Large enterprises update (formerly Corporates contact) - 2007
Large enterprises update - Number one: July 2007
- New structure - Large Enterprises
- Robert Russell - Inland Revenue's new Commissioner
- Transfer pricing update
- Initial results from the 2007 Large Enterprises survey
- PAYE payments and ir-File receipts
- Good governance and tax risk management
- KiwiSaver takes off
- From the editor
New structure - Large Enterprises
Please note, the following structure chart is not a complete Inland Revenue structure chart and only shows those managers and business groups within Service Delivery that have a large enterprise focus.
Robert Russell - Inland Revenue's new Commissioner
Bob Russell was appointed of Commissioner and Chief Executive of Inland Revenue on 21 May 2007. Bob joined Inland Revenue in October 2006 as Deputy Commissioner, Service Delivery.
Before coming to New Zealand, Bob had over 30 years' public sector experience in Canada. As well as revenue roles, Bob has been a manager in urban planning, a range of trade and economic development areas, and in telecommunications, consumer protection and oil and gas regulatory functions.
From 1988 to 2006, Bob was the Assistant Commissioner, Atlantic Region in the Canada Revenue Agency. In that role he was responsible for the full range of Canada Revenue Agency operations within the Atlantic region, plus a number of key national initiatives. Prior to that, Bob held various positions with Industry Canada, and Energy, Mines and Resources Canada.
Bob brings diverse public sector management skills to Inland Revenue and experience of working with key industry groups and taxpayer associations at the highest levels. He has represented both Canada and now New Zealand at the Commonwealth Association of Tax Administrations. In 2006 he received the Public Service of Canada Award for management excellence.
Bob has tertiary qualifications in engineering (BSc), urban and regional planning (MPI) and business administration (MBA). Away from the workplace, Bob has extensive volunteer experience, primarily in amateur sport, and is an avid runner and cyclist. He is enjoying the opportunities offered in New Zealand. Bob is married and has four sons.
Transfer pricing update
Transfer pricing remains the most important international tax issue facing both foreign-owned and New Zealand-owned multinational enterprises. Inland Revenue is continuing to focus closely on cross-border associated party transactions in 2007.
Transfer pricing documentation is central to the process of justifying and explaining pricing of cross-border transactions. A company's main purpose in preparing and maintaining documentation should be to place itself in the position where it can readily demonstrate to Inland Revenue that its transfer prices are consistent with the arm's length principle. Once again, we recommend that you not only maintain, but also regularly update documentation supporting your pricing of cross-border associated party transactions, especially where there has been any material change in business activities.
In addition to routinely examining documentation, Inland Revenue will be paying close attention in 2007 to:
Royalties
We will be carrying out a special project on associated party royalties. In particular, we will be examining:
- the quantum of the royalty in the context of the paying taxpayer's profitability
- the transfer pricing methodology employed, and
- the supporting documentation.
Business restructuring
We will be closely scrutinising conversions to low-risk models, inter alia ensuring revised contractual terms are consistent with the conduct of the parties in practice and that there is true economic substance underlying purported low-risk operations.
Private equity
We will be monitoring those businesses that have been sold to offshore private equity interests. Offshore experience has shown that high gearing can create pressures to extract maximum profits at minimum tax cost.
Advanced pricing agreements
Advance Pricing Agreements ("APAs") represent a more cooperative approach to addressing transfer pricing compliance. They produce significant time and cost savings for both tax authorities and multinationals in comparison with adversarial audits. APAs encourage up-front taxpayer compliance and early resolution of potential disputes. Our preference is for bilateral/multilateral APAs because unilateral APAs may not necessarily be accepted by another affected tax administration, should the covered transactions come under their examination.
We have a mature APA programme with 30 APAs completed and several major applications in progress. We recommend you give APAs serious consideration as not only the ultimate solution to potential double taxation, but also for the more complex transfer pricing issues, especially cases involving intangibles which can result in a wide range of opinions as to pricing.
