Taxman targets multinational profit stripping
Inland Revenue has gone shopping for a database to help it fight erosion of the tax base and “profit stripping” by multinational corporations.
The database will help the taxman to independently assess the level of profitability companies should be returning for tax purposes by benchmarking the prices multinationals charge their New Zealand subsidiaries for head office services.
PwC tax partner Geof Nightingale said the tax department had been making more effort to prevent overseas-owned firms using inflated “transfer pricing” to syphon profits out of the country before they could be taxed.
“It is paying more attention and applying more resources to transfer pricing and talking more with its counterparts in other countries, generally upping its level of sophistication,” he said.
IRD said multinational enterprises often engage in cross-border transactions with associated companies, including paying for the supply of goods and services, intellectual property and financial transactions.
“How these transactions are priced may affect the profitability of both the giving and receiving entities,” it said. “If these prices are manipulated, profits may be shifted out of New Zealand.”
PwC’s website advises that transfer pricing is a key tax issue for multinational companies.
“It is an important driver of shareholder value, providing an opportunity to optimise the value of a business by effective tax rate and imputation credit management,” it says.
“Managing transfer pricing risk remains critical in an increasingly aggressive environment. New Zealand’s Inland Revenue continues to focus on transfer pricing and is currently considering adjustments which, in aggregate, amount to hundreds of millions of dollars.
“Taxpayers will continue to face regular investigations as transfer pricing is included as an integral component of Inland Revenue risk reviews and audits.”
The firm recommends multinationals develop a “sophisticated and tailored audit defence strategy”.
This would include the use of Advance Pricing Agreements (APAs), up-front deals with the tax office setting the service charges multinationals can levy on their New Zealand subsidiaries. Such strategies can deliver audit and litigation cost savings, PwC says, and “embed a cost effective defence” in potential audit situations.
IRD says APAs are ideally suited to issues involving intangibles, such as intellectual property charges, which can result in a wide range of opinions on pricing.
Nightingale said the new database initiative dovetailed with the work the Organisation for Economic Co-operation and
Development and the G20 were doing to crack down on multinational tax rorts but he believed it would probably be happening anyway.
“Inland Revenue has always had a specialist transfer pricing unit so it’s not a major shift, but it is gearing up to improve its focus and this is a further indication of that,” he said.
“What it is calling for is to build a database of comparative pricing data that it will use to benchmark transactions. I imagine it will also be populating that database with whatever retail pricing it can find online and from its own audits and over time it will become quite a rich source of information.”
Given it would take time to build up the pricing information in the database, any impact on businesses would not be overnight but cumulative over time, he said.
Inland Revenue said it had established its specialist transfer pricing unit to advise investigators, recognising not only the significance of transfer pricing but also its complexity.
“The community expects multinational enterprises to contribute their fair share via the tax system. Sometimes this is in conflict with the potential for revenue losses to arise due to incorrect transfer pricing policies and practices.”
IRD’s proposed database would create indicators to benchmark the performance and profitability of the subsidiaries of multinational enterprises and to examine links between offshore entities who may also be associated in New Zealand.
