In the lead-up to Christmas, Inland Revenue provided an overview of its increase in compliance work (e.g. tax investigations and audits) in 2024. Commencing almost 2,000 tax audits in Q1 alone, collecting more than NZD1 billion of overdue debt, and amending tax returns by almost NZD400 million, it was certainly a busy year for Inland Revenue. Perhaps having watched too much Fast & Furious, it has promised to go “full throttle” in 2025. 

Tax issues in M&A transactions are always carefully considered and this will be especially important in 2025 as Inland Revenue has called out corporate restructures and the taxation of multinationals as particular targets for tax audits. Mitigation can go beyond tax indemnities and warranties, with more formal options available – including the voluntary disclosure of incorrect tax positions or seeking a post completion binding ruling. The ability to claim legal privilege or other rights of non-disclosure should also be carefully considered.

Multinationals and corporate restructures pose “systemic risk” to the tax base

While many Government departments lost funding in Budget 2024, Inland Revenue was allocated an extra NZD116 million over four years to collect debt and improve tax compliance, targeting those people who – due to challenging circumstances or a deliberate decision – have not met their tax obligations. There are more people at Inland Revenue focused on investigations and audits, and it has also invested in its analytical capability.

With a KPI of collecting NZD8 of tax for every NZD1 spent, in 2025 tax investigations will be targeted at:

• the hidden economy and organised crime;
• electronic sales suppression tools;
• GST integrity;
• student loans to overseas based borrowers; and
• increased audit activity, especially of multinationals and corporate restructures.

Of relevance to M&A, Inland Revenue considers that multinationals and corporate restructures are areas of systemic risk, as the tax issues are complex and the amounts at risk are large. Inland Revenue will therefore increase audits of multinationals and corporate restructures.

Inland Revenue using data collection tools

In addition to mandatory information requests addressed directly to taxpayers, Inland Revenue has said that it will exercise its powers to trawl financial data for tax risks. The somewhat innocuous sounding Tax Administration (Regular Collection of Bulk Data) Regulations 2022 is a case in point.

The Regulations apply to Payment Service Providers, which are businesses that participate in an electronic payment system by facilitating payments for goods and services between customers and merchants. Examples include parties that act as intermediaries – for example facilitating credit card and debit card payments, such as an EFTPOS provider. Those providers are required to report to Inland Revenue every six months on a wide variety of data, including merchant identity and contact information and bulk transaction data. Inland Revenue receives that data and is now using it to target enforcement activity, for example auditing businesses that show a lot more sales in their payment service provider data than in their GST returns.

Make the most of legal privilege

It is important to ensure that information is protected from disclosure to Inland Revenue where there is a right to do so. Lawyers can claim legal professional privilege for all confidential communications with their clients or other lawyers about tax matters. That information is all subject to privilege and is not required to be disclosed to Inland Revenue. Meanwhile, tax and accounting advisors can claim a statutory right to not disclose certain confidential documents. This applies to communications between tax advisors and their clients for the main purpose of providing or receiving tax advice. However, the non-disclosure right is subject to several exclusions – such as for factual information and tax workpapers.

Addressing M&A tax risk

Tax risks, either from day-to-day business activities or a pre-sale restructure, are usually addressed in a share sale transaction by the tax indemnity and tax warranties. In addition, if a transaction is covered by warranty and indemnity insurance that should cover most tax issues, and specific tax risks can also be insured under a tax-only policy. Further, if an unforeseen tax liability is identified in due diligence, a voluntary disclosure could be made to Inland Revenue. This quantifies the tax shortfall and, if accepted by Inland Revenue, reduces some penalties. In addition, parties can seek post-completion binding rulings to lock in the tax treatment of transactions.