The transfer pricing (TP) rules are governed by New Zealand Income Tax Act 2007 and are closely aligned to OECD Guidelines and the US Section 482 rules. The Inland Revenue has also issued an Information Bulletin and transfer pricing guidelines dealing with the application of the TP legislation. The framework of the legislation is as follows:

The arm’s length price is the guiding principle;
Five methodologies are permitted (see below). The arm’s length price is determined by using whichever of the methods capable of producing the most reliable measure of the price that independent parties would have reached in the framework of genuine commercial negotiations. A non-arm’s length price may be accepted but only if it would increase the New Zealand tax base;
Rules are also in place regarding the attribution of permanent establishment profits between New Zealand and another country;
The burden of proof as to the non-arm’s length nature of a given consideration rests with the Commissioner of Inland Revenue (the Commissioner). The burden of proof is shifted to the taxpayer if the Commissioner can substantiate either that:

the taxpayer withheld its cooperation with the Revenue; or
another consideration is a more reliable arm’s-length measure; and

Domestic law unilaterally caters to the possibility to grant compensating or corresponding adjustments (adjustments may also be available under a tax treaty).

Effective 1 July 2018, the transfer pricing rules are amended to include the following:

OECD transfer pricing guidelines should be used as guidance in relation to how the rules are to be applied, including in relation to the available methods;
Economic substance and the actual conduct of the parties will have priority over the terms of the legal contract by accurately delineating the transfer pricing transaction in line with Section D.1 of chapter 1 of new OECD transfer pricing guidelines;
In consonance with section D.2 of chapter 1 of new OECD transfer pricing guidelines, the authorities can disregard or replace transfer pricing arrangements that are not commercially rational (such as transactions that include unrealistic terms that unrelated parties would generally not be willing to agree to);
Reference to arm’s length conditions for clarifying transfer pricing rules can be used to adjust conditions other than price;
The onus of proof is shifted from the Inland Revenue to the taxpayer to demonstrate that the transfer pricing position aligns with arm’s length conditions (consistent with the onus of proof being on the taxpayer for other tax matters); and
The statute of limitation for transfer pricing adjustment is increased from 4 years to 7 years.

It is clarified that grandfathering of arrangements complying with Advance Pricing Agreements (APA) issued by the Commissioner is undertaken so they remain subject to existing transfer pricing rules till the expiration of APAs.

Definition of Related Parties

Whether or not persons are associated for TP purposes is determined by reference to a set of 11 “association tests”, as follows:

1. Two Companies Test(Sec. YB 2)

Two companies are associated where a group of persons holds an interest of 50% or more of the voting rights in both companies, or control both companies by any means. In circumstances where the voting interest does not accurately reflect the “market value of the participation”, then this market value is substituted for the voting interest test.

The test contains a rule whereby a person has attributed the deemed ownership of anything held by a person associated with him. This is to prevent the circumvention of the test through the fragmentation of interests between companies. Specific provisions deal with land ownership in this regard.

The expression “control by any means” does not apply to a company that is a state enterprise, Crown research institute, Crown health enterprise, or a company which a member of the group of a state enterprise or a Crown entity as defined. Also, the indirect (land) ownership rules do not apply to portfolio investment entities or widely-held funds that qualify for portfolio investment entity status.

2. Company and Person other than the Company Test (Sec. YB 3)

Section YB 3 determines a test for association between a company and a person other than a company. In this regard, a person other than a company may also include a company acting in its capacity as a trustee of a trust. Under the test, both persons are deemed to be associated if the person holds an interest of 25% or more in the voting rights of the company. Similarly to the test above, a “market value interest” standard may be substituted to the voting rights standard where the voting rights interest does not accurately reflect the person’s economic interest in the company. Furthermore, an anti-fragmentation rule applies in this regard as well, whereby the interests of the person and those held by others (notably relatives such as spouse, civil union partner, de facto partner, dependent children) may be aggregated. Note, however, that the anti-fragmentation rules do not apply to a corporate trustee.

3. Relatives Test(Sec. YB 4)

Under the Relatives Test, persons are deemed to be associated if they are:

Within two degrees of blood relationship;
Married, have entered into a civil union partnership or are de facto partners; or
If one person is within two degrees of blood relationship with the other person’s spouse, civil union partner, or de facto partner (essentially, stepchildren and in-laws)

The rules do not apply where one person cannot be reasonably expected to be aware of the existence of the other person, or of the existence of a blood relationship as defined.

