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What is transfer pricing?

Over 80% of world trade involves multinational enterprises ("MNEs"). Well over 50% of world trade comprises associated party transactions. MNEs are a significant force in New Zealand's economic environment.

Transfer pricing rules require cross-border associated party transactions to be conducted on an arm’s-length basis, thereby ensuring that the taxable profits reported by a member of a multinational enterprise reflect the economic activity undertaken by that member.

Many MNEs rank transfer pricing as the most important international issue they face. Tax authorities around the world are implementing and updating their rules and regulations on international transactions as well as increasing their audit activity.

The behaviour of MNEs impacts significantly on how the wider community views the tax system, and the level of confidence that the community has in the system's integrity. The community expects MNEs to contribute their fair share via the tax system. This may be in conflict with the large potential for revenue losses to arise due to incorrect transfer pricing policies and practices.

Further, the structure and operations of MNEs continuously evolve, often with a consequential impact on the income recognised in some countries. Such changes may be perfectly legitimate. Identifying which pricing practices are legitimate and which are not is a difficult process.

Inland Revenue established transfer pricing specialisation to provide advice and assistance to investigators on transfer pricing issues, recognising not only the subject's significance but also its complexity.