Gone are the days of isolation. The world's now truly become a global village. Free-trade-Agreements (FTAs) and Economic Partnership Agreements make it easier for countries to do business with each other. This makes it easier for even small to medium sized New Zealand businesses to try and export their services or products overseas.
However, it's vital for businesses to do their research and understand tax regulations before entering a new country.
KPMG partner Kim Jarrett looks at one aspect that many fail to consider and explains why its important:
One of the first tax regimes that exporters need to get to grips with once they start to establish a presence overseas is transfer pricing. This complex set of rules govern the cross-border prices of goods, services and other transactions entered into between related parties (such as between a parent company and its subsidiary).
Transfer pricing rules in most countries (including New Zealand and all of our major trading partners) are based on common OECD-based principles.
The rules allow tax authorities in New Zealand and overseas to amend the pricing in cross border transactions between associated taxpayers to reflect what they believe the value of the transaction would have been had the parties not been associated (i.e. as if they were trading at arm's length).
Transfer pricing looks not only at obvious international transactions, for example selling a product overseas to an associated party, but it also looks at the rate of management fees, financing, guarantee fees, market support payments and charges for intellectual property or services.
Transfer pricing works to ensure the pricing in cross border transactions between related parties meets the approved methods of calculation in each of the international jurisdictions.
It takes into account the functions, assets and risks in each of the companies involved and benchmarks the results of comparable unrelated entities to the company's returns. Transfer pricing ensures that lower risk entities have justification for their lower returns and can avoid tax authorities amending transactions.
Properly managed, transfer pricing can be a very powerful tax planning tool, enabling companies to maximise tax efficiencies through the careful allocation of assets, functions and resources between group companies.
The concern of tax authorities is to prevent multi-national groups from manipulating profits across the group through inappropriate group charges, thereby reducing the tax take of their local jurisdiction.
With the Global Financial Crisis reducing government revenues in many countries, tax authorities worldwide are becoming more aggressive in securing a piece of the shrinking global tax pie and transfer pricing audit activity is on the rise.
New Zealand is certainly not immune from this trend, and our new International Tax regime has increased Inland Revenue's focus on potential transfer pricing issues. Australia has also increased its level of transfer pricing surveillance, with the Australian Tax Office employing additional staff to assist in transfer pricing tax audits.
The benefits of managing your transfer pricing exposure through proper planning and timely documentation are significant. It ensures that your company operates transfer pricing policies that are appropriate, that are defendable to a revenue authority and that are tax efficient.
Taxpayers about to commence overseas operations ensure their operating model will put them in the best tax position in both countries, both from a tax efficiency perspective, and from a tax governance perspective.
Properly defining each company's role, functions, assets and risk profile before embarking on an overseas venture can enable companies to better manage transfer pricing and its associated tax risks.