Transfer Pricing Guidelines and Penalty Provisions under New Zealand Income Tax Act, 1994

Question 2
The new transfer law was enacted in New Zealand in Section GD13 of the Income Tax Act, 1994 with
an intention to improve the taxpayer disclosure and reporting of New Zealand source based income
and while reducing the manipulation and shifting of profits to lower tax jurisdiction through cross
border transactions. The guidelines developed are in consensus with Organisation for economic
cooperation and development, the principal body for Base Erosion and Profit Shifting (BEPS).
Further, the law developed was consistent with New Zealand Double Tax Avoidance Agreement.
(IRD, 2018)
In terms of the OD 7 and OD 8 of the New Zealand Income Tax Act, 1994, associated enterprise shall
mean the following:
(i) When two companies under any time under the year are under control of group of persons or
individual holding more than 50 % of voting interest in the company;
(ii) When both the companies are controlled by a third party;
(iii) The market interest of both the companies exceeding 50% are controlled by third entity;
(iv) If under any circumstance a company and any person other than a company holds at any time
voting interest in the company equal to or exceeding 25% or The market interest of the
company exceeding 25%;
(v) The two person concerned are relatives to each other;
(vi) A partnership under which any person is a partner in the partnership or he is associated with the
partner in the partnership
(New Zealand Government, 2018)
In terms of HHF3 of the New Zealand Income Tax Act, 1994, relative shall mean the following:
(a) Connected by blood relationship;
(b) Marriage;
(c) Partnership;
(d) Adoption;
(e) Trustee of trust when an individual is beneficiary to that trust.
(New Zealand Government, 2018)
On the basis of above deliberations, in the present circumstance, Andy is going to raise an invoice on
the company Smith-On plc business which has been founded by him and has an interest of 51% which
satisfies the conditions stated here-in-above. Hence, Smith-On plc and Andy are associated enterprise
and transaction between the shall be governed by transfer pricing rules as laid down under New
Zealand Income Tax Act, 1994.
Further, w.r.t the second transaction for supply of equipment’s by Smiley Braces Ltd to the Smith-On
plc. In this regard, since both the entities are under the ownership of Andy with Andy being holding a
substantial interest in the company. The transaction between the two enterprises shall come under the
purview of transfer pricing rule as stated on account of definition of associated enterprise stated
above.

Further, the law of transfer pricing states that transaction between two associated enterprises shall be
carried out at arm’s length. The basis of computation of such arm’s length price has been detailed
here-in-below
Methods of Transfer Pricing in New Zealand in terms of Section GD 13(7) of the New Zealand
Income Tax Act, 1994
(a) Comparable Uncontrolled Price Method;
(b) Resale Price Method;
(c) Cost Plus Method;
(d) Profit Split Method;
(e) Comparable Profits Method.
The first three methods are described as traditional method while the later two are transactional
methods for determination of Arm’s Length Price for transaction between two associated enterprises.
(IRD, 2018)
Comparable Uncontrolled Price Method
The Comparable Uncontrolled Price Method, commonly known as the CUP method is the most direct
and reliable method amongst all the methods. Under the CUP method, the price charged for goods or
services transferred in a controlled transaction is compared to the price charged in a comparable
uncontrolled transaction. It is a price for identical or nearly identical goods traded between two
independent parties under the same or similar circumstances. The method assumes that a known
comparable uncontrolled price exists for the sale or purchase of the same or similar goods between
independent parties.
Further, in case of similar transaction the adjustment shall be made on account of differences in the
following manner:
(a) identify the price charged or paid for property transferred or service provided in a comparable
uncontrolled transaction;
(b) adjustments on account of difference between price charged in the International Transaction or
Specified Domestic transaction and that charged in the uncontrolled comparable transaction,
which materially affect the price charged in open market;
(c) the adjusted price is considered as the arm’s length price in respect of
the property transferred or services provided in the International Transaction.
Further for typical transaction for which CUP shall be used includes the following:-
(a) Transfer of goods;
(b) Provision of Service;
(c) Intangibles;
(d) Interest on loans.
In the present circumstance, since the transaction involve sale of goods by Smily Braces Limited to
Smithe-on-Plc and hence the same shall be benchmarked by using Comparable Uncontrolled Price

Method. Further, the comparable for the said product shall be find in the external market or the price
at which the same good is sold by Smily Braces Limited to non-associated enterprise shall be taken as
CUP.
Further, w.r.t. provision of service the above reason shall hold and the method shall apply
accordingly.
Resale Price Method
The Resale Price Method, commonly known as the RPM is applicable when a product is sold by one
associated enterprise to another and then the same is resold to an unrelated enterprise. The price,
which the unrelated enterprise pays, is the benchmark in this case. The method determines the arm’s
length price for transfers affected to associated enterprises, which resell or distribute to unrelated
parties without significant value additions.
Since in the said case, there has not been any resale of such goods and service, the said method cannot
be used for the purpose of benchmarking.
Cost Plus Method
The Cost Plus Method, commonly known as CPM, is generally suitable for transactions between
associated enterprises in relation to (a) sale of semi-finished goods, (b) long term buy-and-supply
arrangements, (c) subsidiaries performing the role of sub-contractors, etc.
Since in the said case, there has not been any aforesaid circumstance, the said method cannot be used
for the purpose of benchmarking.
Profit Split Method (PSM)
The OECD Transfer Pricing Guidelines observes that the total profits arising out of the Associated
Enterprise transactions must be split in an economically valid basis, each reflecting the functions and
risks of each party engaged in the transaction.
Under the Profit Split Method (PSM), the relative contribution made by each of the associated
enterprises is evaluated with reference to external data in respect of un-associated enterprises
performing comparable functions under similar circumstances. This method intends to eliminate
special conditions imposed in controlled transactions on the levels of profits to be earned by the
associated enterprises. The advantage PSM has over other methods is that it can also be used in cases
where comparable transactions between non-associated enterprises cannot be identified.
Under this method, the combined profits from controlled transactions are divided between the
associated enterprises on the basis of relative value of the functions performed by each of the
associated enterprises participating in the transaction. This method ensures the attribution of both (a)