What is transfer pricing?

Over two-thirds of world trade involves multinational enterprises ("MNEs"). Well over 50% of world trade comprises associated party transactions. MNEs are a significant force in New Zealand's economic environment.

According to Ernst & Young Global Surveys, transfer pricing is the most important international issue MNEs currently face. Tax authorities around the world are implementing and updating their rules and regulations on international transactions as well as increasing their audit activity.

The behaviour of those at the top of the taxpayer scale (such as MNEs) impacts significantly on how the wider community views the tax system, and the level of confidence that the community has in the system's integrity. The community expects MNEs to contribute their fair share via the tax system. This may be in conflict with the large potential for revenue losses to arise due to incorrect transfer pricing policies and practices.

At the same time, many worldwide operations are rationalising their operations with a consequent impact on the income recognised in some countries. Such changes may be perfectly legitimate. Identifying which pricing practices are legitimate and which are not is a difficult process. Consequently, Inland Revenue established the International Audit Unit to provide advice and assistance to investigators on transfer pricing issues, recognising not only the subject's significance but also its complexity.

Date published: 19 Feb 2009

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