John Cantin and Darshana Elwela examine the New Zealand Inland Revenue's approach to the NZ operations of global groups.
In a post-BEPS world, the New Zealand (NZ) Inland Revenue (IRD) is taking a keen interest in the NZ operations of global groups. Australian companies with NZ operations are amongst those in IRD’s crosshairs.
The NZ income tax return is a 'light touch' return. It provides summarised and partial information to IRD. To fill this gap, IRD has initiated the Basic Compliance Package (BCP).
Under the BCP, NZ companies with turnover of more than NZ$80 million provide their financial statements, a reconciliation of taxable income to accounting profit, and group structures, at the time of filing their NZ tax returns. This is used by IRD to tailor its subsequent interactions. This may include formal risk reviews and, in some cases, direct audits.
NZ red flags include: effective tax rates lower than the 28 percent NZ company tax rate; transactions with low or no tax jurisdictions; transactions with cross-border mismatches (e.g. debt in one, equity in another); use of complex or novel financing structures; and uncharacteristic losses or variability of earnings.
Some useful tips for mitigating NZ tax risk:
IRD’s sophistication in taxpayer risk analysis and assessment will only improve as its systems and processes are upgraded (as part of a billion dollar Business Transformation). Therefore, you should expect a greater focus on issues that matter.