If you have any queries about the above, please contact one of our National Advisors (Transfer Pricing):
| Keith Edwards | 09 984 4340 |
| Mike Spelman | 09 984 4327 |
| Kriti Velji | 04 890 3246 |
Initial results from the 2007 Large Enterprises survey
A cross-section of large business taxpayers were interviewed earlier this year as part of our annual large nterprises survey. 100 taxpayers took part to help us better understand what large businesses need, and identify areas where we are doing well and areas in which we could improve.
Of those interviewed this year, roughly 40% also took part in the inaugural survey in 2006.
The initial results from the 2007 survey show some areas of improvement.
"Last year, businesses told us that they thought it was important having a specific Inland Revenue contact person," says Tony Morris, Assurance Manager (Large Enterprises). "This year, we asked businesses to rate their specific contact person’s attributes."
We were rated most positively for:
- being prompt, courteous and professional
- following through on what we said
- being well-trained and competent.
"The initial results also show some areas where businesses are more satisfied compared to the 2006 results," says Tony.
These include:
- requesting appropriate and relevant information
- ability to identify significant tax issues prior to the audit
- ability to investigate in-depth significant tax issues
- investigator giving them a greater understanding of their tax obligations
- completing the audit within a reasonable timeframe.
"While it's pleasing to see some changes, we are committed to continuous improvement.
"We will continue to build on our progress and the new initiatives arising from last year's survey around timeliness and communication during an investigation," says Tony.
Thank you to those businesses who participated in the survey. Inland Revenue values customer input and feedback. We'll share the results in more detail, along with our action plan, in the next issue of Large Enterprise's Update.
PAYE payments and ir-File receipts
We have found some errors matching PAYE payments with what has been declared to Inland Revenue on employer monthly schedules and employer deductions pay-in forms.
When the employer monthly schedule is filed using ir-File a receipt is generated which advises that the schedule has been transmitted successfully. It also provides a summary of the following totals:
- gross earnings
- PAYE and/or withholding tax
- earnings and/or withholding payments not liable for ACC earner levy
- child support deductions
- student loan deductions
- KiwiSaver contributions.
We have also received payments that don't match the totals supplied on the employer monthly schedule. When a schedule has been submitted, please check the receipt and ensure that the payment will match the total tax deductions made. For employers who make payments twice-monthly, please check the receipt matches the total deductions made for the whole month. This will ensure your payment is allocated correctly and reduces any chance of credit or debit occurring with your PAYE deductions.
Your receipts will be listed along with the other files in your workspace, and also in the receipt workspace. To check for a receipt, select one of these workspace options from the left-hand side navigation bar. If you are having any problems with ir-File please call 0800 473 829.
Good governance and tax risk management
This is an excerpt from a presentation to the CFO forum in February 2007 given by Bob Russell, who was at the time Inland Revenue's Deputy Commissioner, Service Delivery and is now Inland Revenue's new Commissioner.
Following some notable recent world events, we've heard much discussion about strengthening governance in companies and in the public sector. Large enterprises here and overseas increasingly recognise that having an explicit tax risk management policy is a good idea, and tax should be on the boardroom agenda.
We have started discussions with the New Zealand Institute of Directors, the New Zealand Institute of Chartered Accountants, the New Zealand Law Society and other New Zealand organisations to increase awareness of the importance of managing tax risks effectively. Based on the work so far, support for the idea of raising tax awareness and capabilities across boards appears to be quite high.
So, what do we consider to be key elements of a tax risk management policy? Fundamentally, it should be consistent with your overall business strategy, and visible and clear to company management and advisors. Overseas, shareholder value has been increasingly damaged where companies got tax wrong. In more specific terms, tax management risks might be categorised as:
- transactional risks
- operational risks
- compliance risks, or
- financial accounting risks.
Transactional risks
Transactional risks can be the highest-level tax risks and occur where transactions are designed specifically for tax purposes. Major transactions will often be examined by a revenue authority, and these deserve close attention by executives and directors. The process used to govern these decisions should be well documented, with an agreed framework against which to judge acceptable risk-for instance, whether tax avoidance rules could affect the transaction.
Operational risks
Operational risks relate to routine business operations, but there can be different levels of risk depending on whether it is a routine domestic transaction (for example, sale of trading stock), or a cross-border related party transaction.
