Tax change 'boost to big Kiwi exporters'

Inland Revenue says it will come down hard on companies that abuse new tax rules for income earned by foreign subsidiaries which could lead to more production and profits going overseas.

Under the new rules, income from foreign subsidiaries will no longer be taxed in New Zealand as it is earned.

Previously, this income was taxed at 30 per cent, less the tax paid by the subsidiary in its own jurisdiction, irrespective of whether the profits were brought back to New Zealand. Instead, the New Zealand tax will be payable only if, and when, the subsidiary's profits were distributed to shareholders.

But there was concern that the change could encourage manufacturers to move more of their production overseas to take advantage of lower tax rates.

Manufacturers could also be tempted to sell good and services cheaply to their subsidiaries, transferring the profits overseas.

Inland Revenue international audit chief adviser John Nash says companies must keep detailed records of foreign transactions to ensure they could show any transfer pricing with a foreign subsidiary was done at arms length.

"A failure to prepare adequate transfer pricing documentation, or acceptance of pricing that is clearly inappropriate could result in a 40 per cent shortfall penalty for gross carelessness."

Grant Thornton transfer pricing specialist Paul Gallagher said some of New Zealand's biggest exporters stood to benefit from the changes, including Fonterra, Zespri, Fisher & Paykel and Fletcher Building.

It also brought New Zealand in line with major trading partners including Australia, Britain and the United States, he said.

"The purpose of these reforms is to assist New Zealand-based businesses to compete effectively in foreign markets by freeing them from a tax cost that similar companies in other countries do not face."

The changes would improve the competitiveness of New Zealand's tax system and encourage businesses with international operations to expand from a New Zealand base.

Mr Gallagher said allowing manufacturers to defer the taxable earnings from foreign subsidiaries could encourage them to send more production overseas or transfer profits previously earned on New Zealand sales to a foreign subsidiary.

Profits could be transferred by selling New Zealand-made products or services to a foreign subsidiary at below normal market values.

By reducing the price of a New Zealand-made widget to $8 from $10 under the old rules, the previous $2 profit is effectively transferred to the lower-taxed subsidiary.

Another option would be to defer indefinitely, manufacturing royalties paid by the subsidiary to their New Zealand parent.

To safeguard the tax-base, Inland Revenue would strictly enforce transfer pricing rules, Mr Gallagher said.

Inland Revenue has warned that manufacturers must be able to justify a lower price charged to a subsidiary than other customers.

"The New Zealand manufacturer would have to be able to demonstrate that the $8 per unit represents an arms-length price for a widget."

- © Fairfax NZ News