New Zealand Multi-Nationals ‘Missing The Boat’ On Key International Tax Issue
The approach New Zealand multi-national enterprises are adopting to a critical international tax issue is proving
detrimental to their ‘bottom line’ according to the findings of a just-released global survey.
After sampling the views of 641 parent companies and 200 subsidiaries in 22 countries, including New Zealand, the Ernst & Young report highlighted transfer pricing as the primary tax concern facing multi-national enterprises.
While their international counterparts are reaping the rewards that come from managing this issue to best effect, New
Zealand multi-nationals are ‘missing the boat’ says Leslie Prescott-Haar, Ernst & Young’s National Director Transfer Pricing.
“Whether it is unwittingly, or through not fully understanding the implications of transfer pricing to their operation,
businesses are paying a cost they shouldn’t have to,” she said.
According to Leslie Prescott-Harr, when transfer pricing is inter-linked with business strategy and planning, the
tangible benefits multi-nationals achieve include operational and financial efficiencies, improved management, enhanced
processes and communication, reduced effective tax rates, defensibility of transfer pricing practices and a reduction of
administrative burden.
“While 25% of total parent organisations sampled who adopt a proactive stance may seem low, alarmingly only 5% of New
Zealand parent companies utilised transfer pricing as a cornerstone of business planning. Not only are these entities
missing out on clear commercial benefits, they are also susceptible to increased scrutiny, and pressure, from revenue
authorities around the world,” she said.
Transfer pricing, says Leslie Prescott-Harr, relates to how transactions between multi-national companies and/or
branches are accounted for or occur. These include transfers of products, property (tangible or intangible), services,
loans and leases and other transactions. When a ‘non arms length’ approach is adopted, rightly or wrongly revenue
authorities are quick to regard these as tax avoidance mechanisms.
This is one area where, according to Leslie Prescott-Harr, New Zealand multi-nationals are ‘missing the opportunity
boat.’
“Globally, revenue authorities have intensified their attack on transfer pricing. Our own Inland Revenue Department is
no exception and in fact is gearing up, and committing resources, to take on more and more transfer pricing audits.
These will become the rule rather than the exception—in fact, 71% of US-based multinationals have had a transfer pricing
audit since 1999 and 76% of all companies surveyed said they expected similar activities to take place within their own
organisation in the next two years.”
“As well as being disruptive, time and resource draining for multi-nationals, these audits have been costly in other
ways. According to the global survey, 33% of the 689 issues raised, and resolved, on audit since 1999 resulted in some
form of adjustment. Double taxation (40%) and penalty imposition (15%) were the end results with transactions involving
intangible property and financing being the most susceptible areas of investigation,” she said.
According to the report, multi-nationals in this country also fall below the international standards in two other
critical areas related to transfer pricing says Leslie Prescott-Haar.
“Internationally, just under 20% of those sampled have put in place a practice of Advance Pricing Arrangements for
transfer price planning as compared to 10% of New Zealand organisations. Similarly, an average of 29% of respondents
indicated they were benefiting from having a global, or coordinated multi-country documentation process that included
identification of opportunities, consistency, enhanced controversy management and cost savings. In contrast, only 15% of
New Zealand parent companies have taken this approach,” she said.
The actions required for New Zealand multi-nationals to come up to speed in dealing with transfer pricing issues, says
Leslie Prescott-Harr, are two fold.
“First of all, these companies should think globally but act locally particularly in implementing ways to benefit from
global, or coordinated, multi-country support documentation.”
“Second of all, make sure a pro-active stance is taken to align transfer pricing with overall strategy. Based on the
survey results, and local experience, New Zealand multi-nationals would gain considerably from having
commercially-integrated transfer pricing strategies,” she said.
NOTE: The full survey can be downloaded from Ernst & Young’s website at www.ey.com/nz
About Ernst & Young
Ernst & Young, a global leader in professional services employs 106,000 people in more than 140 countries. Ernst & Young staff pursue the highest levels of integrity, quality, and professionalism to provide clients with solutions
based on financial, transactional, and risk-management knowledge in Ernst 's core services of audit, tax, and corporate finance.
Further information about Ernst & Young and its approach to a variety of business issues can be found at www.ey.com/nz.
Ernst & Young refers to all the members of the global Ernst & Young organisation.
ends