4. Trustee and Relative Test(Sec. YB 5)

Under this test, a person is deemed to be associated with the trustee of a trust under which benefits accrued or to accrue to a relative of the first person as defined above. Hence, a person A would thus be deemed to be associated with the trustee of a trust if the spouse of A had accrued benefits or is eligible for future benefits from the trust. A number of exclusions apply in particular circumstances.

Generally, a person is deemed to have benefitted from the trust if the person received a distribution from the trust. Likewise, a person is deemed to be eligible for future benefits if the person is named as a potential beneficiary, whether individually or as a member of a class of persons.

5. Trustee and Beneficiary Test(Sec. YB 6)

Under this test, a trustee of a trust and a person who has benefited or is eligible to benefit under the trust are deemed to be associated persons. The definition of past or future eligibility is in line with the definition under the Trustee and Beneficiary Test above. Exceptions apply to unit trusts (as these fall under the 25% interest threshold under Company and Person other than the Company Test), charitable trusts and in a number of other circumstances.

6. Two Trustees with Common Settlor Test (Sec. YB 7)

Under this test, the trustee of a trust and the trustee of another trust are deemed to be associated if the same person is a settlor of both trusts. For these purposes, spouses and civil union or de facto partners would generally be treated as one person. Exclusions from this test apply in specific circumstances, such as for example in the case of certain employee trusts.

7. Trustee and Settlor Test

This test deems the trustee and settlor of a trust to be associated persons. As with Test 6 above, exclusions from this test apply in specific circumstances, such as in the case of certain employee trusts.

8. Settlor and Beneficiary Test (Sec. YB 9)

This test deems the settlor of a trust and a person who had benefited or is eligible to benefit under the trust to be associated persons.

The settlor and beneficiary test is the third test of association (the others being the trustees with a common settlor and trustee and settlor tests) that is based on the settlor of a trust. This focus on the settlor is consistent with the settlor-based focus of the trust taxation rules.

Given that there is a sufficient connection between a trustee and a beneficiary, as well as between a trustee and a settlor to justify treating them as associated persons, there is equally a sufficient connection between a settlor and a beneficiary to justify treating them as associated persons as well.

9. Trustee and Person with Power of Appointment or Removal Test (Sec. YB 11)

This test deems the trustee of a trust and a person who has the power to appoint or remove the trustee of the trust to be associated persons. The test applies regardless of whether the exercise of the power to appoint or remove the trustee is unconditional, or is conditional upon consultation with or consent by another person such as a protector. In contrast, the test does not apply to persons who may exercise the removal or appointment power only subject to the occurrence of future events (e.g. the incapacitation of the person holding such power), or persons who only have the power to object to or cancel the removal or appointment.

10. Partnership and Partner Test (Sec. YB 12)

Under this test, a partnership and a partner in the partnership are deemed to be associated persons. Note, however, that with respect to limited partnerships, association between the limited partner and the limited partnership is deemed only if the former’s share in the partnership amounts to 25% or more.

11. Tripartite Test (Sec. YB 14)

Under this test, two persons are deemed to be associated if each of them is associated to a third person under different association tests other than the Tripartite test itself or, generally, the companies test as outlined above. Other exclusions apply in specific circumstances.

Applicable TP Methods

The following transfer pricing methods apply to the transactions between related parties:

Comparable uncontrolled price (CUP) method;
Resale price method;
Cost-plus method;
Profit-split method; and
Transactional net margin method (TNMM).

New Zealand’s legislation does not impose an explicit hierarchy for the transfer pricing methods. However, there is effectively a hierarchy in that a taxpayer is required to use the method that provides the most reliable result, which depends on the taxpayer's circumstances and the available data. As a general rule, the most reliable method is the one that requires the fewest and most reliable adjustments to be made. In practice, it appears that the transactional net margin method is quite widely used.

Use and Availability of Comparables

There is no statutory requirement to include local comparables in the benchmarking set. Similarly, there is no statutory requirement to use a specific database. Nevertheless, the Inland Revenue recommends the consistent use of those comparables that exhibit key economic characteristics closest to the targeted company or transaction. The Inland Revenue will most likely reject "industry data dumps", even if supplemented by additional statistical analysis using various measures of central tendency (such as interquartile ranges, medians, and averages).

COVID-19 Emergency Measures

In response to the COVID-19 pandemic, the tax authorities have announced that the identification of comparable data to support the arm’s length nature may be challenging for a brief duration and therefore a pragmatic approach may be taken by taxpayers in the absence of comparable data. Taxpayers are required to observe the positive and negative outcomes of pre-COVID-19 expectations and variances resulting from COVID-19 with detailed consideration of the financial impacts of the local entity with supporting documentation.

Powerful Tax Solutions

Tax Rules Engine

Collaboration Tools

Latest Tax News