Compliance risks
Compliance risks relate to compliance with statutory obligations such as filing a return or making a payment. These include internal processes to ensure obligations are met and questions are answered within agreed timeframes.
Financial accounting risks
Financial accounting risk relates to proper internal controls over financial reporting. As you know, this is now clearly directed at a "no surprises" approach to the preparation of financial reports, including tax provisioning.
Certain situations require very careful attention by directors and executives concerned with good governance. You could ask yourselves:
- whether your company has any cross-border arrangements where the profit returned to New Zealand does not match the economic contribution of activities here, with regard to the assets used, functions performed and risks borne
- whether your group's structure is generating tax benefits unrelated to any economic substance
- whether your company is engaging in transactions which would appear unnecessarily complex from a commercial point of view, but which are generating tax benefits
- whether your company is engaging in transactions where the tax benefit is disproportionately high compared to any limited financial exposure, or where the transaction is divorced from economic substance
- whether the company has unexplained or questionable market valuations allocated to depreciable property.
KiwiSaver takes off
The new government work-based savings initiative, KiwiSaver started on 1 July 2007.
With KiwiSaver now in place in New Zealand, it's important to remind you of what it means and what you need to do.
What do employers need to do?
Employers need to decide if their staff are salaried workers or contractors and whether they are eligible for KiwiSaver. To help you make these decisions Inland Revenue has sent all employers a KiwiSaver employer guide (KS 4) which is a "how to" on KiwiSaver and focuses on your obligations as an employer. It also provides information on your options as an employer and, at a high level, outlines the proposed changes signalled in Budget 2007.
If you haven't received a copy or need additional copies of the employer guide or employee information pack, you can download them from the Inland Revenue website (see below) www.ird.govt.nz/kiwisaver/ or call Inland Revenue's telephone service INFOexpress on 0800 257 773 to get copies posted to you.
What you need to do now
Unless you are an exempt employer, you will need to give a KiwiSaver employee information pack (KS 3) to every new employee who is subject to the automatic enrolment rules and who starts a new job with you from 1 July. You'll also need to give a KS3 to any existing employees who ask for one. Then you must start deducting contributions (either 4% or 8%) from a new employee's first pay.
Budget announcements
Budget 2007 announced significant enhancements to the KiwiSaver initiative.
Some of these have been passed by Parliament and are law-others are proposals which are going through the legislative process.
KiwiSaver enhancements passed by Parliament:
- From 1 July 2007, employer contributions to KiwiSaver must be made through Inland Revenue, not direct to a scheme provider.
- Also from 1 July 2007, a new tax credit of up to $1,042.86 a year has been introduced for KiwiSaver members. Conditions apply, for example, the person must 18 years or older, etc.
Proposed KiwiSaver enhancements subject to legislation being passed by Parliament:
- From 1 April 2008, all employers will be required to match employee contributions to KiwiSaver (or a complying superannuation fund). This will be phased in over four years, starting with 1% of gross salary and moving by 1% per year to reach 4% of gross salary by 1 April 2011.
- From 1 April 2008, these employer contributions will be eligible for a matching employer tax credit of up to $20 per week ($1,040 per year) per employee.
- To minimise compliance costs and impacts on cash flow these tax credits will be paid regularly to employers through the PAYE system by offsetting the credit against the employer's contribution and other PAYE liabilities.
The above changes relating to employers are proposals only and not law. Legislation has been referred to Parliament's Finance and Expenditure committee. It is expected to be passed later this year. You can view the Bill and commentary by going to www.taxpolicy.ird.govt.nz
More budget information can be found at www.treasury.govt.nz
For more information about KiwiSaver and employers, go to www.ird.govt.nz/kiwisaver/employers
From the Editor
Disclaimer
Large Enterprises Update comments generally on topical tax issues relevant to large enterprises. While every attempt is made to ensure that the law is correctly interpreted, articles are intended to be a brief overview only and are not a full commentary or analysis of the law. The examples provided are not intended to cover every possible factual situation.
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Date published: 19 Dec 2007
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