the restricted transfer pricing rules can lack the flexibility required to provide a commercially sensible outcome for the taxpayer e.g. where funding terms/structures are the result of negotiations with external lenders at a group level. Similarly, the restricted transfer pricing rules require that borrowers qualifying as “insuring or lending persons” have the same credit rating of the wider group. While there may be evidence to support this approach in some circumstances (e.g. a systemically important banking group) smaller lending groups may operate autonomously and with significantly different investment risk profiles. In such instances, equating the credit rating of the borrower with that of the wider group is clearly not commercially justifiable and may well result a transfer pricing risk in the counter-party jurisdiction.

Technical complexities

Restricted transfer pricing represents a move away from the arm’s length standard. Real world application of restricted transfer pricing continues to produce unique problems and issues to consider. Technical issues include the potential for double taxation, implications for withholding taxes, and deemed dividends in relation to denied interest, as well as timing implications for entering, extending or renewing financing arrangements.

Taxpayers should be aware when contemplating changes to a financial arrangement (i.e. where the financial arrangement is renewed, renegotiated or extended) that these changes may have the effect of triggering a reset of both the calculation date of the threshold criteria and the pricing date of the instrument itself. In light of materially reduced interest rates in the current environment, this could have the impact of significantly reducing the level of deductible interest.

For these reasons, it’s important for taxpayers to proactively consider the implications of the restricted transfer pricing and seek advice where appropriate. Further details in relation to these issues are set out in our earlier article.

Long term debt example

Interesting and somewhat unexpected outcomes can arise where existing debt instruments are for a long term (e.g. a 15-year fixed rate loan entered into in 2005) and the restricted transfer pricing rules require the debt instrument to be priced on the basis of a five-year loan term relevant in 2005. Based on high level benchmarking, the tenor adjustment (15 years to 5 years) could result in a reduction from 6% down to 3.5% for BBB rated borrowers. If the loan is renegotiated or extended for a further term then it would be repriced on the relevant date – if today that may result in an interest rate of substantially less than the 2005 rate (e.g. 1.5%).


Restricted transfer pricing is still in its infancy and the application of these rules will continue to develop as will the complexities associated with their implementation. As Inland Revenue begins to review restricted transfer pricing positions adopted by taxpayers, further discussions and commentary is expected. New Zealand has placed significant resource into the development of the restricted transfer pricing rules and inbound related party cross-border debt will clearly continue to be a focus area. Affected taxpayers are strongly advised to consider the implications of restricted transfer pricing and seek advice if necessary.



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