IRD recently released details of its compliance focus for the 2013-14 income year. The documents released provide an outline of the key areas of focus for the year which includes encouraging voluntary compliance, increasing awareness about tax compliance among small and large enterprises and international tax issues.
This year, instead of issuing a single document outlining the compliance focus for all taxpayers, IRD will issue a series of in-depth reports tailored to the needs of different groups of taxpayers. The groups IRD will specifically address are:
- Small and Medium Enterprises – Employers
- Small and Medium Enterprises – Self-employed/ sole traders
- Multinational Enterprise.
The first reports to be released are on Multinational Enterprises and Small and Medium Enterprises.
The main areas of focus for IRD for Multinational Enterprises include:
- Transfer pricing issues including the use of commodity price benchmarks, low or no-interest loans, recovery of NZ R & D costs and head office overheads and offshore operations returning abnormally high profits.
- International financing arrangements, with specific focus on structuring of financing arrangements, hybrid investments, unusual or complex financing arrangements, inbound loans of more than $10 million and outbound loans of all sizes.
- Technical compliance with the new CFC rules. IRD is likely to focus on changes in CFC operations due to the new rules, utilisation of carried forward losses and FTC balances as well as unusual transactions or unexpected outcomes.
- GST, including associated party transactions, treatment of non-routine transactions, zero-rating, accounting for GST in the correct GST period and reducing preparation errors.
The document also highlights the ‘familiar red flags’ that are likely to attract attention from IRD in regard to tax compliance:
- Effective tax rate – is the group’s effective tax rate substantially less than the statutory rate of 28%?
- Low or no tax jurisdictions – has the group participated in any material transactions involving these jurisdictions?
- Differing accounting treatments – are there material differences in the treatment of major items for financial reporting and tax reporting purposes?
- Large tax benefits – has the group taken part in any transactions where the anticipated net return is predominantly due to projected tax benefits?
- Cross-border mismatches – are there any differences in tax treatment of a transaction or an entity between countries (eg debt in one, but equity in another)?
- Complexity – has the group been involved in any complicated arrangements (eg, major restructures, use of special purpose vehicles or innovative financial arrangements)?
- Capital gains/tax credits – have any untaxed profits been derived or unusually high foreign tax/imputation credits been claimed by the group?
- Tax losses – have any uncharacteristic losses arisen (or been utilised) within or across the group as a whole?
- Ownership changes – have any mergers, takeovers or ownership changes occurred and affected continuity tests for losses and imputation credits?
- Variances between years – are there any material variances in profitability, tax payable, or major line items in supporting financial statements for the group?
Small and Medium Enterprises
The main areas of focus for IRD for Small and Medium Enterprises include:
- Filing GST returns and correcting errors.
- Outlining employers’ obligations and encouraging employers to file employer monthly schedules on time and to deduct student loan repayments and Child Support payments as required.
- Reminding employers that as of 1 April 2013 the employer’s contribution towards employee KiwiSaver funds are compulsory at a minimum contribution of 3%.
- Increasing awareness of the difference between employees and independent contractors and the specific rules that apply to each.
- Increasing tax compliance among non-resident contractors and contract payers.
Further details on IRD’s Compliance Focus are available on IRD’s website.
If you would like to discuss details of IRD’s compliance focus or how it may affect you, contact your Hayes Knight advisor or our specialist tax team.
Phil BarlowTax DirectorT + 64 9 414 5444
Shelley-ann BrinkleySenior Tax Manager
T +64 9 414 5444