Every entity transacting cross-border with related parties should have a transfer pricing policy review at the top of their priority list for 2022.
2022 is shaping to be the year in which your transfer pricing policies are going to be firmly placed under the IRD’s spotlight, so they will need to stand up to increased scrutiny. Without the proactive involvement of management and governance, there is a real risk positions taken will be challenged by the IRD.
To further compound the challenges of yet another year marred by disruption, tax authorities have made it loud and clear they still expect to see cross border related party transactions priced according to the arms-length principle - particularly to ensure Government financial support is not shifted offshore. To enforce this, the IRD have actively issued questionnaires to get a look under the hood of organisations’ transfer pricing policies.
This has created even more pressure on New Zealand entities of multinationals who are often subject to inflexible group transfer pricing policies which have not factored in the implications of Government support, operational disruption, market upheaval, shifting profit drivers and value creation.
Keeping up with changes
During the past 12 months transfer pricing rules and guidelines have continued to change and evolve at an ever-increasing pace, an example being the OECD’s continuation of the Base Erosion and Profit Shifting (BEPS) project. Since 2013 the project has been addressing the ability of multinationals to manipulate and alter their global taxation liability when operating in different locations, including tax havens. The changes acknowledge old rules were steeped in pre-technology structures and practices: the world of international commerce have moved on significantly, but the tax rules had not.
More work was needed which saw the OECD release its proposal for BEPS 2.0 Pillars 1 & 2. These pillars continue to address tax challenges arising not just from the digitalisation of the global economy but also the significant increase in globalisation - and in doing so they create a fairer international tax system. They also reduce the ‘race to the bottom’ for corporate tax rates - a race that has lasted decades.
New Zealand’s progress
We are one of 136 countries who have signalled a commitment to implement Pillars 1 & 2; this will change the playing field for entities of large multinational groups. These rules are ambitiously intended to be legislated in 2022 and apply in 2023.
The past 12-24 months have taught us a ‘set and forget’ or ‘light touch’ transfer pricing approach to cross border related party transactions comes with risks, and more proactive transfer pricing policy management is required. It’s now vital for management and governance to be across their organisation’s transfer pricing policies and to understand how they work within the business; transfer pricing updates and reviews are no longer a simple box-ticking compliance exercises - they are opportunities for policy optimisation and risk mitigation.
It is clear there will still be a hangover of the past 24 months in 2022 as markets continue to recover and a new normal sets in. Changes to international transfer pricing rules will not slow down - in fact they will only increase. While BEPS 2.0 is targeted at larger multinationals it is a fundamental change in how the international tax framework operates and the concern is that governments could overhaul their transfer pricing rules and guidelines, impacting all entities transacting cross-border with related parties.
Tax authorities are talking to each other more
The changing transfer pricing landscape is amplified by the increase in collaboration between tax authorities around the world. The IRD is party to a significant amount of international information sharing agreements and receives vast amounts of data about multinational groups operating in New Zealand. The IRD is also using its new IT systems to more efficiently target entities transacting cross- border with related parties, who are perceived as posing a high transfer pricing risk.
A word of warning for smaller, non-multinational organisations
Many taxpayers believe transfer pricing is only applicable to large multinationals and focussed on profit shifting (hence the “transfer price”). In reality, it’s a set of rules to ensure each country’s tax authority gains maximum tax revenue, and applies to all types of organisations and individuals where there are cross-border related party transactions. In essence, these rules seek to provide certainty that the fee paid for those goods and services will be seen as fair by each country involved, and if so minimise the risk of double taxation and disputes between jurisdictions.