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Multi-Nationals Missing The Boat On Tax Issue

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 &Young'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.

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