IRD's 'safe harbour' guidelines get warm welcome

By BRIAN FALLOW

WELLINGTON - Long-awaited transfer pricing guidelines released by Inland Revenue yesterday have been greeted as generally pragmatic and realistic.

The guidelines, which have been promised for the past 18 months, cover the transfer of intangible property and the provision of intra-group services.

In addition to general management fees, intra-group services include such things as information technology support or call centres.

PricewaterhouseCoopers tax partner Julia Hoare welcomed the guidelines' pragmatic approach and especially the decision to include "safe harbours" for intra-group services.

That move, though disapproved of by the OECD, would save the substantial and disproportionate compliance costs involved in a full transfer pricing calculation.

The IRD says that where the cost of the services is under $100,000 a year, then cost plus a markup of 7.5 per cent is an acceptable transfer price.

A similar rate applies for "non-core" services where the amount charged for is no more than 15 per cent of the New Zealand company's accounting expenses.

The guidelines on intangible property apply to any rights to use patents, trademarks and trade names, copyright and other intellectual property such as know-how and trade secrets.

Julia Hoare said the IRD "acknowledges that applying the arms-length principle to transfer of intangible property can be problematic, because appropriate comparable transactions can be difficult, if not impossible, to locate - especially in a small country like this."

The guidelines tried to provide practical solutions but would depart from OECD principles where no reliable comparisons were available.

While this was commendable, companies would need to be cautious as such approaches might not be acceptable to overseas revenue authorities, she said.

Taxpayers could find themselves caught in the middle of an argument between two tax authorities.

The release of the guidelines comes as the IRD begins to step up the pressure on multinational companies in New Zealand over transfer pricing rules.

The rules aim to stop companies from dodging tax by fixing artificial prices to transactions between related companies in different tax jurisdictions.