Tax Alert


Transfer pricing: developments in debt pricing

Tax Alert - September 2018

By Bart de Gouw & Young Jin Kim

Inland Revenue administrative guidance on small value loans

Inland Revenue have recently updated their administrative guidance on cross-border associated party financing. Inland Revenue now considers that for small value loans (being cross-border associated party loans by groups of companies for up to NZD 10 million principal in total per year), pricing of 300 basis points (3%) over the relevant base indicator is broadly indicative of an arm’s length rate, in the absence of a readily available market rate for a debt instrument with similar terms and characteristics. This is an increase from the previous guidance of 250 basis points (2.5%). This guidance applies from 1 July 2018 onwards and the next review of interest rates for small value loans is scheduled for 30 June 2019.

With the recent introduction of restrictive transfer pricing rules from 1 July 2018, taxpayers with cross-border associated party financing will undoubtedly face increasing scrutiny from Inland Revenue in relation to their financing transactions. Taxpayers may wish to consider the application of the administrative guidance where possible in order to manage their ongoing compliance costs.  

Financing Guidance

The OECD released a discussion draft paper on 3 July 2018 which aims to clarify the application of the transfer pricing guidelines to financial transactions. This paper is still in draft format and is intended to open the following items for further discussion:

  • Accurate delineation of the actual transaction to determine the capital structure (debt versus equity determination)
  • Risk-free and risk adjusted rates of return
  • Treasury functions
  • Intragroup loans
  • Cash pooling
  • Guarantees
  • Captive insurance

A more substantive summary of the discussion draft by Deloitte Global can be found here. Submissions on the discussion draft close on 7 September 2018.

What this means for New Zealand taxpayers

The discussion draft is expected to be revised and updated in due course as the OECD reflects on its positions following the submission process. Nevertheless, the discussion draft provides some useful insights on the OECD’s likely direction of travel with respect to financing transactions.

Discussions around risk-free and risk adjusted rates of return on intra-group loans closely resemble the guidance relating to intellectual property (i.e. ensuring that the rate of return associated with the creation and/or use of intellectual property is aligned with the level of functions performed, risks managed and controlled, and assets owned by the relevant group entity). The application of these principles to loans made by group finance companies without personnel capable of making risk-taking decisions can lead to outcomes which are unexpected.  

The commentary in the discussion draft on guarantee fees may also prove to be useful for New Zealand taxpayers given that the restricted transfer pricing rules do not explicitly cover guarantee fees.

We will continue to provide updates on developments in this area.


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