NZ Inland Revenue takes aim: BCPs, risk reviews and audits

NZ Inland Revenue takes aim

John Cantin and Darshana Elwela examine the New Zealand Inland Revenue's approach to the NZ operations of global groups.

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A furled and an unfurled silver fern frond

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:

  • If you don’t have a tax strategy, get one. Tax governance by multinationals is an increasing area of focus for IRD. The questions include: are appropriate resources (including NZ capability) being applied to tax matters, are there sufficient internal checks and balances, and is there good tax awareness by Management and the Board of positions being taken? If the answer to any of these is no, expect a knock from your friendly NZ tax inspector. 
  • Understand and be able to explain your position. The commercial impact and effect is particularly important to defending any assertions that your structure involves tax avoidance. 
  • Get your NZ tax advisors involved at an early stage, ideally before a major transaction proceeds, but certainly when a BCP request or IRD questionnaire is received. New Zealand’s penalty regime allows reduced or no penalties if a voluntary disclosure is made prior to an audit commencing.  
  • Make sure your NZ ‘defense’ documentation (e.g. transfer pricing support, interest rate benchmarking on loans) is up to scratch, up to date, and that it matches the transaction and the operations. An Australian (or global) transfer pricing analysis is not acceptable support as far as IRD is concerned. Documentation which does not match the actual NZ activity will not help.  

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.

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