New Zealand's multinational enterprises compliance focus 2024: Transfer pricing implications
A new era in multinational tax compliance
In November 2024, Inland Revenue (IR) released its updated "Multinational Enterprises | Compliance Focus 2024" document—the first major revision since 2019. This comprehensive publication outlines IR's strategic approach to ensuring tax compliance among multinational enterprises (MNEs) operating in New Zealand, with significant implications in the transfer pricing area.
For businesses with cross-border operations to/from New Zealand, this document signals both continuity and evolution in IR's approach, providing critical insights into enforcement priorities, risk assessment methodologies, and compliance expectations for the coming years.
The evolution of New Zealand's compliance framework
The five-year interval since IR's previous compliance focus document represents a significant period of transformation in New Zealand's tax administration landscape. This update emerges from several important contextual factors:
Post-business transformation capabilities
The completion of IR's Business Transformation programme has equipped the tax authority with enhanced systems and sophisticated analytical capabilities that directly impact their compliance activities. These technological advancements enable more targeted, data-driven approaches to risk assessment and enforcement.
The "right from the start" philosophy
IR continues to emphasise prevention rather than correction, focusing on helping taxpayers "get it right from the start." This philosophy underpins what the document calls the "four Ps" that guide interactions with MNEs:
- Pragmatism: Taking a practical approach to complex international tax matters
- Proportionality: Ensuring responses match the scale and significance of issues
- Prioritisation: Focusing resources on areas of highest risk to the tax base
- Prevention: Addressing potential issues before they develop into compliance problems
The document explicitly reaffirms IR's commitment to being "pragmatic and proportionate in reaching solutions to problems," maintaining the balanced approach promised in 2019 while emphasising IR's determination to protect New Zealand's tax base.
Enhanced monitoring and intelligence gathering
For the past decade, IR has actively monitored foreign-owned MNEs with annual turnover exceeding $30 million through its International Questionnaire (IQ). This monitoring tool has become a cornerstone of IR's risk assessment strategy.
Rich data resources
The document reveals that IR now holds ten years of information and intelligence on MNEs operating in New Zealand. This rich data resource has proven particularly valuable during the pandemic recovery period, with IR noting that "despite some significant losses reported by tourism and hospitality enterprises in the recent years, most MNEs have reported steady profits."
Multiple intelligence channels
IR's monitoring capabilities have been significantly enhanced through several information channels:
- Annual International Questionnaire responses
- Country-by-Country (CbC) reports from treaty partners
- Summaries of cross-border tax rulings
- Intelligence from the Overseas Investment Office and New Zealand Customs Service
- Information shared through the Joint International Taskforce on Shared Intelligence and Collaboration (JITSIC)
This multi-faceted intelligence approach allows IR to conduct targeted interventions based on risk profiles, minimising compliance costs for businesses already meeting their obligations.
Transfer pricing: Areas of enhanced scrutiny
The Compliance Focus document provides clear signals about IR's transfer pricing enforcement priorities and risk assessment approach.
Increased resourcing and focus
A notable development is IR's investment in additional resources for its specialist transfer pricing team. The document mentions four new transfer pricing case leads and recruitment for another Technical Specialist. This staffing increase clearly signals that IR is preparing for increased engagement with taxpayers on transfer pricing matters.
The current Government's focus on prudent fiscal management has resulted in a renewed emphasis on active tax base maintenance, translating to increased audit activity. Taxpayers who may have received less scrutiny in recent years should prepare for potentially closer examination of their transfer pricing arrangements.
Transfer pricing risk indicators
The document provides a valuable risk checklist that serves as an early warning system for potential IR inquiries. According to IR's guidance, indicators that might trigger further review include:
- Two consecutive years of tax losses
- Negative earnings before interest and tax (EBIT)
- Distributor earnings before interest, tax and exceptional items (EBITE) less than 3%
- Retailer EBITE less than 5%
- Manufacturer EBITE less than 7%
- Royalties greater than 33% of EBITE
- Interest greater than 20% of EBITDA
- Debt greater than 40% of assets minus non-debt liabilities
An important contextual factor to consider is New Zealand's geographic isolation. Given this factor, MNEs could be expected to return higher operating margins in New Zealand relative to other markets, reflecting reduced competition or increased functional intensity of local operations.
Pillar two implementation: Transfer pricing implications
A significant development covered in the document is New Zealand's implementation of the OECD's Two-Pillar Solution, particularly Pillar Two's Global Anti-Base Erosion (GloBE) rules commencing January 1, 2025. These rules will establish a global minimum effective tax rate of 15% for MNEs with annual revenues exceeding EUR 750 million.
The pillar two-transfer pricing connection
This commitment to the Pillar Two rules reinforces the importance of getting transfer pricing positions right from the start. The Pillar Two rules effectively assume the underlying transfer pricing position is correct when assessing the effective tax rate position. As such, transfer pricing errors can lead to more complicated calculations and potential double taxation under the Pillar Two rules.
