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New Zealand's transfer pricing rules are to be applied consistently with the OECD's Transfer Pricing Guidelines for Multinational Enterprises and Tax Administrations - July 2017. Guidance on intangible property arrangements is contained in Chapter VI of the guidelines.

Transfer Pricing Guidelines for Multinational Enterprises and Tax Administrations (OECD)


For the purposes of the guidelines, paragraph 6.6 says an intangible is 'capable of being owned or controlled for use in commercial activities, and whose use or transfer would be compensated had it occurred in a transaction between independent parties in comparable circumstances' and is 'not a physical asset or financial asset'.

Identifying intangibles

It is important that intangibles are clearly identified. Companies must be able to demonstrate that they add significant and substantial value if large royalty payments are to be substantiated. We ask similar questions to those raised by the Australian Taxation Office in this regard.

  1. Have all intangible profit drivers been individually identified (including goodwill and any licensed intangibles)?
  2. What is the value of all intangibles owned and used by the company and have they been valued by a professional firm?
  3. Is the intangible protected?
  4. Who bore the cost of creating the intangible?
  5. How and to what extent does the intangible contribute to the profit?
  6. Has an intangible been assigned and if so what was the consideration?

The most common way of identifying intangibles created locally is through close examination of research and development costs and remuneration data (high pay for special skills leading to greater value-added / non-routine intangibles). We pay close attention to such data to ensure that due recognition is being given to the creation of valuable intangibles in New Zealand.

Goodwill

A common issue that seems to be roundly ignored is that any substantial business carries with it goodwill. Attributing all intangible value to trademarks, trade names and so forth can only be done by ascribing a nil value to goodwill. In the context of any well-established business, such a position is hard to support.

Inbound royalties

Inbound licensing of intangibles, including royalty charges, is a current focus. The following checklist might be useful to companies involved in licensing arrangements with offshore associates.

Question Checklist

1

Is there an up-to-date licensing agreement in place?

2

Does the agreement clearly identify the intangible property being supplied and accurately reflect the commercial arrangement for the New Zealand market, or is it merely a standard document used in many markets?

3

Does the intangible property add significant and substantial value to the New Zealand business operations taking into account existing valuable goodwill, a monopoly or duopoly position, local know how or other domestic intangibles?

4

If a royalty is paid for the use of the intangible property, has a standard global/regional rate been used or has the rate been customised to the circumstances of the New Zealand business?

5

Some activities of the licensee may not require use of the intangible property - have these been excluded from royalty computations?

6

If a royalty is paid for the use of any intangible property, does the taxpayer produce appropriate profits for its functions, assets (including its own intangibles) and risks after payment of the royalty?

7

Has the 25% rule been used as a cross-check? (Note: 25% of earnings-before-interest-tax-and-exceptional-items and royalties is generally considered towards the top end of sums payable to a licensor absent unusual circumstances.)

8

If royalties are high relative to earnings derived from the intangible property, has consideration been given to renegotiating the terms of the license? If not, why not?

9

Has non-resident withholding tax been deducted and at the correct rate?

10

Has any additional assistance been provided from offshore in connection with the supply of scientific, technical or commercial knowledge or information? (Such assistance may also be subject to non-resident withholding tax.)

It is the responsibility of local management to ensure a company's transfer prices are in accordance with the arm's-length principle. Where substantial royalties are incurred to offshore associates, we suggest you seriously consider the possibility of working cooperatively with us to obtain an advance pricing agreement.

The 25% rule

We apply the 25% rule in our risk assessment analyses to select transfer pricing cases for further review. Inbound royalty amounts exceeding the 25% rule are initially assigned a high risk rating pending further review. We recommend that taxpayers also consider applying this as a cross-check.

Intangible property transfers

The transfer of intangible property out of New Zealand, particularly where it's intended that the property be subsequently licensed back to the original property owner, will continue to be a focus area for us.

The transfer of bundled intangible property or 'catch-all' transfers, as compared with the transfer of specific legally protectable property, will be subject to the highest degree of scrutiny. In these cases, care must be taken to ensure that bundled transfers do not include property that is inseparable from the business from which it has been generated, for example goodwill.

In all cases, it's important to be able to identify:

  • what is being sold
  • who developed it
  • who currently owns it
  • whether or not it is capable of sale.

A thorough examination of the legal arrangements implemented to effect the transfer is also critical. A valuation of the intangible property can only be undertaken once all of the facts are fully understood in context.

Location savings

Local market features are considered in a comparability analysis, but as confirmed in the OECD guidelines, are not intangibles for transfer pricing purposes. Although we currently have no issues on hand, we're aware that the treatment of location savings, particularly the value attributed to location savings vis-à-vis other factors, is an area of growing contention globally.

We're concerned that in some cases the value arising from location savings is hypothetical and not borne out when comparisons are made with comparables. We see this as another area where the arm's length outcome can only be properly determined by reference to the specific facts of the case, and recommend taxpayers contact us if experiencing difficulties.