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”).”
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