The GloBE determination process
The Compliance Focus document outlines a six-step determination process for identifying tax liability under the GloBE rules:
- Identify whether in scope
- Determine jurisdictions not eligible for safe harbor exclusion
- Determine GloBE Income for each group member
- Calculate Covered Taxes attributable to each entity
- Calculate the Top-up Tax rate and Jurisdictional Top-up Tax
- Identify liable entities and allocate Top-up Tax
This methodical approach emphasises the importance of early planning and system development for affected MNEs.
Corporate tax governance expectations
The document strongly emphasises the importance of robust tax governance frameworks for MNEs. IR notes that such frameworks are not only fundamental to tax compliance but also align with broader environmental, social, and governance (ESG) commitments expected of modern businesses.
Tailored rather than prescriptive
Rather than mandating specific governance structures, IR encourages "improved fit for purpose corporate tax governance" tailored to each business's circumstances. This approach aims to foster "an environment of mutual trust and cooperation by working with taxpayers, and their representatives, and not taking a prescriptive or adversarial approach."
Key areas for improvement
IR has highlighted several key areas where corporate tax governance could be strengthened:
- Addressing reliance on key persons by documenting procedures
- Moving beyond "set and forget" approaches to testing and updating governance frameworks
- Providing clear direction through reports to the board
- Customising governance in New Zealand rather than simply adopting offshore models
The document provides a practical self-assessment checklist for MNEs to evaluate their tax governance compliance strategy, allowing businesses to identify potential gaps and implement appropriate improvements.
Simplification measures: Reducing compliance costs
Recognising the compliance burden that transfer pricing requirements can create, the document outlines several simplification measures aimed at reducing costs in low-risk situations.
Low value-adding intra-group services
One notable measure is the approach to low value-adding intra-group services. According to IR guidance, "Qualifying services may be priced at cost plus a 5% mark-up without the need to provide benchmarking." This aligns with the OECD's simplified approach for such services.
To qualify for this simplification, services must:
- Be supportive of nature
- Not be part of the core business activity of the multinational group
- Not involve unique and valuable intangibles or significant risk assumption
These measures reflect IR's commitment to "striking a balance between protecting the tax base and containing compliance costs."
Strategic responses: Navigating the new compliance landscape
The Multinational Enterprises Compliance Focus 2024 document signals an evolution in IR's approach to transfer pricing compliance. While maintaining its commitment to pragmatism and proportionality, IR has clearly bolstered its monitoring capabilities and enforcement resources.
For businesses operating in New Zealand, several strategic responses warrant consideration:
1. Conduct a comprehensive risk assessment
Use IR's published risk indicators to evaluate potential compliance vulnerabilities:
- Review performance metrics against IR's thresholds
- Identify transactions or arrangements that may trigger closer scrutiny
- Document commercial rationales for arrangements that may appear high-risk
2. Strengthen transfer pricing documentation
Enhance documentation in anticipation of increased scrutiny:
- Ensure alignment with OECD guidelines and IR expectations
- Develop robust functional analyses that accurately reflect the New Zealand business context
- Address New Zealand-specific market factors that may justify different margins
3. Enhance tax governance frameworks
Implement or strengthen governance processes to demonstrate commitment to responsible tax practices:
- Document key decision-making processes and responsibilities
- Implement regular testing and updating mechanisms
- Develop board reporting protocols for tax matters
- Customise governance frameworks to New Zealand's specific requirements
4. Prepare for pillar two implementation
For MNEs meeting the EUR 750 million threshold:
- Develop systems to support the six-step GloBE determination process
- Conduct impact analysis on potential top-up tax liability
- Ensure transfer pricing positions align with Pillar Two calculations
5. Consider advance pricing agreements
For material transactions, evaluate whether Advance Pricing Agreements could:
- Provide certainty for significant transfer pricing positions
- Reduce ongoing compliance costs
- Mitigate audit risk for key arrangements
Finding balance in New Zealand's tax landscape
The Compliance Focus 2024 document represents not just a compliance roadmap but an opportunity for MNEs to strengthen their transfer pricing positions and governance frameworks in a manner that supports both their commercial objectives and their obligations to New Zealand's tax system.
As IR continues to refine its risk-based approach to compliance, businesses that proactively align with expectations and adopt robust transfer pricing practices will be best positioned to navigate New Zealand's evolving tax landscape. The key lies in finding the balance between commercial reality and compliance expectations—a balance that requires technical expertise, strategic foresight, and practical implementation.
TPEQ provides specialised transfer pricing guidance to help multinational enterprises navigate New Zealand's evolving compliance landscape. Contact our team to discuss your specific challenges.
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