Inland Revenue has updated its compliance focus guide for foreign (and New Zealand) headquartered multinationals, reflecting on the progress made over the last five years and highlighting its top priorities for future compliance activities.
What the latest version of the guide covers
Takeaways and actions for multinationals
The release of the 2024 multinational enterprises compliance focus guide comes at a time when Inland Revenue is increasing its general enforcement activity.
As a general theme, there will be more audits and investigations, with a faster transition to audits, than previously. The use of data analytics and intelligence from various sources as part of Inland Revenue’s risk profiling is likely to result in more targeted audit activities focused on specific risk areas. Are you aware of your key tax risks and how they are being managed?
Starting next year, there will be changes to the Basic Compliance Package (“BCP”) process, which will target these requests at a much smaller group annually, to allow for more in-depth reviews.
- Taxpayers that are part of the BCP population (currently, New Zealand owned multinationals with turnover of at least NZD 80 million or foreign owned multinationals with turnover of at least NZD 30 million) can expect to receive BCP information requests every three years, rather than annually, from 2025.
- This does not mean that those not selected for a BCP review will lack scrutiny. You may still be subject to other compliance activities, such as a risk review or even an audit, or may be required to complete other questionnaires (e.g., the international questionnaire), if Inland Revenue identifies specific areas of concern.
Tax governance is a key risk indicator. It is, therefore, critical that your organisation has New Zealand “fit-for-purpose” tax governance arrangements, including:
- Customised tax governance frameworks and policies that are not merely a “lift-and-shift” of a global or foreign tax policy. Explicit consideration needs to be given to New Zealand risks, functions, processes, and personnel involved in tax management.
- Independent testing of your tax processes, particularly, around compliance obligations, for both accuracy and operating effectiveness. Relying solely on overseas controls testing programmes may not be sufficient if New Zealand processes and data are not explicitly being tested.
- Evidence that there is Board-level consideration of material tax risks. This may be challenging for some inbound multinationals, particularly, if New Zealand has limited functions, senior management have dual roles as directors, and there is little to no reporting to the local board in general.
Documented support is vital to demonstrate effective management of transfer pricing and international tax risks.
- The compliance focus guide includes a transfer pricing governance checklist, which emphasises the need for documentation to be comprehensive (covering all cross-border related party transactions), developed with input from local management or the finance team, and kept up to date for changes in business functions, assets, and risks. In addition to the risk indicators listed earlier, the guide also highlights some specific transfer pricing risk areas, including the suitability of comparables used for benchmarking purposes. In particular, Inland Revenue cautions against using data from countries (e.g., in Asia) that are not of a similar size and/or stage of economic development to New Zealand.
- The BEPS 1.0 measures, including the hybrid mismatch provisions and restricted transfer pricing interest limitation rules, are now well embedded. Inland Revenue is actively querying compliance with these rules. Therefore, multinational groups should have robust analysis to support its New Zealand tax filing positions and any BEPS disclosures accompanying the income tax returns. Similar expectations will apply if you are within the scope of the GloBE / Pillar 2 legislation.
The compliance focus guide includes several checklists and red flag indicators designed to assist multinational groups in self-assessing their international tax and transfer pricing risk profiles. We recommend promptly consulting with your tax advisors regarding any identified issues to ensure that associated risks are properly addressed and managed. Various options are available to manage risks and obtain certainty in respect of cross-border arrangements.
For more information on the international tax risk areas highlighted in the 2024 multinational enterprises compliance focus guide, and their impact, or to discuss how your tax governance arrangements measure up to Inland Revenue’s expectations, please contact your regular KPMG advisor or Darshana Elwela and Polina Belykh.
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