New Zealand: April 2019 – the Inland Revenue published final guidance related to recently amended legislation that better aligns local rules with certain OECD base erosion and profit shifting measures.
The guidance comprises five reports covering:
- Interest limitation
- Transfer pricing
- Permanent establishments
- Administrative measures
The reports can be found here.
With respect to the transfer pricing report, taxpayers must now identify and accurately delineate the relevant intercompany transaction as well as the arm’s length conditions and prices that would have been agreed to by independent parties.
The guidance requires that the arm’s length price be determined based on arm’s length conditions – that is, it may be necessary to adjust some of the conditions of the related party arrangement in order to determine the arm’s length price.
Where a transaction is not commercially rational due to terms that unrelated parties would not be willing to agree to, the transaction may be disregarded and potentially replaced. In these cases, the Commissioner of Inland Revenue has broad discretionary powers to make amendments.
Broadly speaking, taxpayers need to consider whether uncontrolled parties dealing at arm’s length would have agreed to either a different transaction or not agreed a transaction at all, in line with certain principles of the OECD transfer pricing guidelines – paragraph 1.122 sets out circumstances in which the transaction between related parties can be disregarded for transfer pricing purposes:
…every effort should be made to determine the actual nature of the transaction and apply arm’s length pricing to the accurately delineated transaction…
This guidance stresses the importance of ensuring that contract terms related to intercompany transactions align with the actual conduct of the parties, as well as ensuring that related party transactions are commercially reasonable.