If you’re a wonk like me who follows developments in the international tax world, you’d be forgiven for wondering about Inland Revenue’s (IR) international strategy in recent years.

The wait is over. 

Last month IR released their latest Compliance Focus for Multinational Enterprises (MNC Guide), previously updated in 2019.

We’ve heard a lot about the importance of data, and IR has collected a lot of it. But what should we make of the latest MNC Guide and what does it tell us about IR’s international tax strategy?

• Is it a paltry exercise, substituting for meaningful and needed change in transfer pricing enforcement? 
• Is it a progressive document, evolving in step with our key trading partners, reinforcing our status as a good team player?
• Is it a pragmatic response, positioning IR ready to respond to an international environment of unpredictable currents? 

In truth, once the waves settle, we’ll likely agree it’s all the above.
 

A paltry exercise

Last month, the government published the Crown’s financial accounts for the 2023-24 year. In six years, Crown expenditure has increased from $104b to $180.1b (36.0% to 43.6% of GDP) while net debt has increased from $57.5b to $175.5b (19.9% to 42.5%).

The pandemic explains some of this deterioration. However, as the Commissioner highlights in his foreword to the MNC Guide, IR is the “steward of New Zealand’s tax system”, playing a pivotal role in advising the government and implementing its agenda. Notwithstanding recent investments in additional investigators, formal audits remain rare, and settlements remain reasonably easy to achieve on terms taxpayers are willing to accept. Why does the MNC Guide not promote a concerted effort to ramp up enforcement activity?

For example, the MNC Guide retains a 3% Earnings Before Interest, tax and Extraordinary Items (EBITE) as IR’s published ‘risk indicator’ for foreign-owned distributors operating in New Zealand, compared with similar Australia Taxation Office (ATO) guidance that identifies returns below a 5.3% EBIT as a ‘medium’ risk. 

Granted, both IR and the ATO reserve their right to apply enforcement resources based on the circumstances of the case. But, with over 800 foreign-owned enterprises in New Zealand where local turnover exceeds $30m (being 33% of the total corporate tax base!), arguably, the MNC Guide’s risk indicators are leaving tax on the table that audit resources cannot address.

Between 2020 and 2024, 68 MNCs (17 annually) underwent a transfer pricing audit, filtered from 546 targeted compliance reviews (136 annually). Given that only around 2% of large foreign-owned enterprises are audited each year, with even fewer receiving adjustments and penalties, we might be concerned about the signals being sent to global CFOs and tax managers, particularly where risk appetite is higher.   

The MNC Guide is IR’s primary public transfer pricing guidance, setting the swim lanes for large enterprises operating here. With only a few lifeguards (i.e., IR agents) keeping an eye on the swimmers, maybe it’s time to reinforce the ropes.

A progressive document

But are we getting ahead of ourselves? New Zealand has always been a global price taker, then why should our approach to transfer pricing enforcement be any different? Arguably, taxpayers and advisors should be comforted by the balance in the new MNC Guide, demonstrating continuity and change in key aspects of guidance. 

Achieving certainty remains prioritised and prized. IR continues to encourage applications for unilateral and bilateral Advances Pricing Agreements (APAs), having finalised 21 in the year to 30 June 2024. Overall, APA discussions continue to be positive and constructive, which is consistently reflected in taxpayer feedback, in contrast to other tax authorities. 

The MNC Guide’s focus on data and transparency, undoubtedly at the forefront of IR’s thinking, remains critical. IR receives over 1,500 country-by-country reports (CbCR) annually from treaty partners and actively participates in global information exchange and cooperation conventions, which BEPS Pillar 2 legislation taking effect on 1 January 2025 will complement. 

IR has included new guidance that, while well-signalled in recent questionnaires and risk reviews, is welcome. Having issued multiple waves of tax governance questionnaires, the MNC Guide now offers some clarity on the role and importance of transfer pricing in tax governance through a handy checklist of questions. 

Further, IR has now published their resistance to the use of non-Australasian comparable data, citing the significant market and regulatory differences between New Zealand and most East Asian markets. As always, how IR enforces the guidance will remain a watching brief.

On the other hand, the MNC Guide uncovers possible insights into where enforcement thinking may be headed. Mention of New Zealand’s “geographic isolation and lack of competitive pressures” as a basis for higher local returns could signal impending pushback on the use of ‘low risk’ profiles to justify low profitability. Don’t forget, through CbCR exchange, IR now has a good sense of where MNC Groups are allocating their global profits.

Maybe a closer look at the ropes shows stronger swim lanes and clearer water than an initial glance suggests?
 

A pragmatic response 

Whether paltry or progressive, despite IR’s reputation as a good global team player with growing capacity, it cannot change the global transfer pricing landscape unilaterally. Ultimately, the MNC Guide reflects this realism whilst carving out an ability to remain nimble and ensure the right outcomes for New Zealand. 

Earlier this year IR published its position regarding the OECD’s guidance on Amount B for baseline marketing and distribution activities, asserting that New Zealand taxpayers should continue to apply the arm’s length standard. However, careful readers may have noticed a softer and less prescriptive position set out in the MNC Guide. Whilst maintaining its independence, IR’s newer publication may suggest a subtle and pragmatic response to feedback received, both local and international. 

It’s worth mentioning two further consistent themes in the MNC Guide:

First, intelligence and data. The MNC Guide outlines that IR has recently issued questionnaires across an array of sectors and issues, including distributors (372 questionnaires), finance (84), intangibles (30), losses (14), manufacturing (32), services (44), the COVID-19 wage subsidy (436) and TP documentation (65). Inclusive of CbCR exchange and other review activities, IR has compiled a rich data set from which to benchmark in future risk assessments. As taxpayers’ systems become more sophisticated, IR’s pragmatic investment in good data will enable it to meet this challenge with a rounded understanding of other taxpayers in similar circumstances. 

Likewise, the MNC Guide emphasises the importance of customising New Zealand taxpayers’ transfer pricing to their local activities based on local circumstances. IR has a (generally) good track record promoting OECD guidance and accepting industry norms whilst remaining pragmatic in their application to a local context, a theme which resonates in the MNC Guide.

The waters of international tax remain choppy, but let’s take confidence that IR acknowledges this and appears prepared to respond to the changing tides.  
 

The fourth P… An opportunity to prepare

There is no statutory requirement to prepare contemporaneous transfer pricing documentation in New Zealand. BUT – and it’s an important BUT – appropriate care and analysis of transfer pricing positions remains the taxpayer’s statutory obligation and this evidence must be documented on a contemporaneous basis. In any compliance action, this will be your life raft.
 

Prepare. Prepare. Prepare.

With 65 transfer pricing documentation questionnaires issued in recent months, more will come.  There remains no substitute for robust documentation to protect against adjustments and penalties. This does not necessarily mean an exhausting analysis of an entity’s functional profile paired with an all-consuming method selection and benchmarking analysis is required. 

The real test is to evidence your transfer pricing analyses thoughtfully and sustainably as part of your business-as-usual activities, underpinned by sound tax governance principles. 

Just because the water looks clear, it doesn’t mean there aren’t sharks out there – get that life raft ready. 

Want to get in touch?

Stefan Sunde leads RSM New Zealand’s international tax and transfer pricing practice. Feel free to contact him or any other member of the RSM team to discuss further.