New Zealand – new transfer pricing and permanent establishment rules proposed


At the beginning of March 2017, the New Zealand Government released three consultation papers proposing new measures to strengthen New Zealand’s rules for taxing large multinationals.  These three consultation papers addressed:

  • Transfer pricing and permanent establishment avoidance;
  • Strengthening our interest limitation rules; and
  • New Zealand’s implementation of the multilateral convention to implement tax treaty related measures to prevent BEPS.

In releasing these consultation papers, the Minister of Revenue stated that although “(New Zealand’s) broad-based low rate tax system continues to perform very well for New Zealand overall … it’s important that it keeps evolving to ensure that all companies operating in New Zealand pay their fair share of tax.”  The New Zealand Government’s initiative to strengthen New Zealand’s transfer pricing rules reflects the outcomes of the OECD’s Base Erosion and Profit Shifting (BEPS) program as well as the legislative changes made to Australia’s transfer pricing rules over the past five years.  As more than half of New Zealand’s direct foreign investment relates to Australia, the New Zealand Government recognises the need to align New Zealand’s transfer pricing rules with those of Australia and the fact that if it doesn’t, it may miss out on its fair share of trans-Tasman tax.

This blog deals only with the transfer pricing and permanent establishment avoidance consultation paper released by the New Zealand Government.  Separate blogs will be issued in relation to the interest limitation rules and the BEPS related treaty initiatives.

The key proposals set out in the transfer pricing and permanent establishment avoidance consultation paper are as follows:

Source and permanent establishment avoidance

The proposals include:

  • A new anti-avoidance rule will be introduced that will apply to large multinationals (with over EUR €750 million of consolidated global turnover) that structure to avoid having a permanent establishment (taxable presence) in New Zealand. The proposed rule would deem a non-resident entity to have a permanent establishment in New Zealand if a related entity carries out sales related activities for it in New Zealand. This permanent establishment will be deemed to exist for the purpose of any applicable double tax agreement (DTA). Essentially this rule will apply where:
    • Sales are made to New Zealand customers or consumers by an overseas company;
    • A company related to the sales company (either a subsidiary or dependent agent) carries out activities that relate to or support those sales;
    • The revenue from those sales is not attributed to New Zealand (either wholly or in part) for tax purposes; and
    • The arrangement is designed to defeat the intention of New Zealand’s tax treaties.
  • An amount of income will be deemed to have a source in New Zealand if New Zealand has a right to tax that income under the permanent establishment article of any applicable DTA. For non-residents in respect of whom no DTA applies, New Zealand’s model treaty permanent establishment article will be incorporated into domestic law to apply as an additional source rule.
  • A non-resident’s income will have a New Zealand source when the income would have had a New Zealand source if the non-resident’s wholly owned group was treated as a single entity.

Transfer pricing rules

  • The New Zealand transfer pricing rules will be strengthened so they align with the OECD’s guidelines and Australia’s new transfer pricing rules. This involves amending New Zealand’s transfer pricing rules so that:
    • they disregard legal form if it does not align with the actual economic substance of the transaction;
    • in cases where independent entities would not have entered into the contracted conditions, the transfer pricing rules would allow for those conditions to be replaced by arm’s length conditions (or allow the entire arrangement to be eliminated or disregarded);
    • the legislation specifically refers to arm’s length conditions and the latest OECD Transfer Pricing guidelines (which incorporate the BEPS actions 8–10 revisions).
  • The burden of proof for demonstrating that the actual conditions align with arm’s length conditions will be shifted from the Inland Revenue to the taxpayer (consistent with the burden of proof for other tax matters).
  • The “time bar” for transfer pricing issues will be increased to seven years (in line with Australia).
  • The transfer pricing rules will be amended to also apply to investors that “act together”, such as private equity investors.
  • Inland Revenue will collect the information required by the OECD’s country-by-country reporting initiative from multinational groups with over EUR €750m of annual consolidated group revenue (large multinationals). However large multinationals will not be required to file their master and local files annually. Furthermore, Inland Revenue’s powers to access information and documents held by large multinationals offshore will be increased.

Administrative rules

  • If a large multinational (over EUR €750m worldwide revenues) does not cooperate with Inland Revenue, then Inland Revenue will be able to issue a notice of proposed adjustment (NOPA) (and any subsequent documents under the disputes process) based on the information available to it at the time.
  • Any disputed tax must be paid by a large multinational earlier in the disputes process. This only applies in respect of disputes over transfer pricing, the amount of New Zealand sourced income, and the application of a DTA.
  • Tax payable by any member of a large multinational can be collected from any wholly owned group member, or the related New Zealand entity in case of the new PE avoidance rule.
  • Inland Revenue will be empowered to collect more information from large multinationals, including information about its various non-resident group members.


These new rules are, at this stage, only proposals and are subject to public feedback and comment.  Therefore some of these proposed rules may be revised.  However, the objective of the New Zealand Government is clear: they acknowledge the need to revise and amend New Zealand’s transfer pricing and permanent establishment rules to reflect modern business practice (and particularly e-business) and given that the proposed amendments will have bipartisan support in the Parliament, it is likely that most (if not all) of the proposed amendments will be made to the New Zealand tax laws.

