Service Charges Guidance in New Zealand
New Zealand’s Inland Revenue recently released new guidance on services charge. It is available here.
The guidance provides a “Checklist for international service charges:
- Understand the charge, go behind the label and document it (the actual services provided, the benefits arising, the basis of the charge, etc).
- The cost plus method is generally best, but never rule out the possibility of internal comparables (where similar services are being provided to third parties by the provider).
- Watch out for “duplicated services” – in particular, does the enterprise have an infrastructure in New Zealand which can and does provide the type of services for which charges are also being made from overseas?
- Be wary of charges for directors/chief executives (doing no more than investment monitoring), and overseas regulatory costs (for instance, Sarbanes Oxley compliance costs) – these are most probably non-chargeable “shareholder services”.
- Get the cost base right (including New Zealand tax deductibility of items included in cost sharing arrangements) and apply a sanity check – does it make sense, especially in relation to the bottom line?
- Mark-ups must be fair and reasonable in relation to the nature of the service and the risks assumed – for example:
- no mark-up for simply on-charging third party costs;
- minimal mark-ups for low risk supporting services;
- higher mark-ups where specialist knowhow or expertise is involved.
- An allocation key should result in a charge proportionate to expected benefits – in this regard, turnover can be too simplistic and arbitrary (don’t just assume a close relationship between services provided and sales without further analysis).
- For outbound direct investment/New Zealand exporters, management and other support services provided to offshore associates (including controlled foreign companies) must be identified and fully charged.
- A branch is not legally distinct from the rest of the enterprise – service charges should therefore be allocated on an actual cost basis only (ie no mark-ups).
- Keep in mind other tax obligations such as withholding on services performed in New Zealand by offshore associates and royalties (“knowhow and connected services”).”
Robert Robillard, Ph.D., CPA, CGA, MBA, M.Sc. Econ.
Senior Partner, DRTP Consulting Inc.
514-742-8086; robertrobillard “at” drtp.ca
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