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New Zealand's transfer pricing rules have always been about striking a balance between protecting the tax base and containing compliance costs. We have implemented a range of simplification measures targeted at reducing compliance costs in situations that are likely to present a low transfer pricing risk.
The OECD has introduced an elective, simplified approach for pricing low value-adding intra-group services. We recognise that there are considerable benefits for taxpayers in aligning our practice with international standards.
We are adopting this simplification measure for qualifying low value-adding intra-group services with a total value of below NZ$1m per annum. This measure will apply from income years commencing on or after 1 July 2018.
Qualifying services may be priced at cost plus a 5% mark-up without the need to provide benchmarking. Detailed guidance on the definition of low value-adding intra-group services, the internationally agreed simplified charging mechanism, and documentation expectations are contained in the OECD Transfer Pricing Guidelines for Multinational Enterprises and Tax Administrations 2017, Chapter VII Special Considerations for Intra-Group Services, Section D.
In summary, qualifying services:
The approach is not applicable where the services are also provided to unrelated customers.
We will periodically review the application threshold for this simplification measure.
For previous years, we applied an administrative practice for services described more fully in paragraphs 559, 561 and Table 8 of our October 2000 Transfer Pricing Guidelines (Tax Information Bulletin Vol 12, No 10 (October 2000), Appendix). The de minimis threshold for this administrative practice had been regularly reviewed and was increased from $600,000 to $1m with application from 1 January 2015. This administrative practice does not apply for income years commencing on or after 1 July 2018.
New rules have been introduced requiring certain related-party loans between a non-resident lender and a New Zealand-resident borrower to be priced using a restricted transfer pricing approach. Detailed guidance on the new approach is in Tax Information Bulletin Vol 31 No 3 (April 2019)
Where New Zealand-resident lenders correctly apply the restricted transfer pricing approach to set the interest rate on their loans to related non-resident borrowers, we will consider the result to be arm's length. This is on the basis that the amount deducted by the non-resident borrower in the foreign jurisdiction does not exceed the amount returned as income by the New Zealand-resident lender.
For small value terms loans (ie, for cross-border associated party loans by groups of companies for up to $10m principal in total), we currently consider 325 basis points (3.25%) 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 risk characteristics.
Transactions priced in accordance with this simplification measure are likely to present a low transfer pricing risk and as such no further benchmarking is required. Our next review of interest rates for small value term loans is scheduled for 30 June 2020.
For previous years, indicative rates for small value term loans have been as follows:
|1 July 2006 to 30 September 2009||1.5% on a maximum principal of $1m|
|1 October 2009 to 30 June 2013||3% on a maximum principal of $2m (reflecting the global financial crisis)|
|1 July 2013 to 30 June 2014||2.75% on a maximum principal of $2m|
|1 July 2014 to 30 June 2015||2% on a maximum principal of $10m|
|1 July 2015 to 30 June 2018||2.5% on a maximum principal of $10m.|
|1 July 2018 to 30 June 2019||3% on a maximum principal of $10m|
Foreign-owned wholesale distributors (ie, firms that purchase and on-sell goods to other firms without significant transformation) are the most common multinational business form encountered in New Zealand. We will continue to monitor the profitability of these firms.
For foreign-owned wholesale distributors with an annual turnover of under $30m, we currently consider a weighted average earnings-before-interest-tax-and-exceptional-items (EBITE) ratio of 3% or greater is broadly indicative of an arm's length outcome, in the absence of readily available transactional data for that distributor's transfer pricing transactions or other comparable market data for distributors operating with similar risk characteristics.
Transfer pricing outcomes in accordance with this indicative ratio are likely to present a low transfer pricing risk and as such no benchmarking is required to support the arm's length nature of the distributor's weighted average EBITE ratio.
We will periodically review this simplification measure.