Compliance focus 2009-10: Community and business segments

Large enterprises

  

Our compliance approach

Many large enterprises are publicly listed, foreign-owned or part of international operations. They often manage their tax obligations from an international perspective, with financial arrangements and ownership typically involving several jurisdictions. Their tax responsibilities are complex.

In addition to interacting with us throughout the year on the full range of tax types and collecting and passing on other payments, large enterprises comply with industry specific and international tax legislation.

Because of their complexity and significance we take a different approach to providing assistance to many of our large enterprises. We have a relationship management programme including one-to-one account management. Regular meetings are held between our senior managers and chief executive officers to discuss issues. We offer a range of advice to large enterprises to provide certainty about different tax arrangements. Our quarterly Large Enterprises Update newsletter provides information for people who deal with tax matters in large corporate organisations.

We carry out an annual survey to assess large enterprises' perceptions of us and our impact on their compliance behaviour. The survey helps us to better understand what matters most to them, areas of our service they are happy with and areas for improvement.

Our approach to risk identification for large enterprises is more entity specific than other large enterprises. We identify issues on an individual basis as well as general and industry issues across the sector.

Income tax returns for many large enterprises are reviewed on an annual basis and individual effective tax rate calculations are undertaken to determine if any risks exist. We discuss any risks identified with the large enterprise before deciding if any further action is required. We use this information to prioritise issues for investigation.

Helping large enterprises have greater certainty

Large enterprises have told us they want certainty so they can make the right business decisions. Certainty can be provided through personalised relationships and timely and effective information and services. In line with international trends, we are reviewing our relationship with large enterprises, particularly around complex and large tax issues. A key objective is to develop and foster relationships based on two-way transparency and early disclosure of tax issues. This approach is intended to result in mutual benefits. Overseas experience shows that two-way transparency and disclosure results in more certainty upfront and much less investigation activity. We will be actively exploring how we can achieve cooperative compliance with large enterprises through enhanced relationships. We are focusing on improving our people's commercial awareness. This will help them deliver a better service to large enterprises. We are committed to reviewing the timeliness of our services and activities. In particular, the rulings system and the time it takes to complete an investigation. We are also looking to ensure we have processes in place to regularly update the large enterprise during the investigation process. Another way of improving timeliness is by working with large enterprises on transaction issues or impacts of legislative changes as they happen, rather than several years after. Our advice matrix describes the nature of the technical assistance and information we provide for those who want certainty on transactions or issues. Under this approach, we will provide advice in the following categories:

Binding rulings Where a business requires certainty on a specific arrangement, including consideration of the tax avoidance provisions, there is, generally, the ability to obtain a binding ruling. Informal indicative view We will provide an initial informal view on arrangements, transactions or issues, if requested, to assist with any future decisions on the transaction. Transactions where no binding rulings available Where a binding ruling cannot be legally obtained, written advice would generally be provided. Statutory discretions/ determinations Where the legislation specifically requires the Commissioner to exercise his discretion, approve an action or make a determination, we will provide advice either as part of a binding ruling application, determination process or through written advice. Existing Inland Revenue policy We will identify or confirm an existing Inland Revenue policy if requested. Straightforward technical, procedural and administrative matters We will provide confirmation through information and technical correspondence. Identified legislative or administrative anomaly Where situations raise a legitimate issue about the meaning of statutory wording, involving a material legislative ambiguity for which no published view exists, we may provide guidance for resolving the issue.

Areas of focus

Large enterprises generally meet their obligations for registering, return filing and paying. Due to their size and complexity, accurate reporting is the main compliance issue.
In 2007-08, investigations of large enterprises resulted in net discrepancies and adjustments of $723 million. This included $14.4 million refunded or credited to large enterprises. Large enterprises also made 169 voluntary disclosures declaring $39.9 million of tax.

International issues

Over two-thirds of world trade involves multi-national enterprises and well over 50% of world trade comprises associated party transactions. Increased cross-border activity and the development of global capital markets make it easier for businesses to move profits between countries.

Our activities are aimed at making sure New Zealand maintains its fair share of multi-national tax.

Transfer pricing has been identified in global surveys as the most important issue for multi-national enterprises.

What we will be doing

We will work with international tax bodies and tax treaty partners to share information and better understand international compliance risks. In particular we will:

• further develop the directory of aggressive tax planning schemes to identify trends and appropriate ways we can respond
• work with overseas tax authorities on joint initiatives, such as identifying key bilateral differences in the treatment of hybrid financial instruments
• continue to develop our understanding of issues, including training for our staff.

Our transfer pricing work programme will continue to cover the full range of both inbound and outbound associated party transactions, with special emphasis on:

• any arrangements made to import offshore losses through non-market pricing
• potential gaming of interest rates, taking undue advantage of gyrations experienced in credit spread
• pricing of hybrid financial instruments, such as mandatory convertible notes
• advance pricing agreements.

We will continue to closely monitor foreign enterprises operating limited risk structures, such as limited risk distributors/commissionaires and contract/toll manufacturers, in New Zealand

We are aware of pressures building on company balance sheets as a result of losses and asset write-downs. We will be reviewing compliance with thin capitalisation rules, especially for those groups with above average debt.

Aggressive tax planning

Large enterprises decide whether to adopt particular tax planning opportunities in line with their strategies for tax risk management. There is often a fine line between legitimate tax planning and tax avoidance.

