NEW ZEALAND Law and Practice Contributed by: Greg Neill, Fred Ward and Callum Burnett, Russell McVeagh
Royalties For royalties paid to non-residents, the rate of with - holding tax imposed under domestic law is also 15%. Again, however, this rate may be reduced to 10% under an applicable DTA. In some of New Zealand’s more recently negotiated DTAs, the rate in respect of royalties may be further reduced to 5%. 4.2 Key Treaty Jurisdictions for Inbound Investment The framework of New Zealand’s DTAs generally fol - lows that of the OECD Model Tax Convention. New Zealand currently has 41 DTAs in force, covering almost all of its major trading partners (including Aus - tralia, China, Japan, the United States, South Korea and the United Kingdom). These bilateral tax treaties seek to reduce tax impediments to cross-border trade and investment, and to assist tax administration. New Zealand is also in negotiations with other jurisdictions to implement DTAs that will further broaden New Zea - land’s DTA network. New Zealand is party to a variety of tax information exchange agreements to facilitate the exchange of tax-related information with countries where no DTA is applicable. The ratification of the MLI also strengthens New Zea - land’s position when it comes to international taxation, by modifying New Zealand’s existing tax treaties. 4.3 Tax Authority Scrutiny of “Treaty Shopping” Practices The MLI entered into force in New Zealand on 1 Octo - ber 2018 and introduces an anti-abuse rule called the “principal purpose test” into many of New Zealand’s DTAs. This test is found in Article 7 of the MLI and acts to deny the benefits of a DTA where one of the principal purposes of using a treaty country entity by a non-treaty country resident is to obtain the benefits of the tax treaty. The principal purpose test does not apply to all of New Zealand’s DTAs. 4.4 Transfer Pricing Issues for Inbound Investors The most significant transfer pricing issues for inbound investors operating through a local corporation are
generally the pricing around the inbound sale of goods and interest costs on related-party debt. According to New Zealand’s Inland Revenue, the most common multinational business form encountered in New Zea - land is foreign-owned wholesale distributors or those that purchase and on-sell goods without significant transformation. 4.5 Challenges to Related-Party Limited Risk Distribution Arrangements While no transfer pricing dispute has yet progressed through the courts in New Zealand, there have been instances where Inland Revenue has challenged the use of related-party limited risk distribution arrange - ments for the local sale of goods or provision of ser - vices. 4.6 Local Transfer Pricing Rules and OECD Standards New Zealand adopted changes to its transfer pricing regime in 2018 to better align with the OECD’s trans - fer pricing guidelines. These amendments included the adoption of restricted transfer pricing in rela - tion to inbound debt. New Zealand’s transfer pricing approach is generally guided by OECD transfer pricing guidelines, and the Income Tax Act notes explicitly that New Zealand’s rules are intended to apply con - sistently with the OECD guidelines. 4.7 Transfer Pricing Disputes and Mutual Agreement Procedures While no transfer pricing dispute has progressed through the New Zealand courts, it is an area of increasing interest to Inland Revenue, and transfer pricing matters are actively investigated and chal - lenged. This is due to the material risk to the New Zealand revenue base and due, in particular, to the monetary amounts that are often involved in cross- border transactions between related parties. The mutual agreement procedure (MAP) will gener - ally be utilised as part of a transfer pricing dispute with Inland Revenue, and transfer pricing matters are typically resolved under the MAP. This is a key reason why no transfer pricing dispute has yet progressed to the courts.
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