There are several aspects of the proposed new rules that merit special comment:

  • The single economic unit concept that deems foreign income to be sourced in New Zealand when related party sales services (that do not otherwise give rise to a permanent establishment under the existing principles) are provided is an interesting (and potentially disconcerting) development. It does seem to stretch the economic substance principle beyond the generally accepted application of the concept for OECD purposes and may need to be reconciled with the OECD’s recent validation of the sanctity of the separate legal entity concepts in the revision of Chapter 6 (intangibles) of the OECD Guidelines. We expect that this proposal will be debated vigorously by tax practitioners.
  • The adoption of the substance over form approach to transfer pricing is important and long overdue from a New Zealand perspective. The change in the focus of the legislation from the determination of an arm’s length amount to arm’s length conditions and the ability for Inland Revenue to reconstruct non-arm’s length arrangements represents a significant change in the New Zealand transfer pricing landscape.  Taxpayers will therefore need to revisit their transfer pricing arrangements to ensure that not only are the prices they use arm’s length but that the arrangements that they enter into are of an arm’s length nature.  The consultation paper has not indicated that there will be any transactional grandfathering clauses, so taxpayers will likely need to address and redress (as required) both their existing and new arrangements from the date the new rules apply.[1]
  • Perhaps the most significant change (from an administrative perspective) relates to the burden of proof and the information-gathering powers of the Inland Revenue. New Zealand was reasonably unique in that its transfer pricing rules placed the burden of proof in all transfer pricing matters onto the Inland Revenue.  Clearly that, and the limited information gathering powers that the Inland Revenue had in relation to transfer pricing matters (it could only request information for the local entity not from its international related parties) were having an adverse impact on the Inland Revenue’s ability to administer the transfer pricing rules in New Zealand.   It is now considered that as the taxpayer has ready access to considerably more information in relation to its related party dealings than Inland Revenue does, the onus should be shifted to the taxpayer to evidence that its transfer pricing arrangements are arm’s length.  The consultation paper notes that while New Zealand will not make documentation mandatory, there is an expectation that taxpayers should prepare contemporaneous documentation to support their tax filing positions.  The consultation paper notes that in the absence of contemporaneous documentation being prepared, a 25% penalty for “lack of reasonable care” would be, as a minimum, applicable where a transfer pricing adjustment was successfully levied on a taxpayer.  The consultation also recommends the introduction of rules that provide for foreign information requests.

New Zealand is a small country that will be considered to be immaterial (from a financial reporting perspective) by a number of large multinationals.  It has generally been perceived as taking a low-key approach to transfer pricing risk management and has a reputation for seeking to deal with transfer pricing matters in a transparent and cooperative manner.  Inland Revenue is keen to continue that transparent and cooperative approach but will now have considerable more ammunition to ensure that New Zealand gets to keep its fair share of tax revenue from income generated from New Zealand.  Therefore, while New Zealand may not be significant from a financial reporting perspective, due care and attention will need to be given to ensuring that the multinational’s transfer pricing arrangements with New Zealand meet the new arm’s length standard.  Given the time and cost that is potentially involved in managing the risks associated with small countries such as New Zealand, consideration should perhaps be given to negotiating a unilateral advanced pricing agreement for the New Zealand business: the New Zealand Inland Revenue is very encouraging of unilateral advanced pricing agreements as means to manage both its and the multinational’s resources and risks.

Country-by-country reporting

For inbound multinationals with global turnovers in excess of EUR €750 million that are subject to the OECD’s new Country-by-country reporting rules, Inland Revenue has confirmed that it will seek the parent entity Country-by-country report from the parent entity’s home revenue authority under the international information-sharing treaties.  The provision of this report is not expected to be the responsibility of local management.

Inland Revenue has also confirmed that for affected inbound multinationals, the global masterfile and local CbC files will not have to be filed with Inland Revenue and will only need to be provided if so requested by Inland Revenue.  However, local management should:

  • Obtain a copy of the global masterfile from the parent entity and have that available to provide to Inland Revenue if requested: the parent entity is generally responsible for the preparation and update of the global masterfile document; and
  • Prepare the CbC local file. The CbC local file is a standardised XML schema  Local management should retain copies of the annual CbC local files and make them available to Inland Revenue if requested.  The annual local file should be retained for seven years in accordance with New Zealand’s tax record retention rules.

New Zealand headquartered multinationals with global turnovers in excess of EUR €750 million are expected to be fully compliant with the OECD Country-by-country reporting requirements. Inland Revenue reports that there are approximately twenty affected New Zealand corporates.

The Country-by-country reporting rules apply in New Zealand from the income years commencing on or after 1 January 2016.

[1] As noted above, these “rules” are only proposals at this stage: they are not laws. The “rules” will only become law once the relevant legislation is passed by Parliament and that legislation receives Royal Assent.

About Quantera Global

Quantera Global is the world’s leading independent transfer pricing advisory firm, providing specialist and integrated transfer pricing services to multinationals of all sizes across the globe. We provide specialist transfer pricing consulting services in Asia, Europe and the Americas, in order to support multinationals to satisfy all aspects of their transfer pricing design, compliance and risk management requirements.


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