What we will be doing

Our activities during 2009-10 will focus on:

• identifying and analysing key transactions which might have a tax risk, for example, business restructures
• advising customers which schemes we are concerned about, for example, through our Revenue Alerts
• monitoring compliance issues identified by Inland Revenue staff working with large enterprises
• working with international tax bodies developing the directory of aggressive tax planning schemes, to identify trends and appropriate ways we can respond
• continuing to undertake investigations and compliance projects where the application of the tax avoidance provisions are the key factor, including (but not limited to) hybrid financial instruments, imputation structures and structured finance.

International financial reporting standards (IFRS)

New Zealand companies have been using the New Zealand adapted International Financial Reporting Standards (IFRS) for reporting periods starting on or after 1 January 2007. IFRS has significant implications on accounting practices and it may also have impacts on tax calculations. We have worked closely with companies during the change to using IFRS to assess the impact on their tax liabilities and provide tailored assistance.

We will continue to monitor tax returns of companies and work with them to identify and respond to any issues that may arise.

Compliance projects

Some compliance issues relate across the large enterprises customer group and are best addressed by a project approach.

Current compliance projects for 2009-10 include:

Complex financing

Some large enterprises reduce their tax by entering into tax arbitrage arrangements, either within New Zealand or with parties based overseas. Tax arbitrage can involve directing income (or expenses) from a party subject to a less favourable tax treatment, to a party subject to a more favourable tax treatment.

We will be monitoring large enterprises (including financial institutions) to make sure we are aware of new structured finance arrangements, and challenging arrangements where appropriate, with investigations and legal action.

A hybrid instrument is an investment that is part equity and part debt and can be used in tax arbitrage arrangements when each party treats equity and debt differently for tax purposes. We have noticed an increased number of New Zealand companies issuing hybrid financial instruments, especially mandatory convertible notes, to their non-resident parent companies and/or associates. We have concerns about the tax treatment in New Zealand and the non arms length nature of some of these transactions.

We are issuing financing questionnaires, mainly to foreign-owned companies to identify, for example, which companies have issued hybrid financial instruments. In some cases we will investigate further.

GST compliance

Crown entities account for 28% of total GST. The major compliance risk for this sector is the systems and processes used to account for their GST. We will be implementing a programme of system and process reviews for Government departments, large Crown entities (including DHBs and tertiary education institutions) and local authorities.

In addition, this year we will be undertaking a general "heath check" on large enterprises GST accounting systems to verify that effective systems are in place to account for GST and GST compliance is still satisfactory.

Executive remuneration

Risk review work carried out will include executive remuneration. The initial phase will involve the completion of a questionnaire where the results will be evaluated against supporting information and analysis. This may result in specific contract/file reviews to understand the tax treatment of remuneration packages. Executive remuneration will be reviewed as part of our regular investigations.

Mergers and acquisitions

There are many tax risks that can arise for both the vendor and purchaser when shares of business assets are transferred. For example, in assets sales, the GST may not be returned. In share sales, the company being sold may not make the required forfeits of losses and imputation credit balances.

To help us understand the transaction as it happens and identify any tax issues, we monitor large enterprises for significant merger or acquisition transactions and offer advisory visits.

During an advisory visit we will discuss the steps undertaken by the business to implement the transactions. This information is used to help detect issues and also assess the impact on the tax payments of, for example, any refinancing. If we detect any issues at the time of the visit, we will let them know. Depending on the nature and extent of the issues, we may investigate. In situations where the advisory highlights an issue that could apply to other business's risk assessments or investigations, activity could occur over a wider group.

Industry risks

Compliance issues are more likely to occur in some industries because they are structured to minimise tax, the complexities of their operations, and the impact of implementing new and/or specialist legislation.

What we will be doing

We work with these industries to identify and address emerging risks. We will continue to develop relationships with industry associations to assist with compliance and legislative issues. These relationships mean we can discuss problematic issues which raise complexities for voluntary compliance and we can often reach agreement on an acceptable approach to make it easier to comply. Discussion with industry associations can highlight ambiguities and anomalies with legislation which we can consider for legislative amendment.

In 2009-10 we will have a particular focus on the energy, film, banking, finance, investment and insurance industries.

Energy industries

The current energy environment is focusing on increasing the level and investigating alternative sources of electricity generation. This activity will continue to raise issues on the correct tax treatment of feasibility expenditure, repairs and maintenance, refurbishment and replacement programmes related to generation assets.

Due to the volatility in global oil prices, New Zealand has experienced an increase in oil and gas exploration activity, both onshore and offshore. We will be closely monitoring the activities of large businesses involved in this industry as a result of the increased production from the new oil and gas fields, to assess the tax implications.

Film industry

The New Zealand screen production industry has been subject to special tax rules since the early 1980s. We are continuing to assist in incentive programmes for the film industry. As well as the large budget screen production grant, a new screen production industry fund is being introduced this year. We will be closely monitoring applications for the new incentive fund to make sure genuine applications are being made.

Banking and finance industry

We will continue to assist the industry by working with them on the tax effects of business responses to the global economic environment. This could include ensuring government initiatives are not unintentionally impeded by the tax system. Our investigation focus will be on structured finance arrangements that financial institutions either take part in or facilitate for their customers.

Investment

Implementation of the relatively new taxation of investment income (TOII) and portfolio investment entities (PIE) rules continue to be an issue. We will continue to assist fund managers to resolve issues. A particular focus at the investment entity level will continue to be on examining the transitional adjustments on entry to the TOII and PIE regimes.

Insurance

Both life and general insurance are subject to specialised rules for income tax and GST purposes. Developments in the nature ofinsurance productshave raised some issues about the application of the rules to different types of insurance. New tax rules are currently being proposed and a particular point of focus for us will be working with the industry as they work through the transitional stage and start applying the new rules.

 

 

 

 

Date published: 09 Jun 2009

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