PAYE and NRCT simplification coming for cross-border workers
Inland Revenue proposes concessions to improve certainty, efficiency, and fairness for businesses
By Jayesh Dahya & Charlotte Monis
Managing Pay As You Earn (PAYE) or withholding tax obligations for cross-border workers has always been fraught with difficulty.
Foreign employers and New Zealand businesses who bring workers to New Zealand often face uncertainty in managing their tax obligations. These uncertainties include whether there is a need to register for PAYE, for example, foreign employers may not know at the outset whether their workers will be subject to New Zealand tax as they may qualify for an exemption. Likewise, it is often unclear at the outset whether non-resident contractor withholding tax (“NRCT”) needs to be deducted from payments to contractors coming to work in New Zealand. Many tax obligations are triggered if a person is in New Zealand for more than 92 days in a 12-month period (using domestic law) or more than 183 days (when considering double tax agreements).
Concerns have been raised that if the day count test is breached, the retrospective effect of the test results in the worker being subject to income tax from the first day of their presence in New Zealand. This means foreign employers and New Zealand businesses face additional compliance costs to correct the tax position and can potentially incur penalties and use of money interest charges.
Remote work arrangements have heightened these concerns as foreign employers often do not have a presence in New Zealand and many may not have systems to manage their employee tax obligations in New Zealand.
What are the proposals?
To address these concerns Inland Revenue has released an Officials Issues Paper “Cross-border workers: issues and options for reform” with a range of proposals aimed at providing greater certainty for foreign employers and New Zealand businesses who engage cross-border workers.
These proposals include:
- Introducing flexible PAYE arrangements for employees who remain on a foreign payroll.
- Clarifying when PAYE, FBT and ESCT obligations arise for non-resident employers and when these obligations transfer to the employee.
- Allowing non-resident employers to transfer PAYE, FBT and ESCT obligations to a related New Zealand entity.
- Changing the NRCT withholding thresholds to a “single” payer requirement, introducing a non-resident contractor reporting requirement and making NRCT more flexible.
- Taxing contributions to foreign superannuation schemes under the PAYE regime rather than the FBT regime.
- Repealing the PAYE employer bond provisions as these are rarely used.
Flexible PAYE arrangements
Catch up payments
Inland Revenue is proposing to allow “catch up payments” to be made for employees on a foreign payroll where an employee breaches the day-count threshold (92 days/183 days), provided the employer reasonably believed that an exemption would apply.
This removes the penalty and interest exposures that typically arise once these breaches are discovered and will reduce the compliance costs associated with remedying the positions.
The employer will have 28 days to correct the position once the employer first becomes aware that this day count threshold has been breached. Our experience suggests that it may be difficult to meet the 28-day requirement. In practice, there can be delays with obtaining Inland Revenue numbers for cross border employees who may not have or do not intend to open New Zealand bank accounts, meaning that it could be difficult to meet the 28-day requirement. The additional time it may take to collect compensation information from outsourced service centres and for this information to then be provided to local country payrolls should also not be underestimated. This is something that requires further consideration.
It is also proposed that this flexibility should also be available to New Zealand businesses who make payments to non-resident contractors, as similar issues arise when it subsequently transpires NRCT obligations arise due to a change in circumstances.
Inland Revenue example: Estella, a Brazilian tax resident, comes to NZ on a ten-week assignment (70 days) to work on a construction project. A New Zealand company manages the project and takes responsibility for the employees. At the outset of Estella’s assignment, it is anticipated that the 92-day exemption under New Zealand domestic law will apply. New Zealand does not have a double taxation agreement with Brazil.
Unfortunately, two weeks after Estella’s arrival, the project managers are told that equipment necessary to complete the work Estella is undertaking will be delayed arriving in New Zealand. This delay means that Estella’s time in New Zealand will extend to 14 weeks (98 days). At this point, the New Zealand company expects the threshold to be breached so it puts Estella on the shadow payroll. A catch-up PAYE payment for the first two weeks is made, and PAYE is applied thereafter.
PAYE arrangements and in year square ups
Inland Revenue has recognised that there are complexities involved with cross-border worker arrangements. Tax equalisation arrangements, gross up calculations, collecting and reporting employment information and foreign exchange all make it difficult when managing PAYE obligations for workers on a foreign payroll.
To address these issues, two options have been proposed:
In-year square ups
Employers will be allowed to make adjustments during the year and make a catch-up payment.
Final adjustments to be made in the employee’s tax return.
Employers enter into a PAYE agreement with Inland Revenue.
The agreement is subject to certain conditions, such as being tax equalised with an in-year review to capture material changes.
Final adjustments to be made in the employee’s tax return.
This method is currently available to non-resident employers in special circumstances. The current proposal is to clarify when these arrangements can be applied to cross border workers. However, as PAYE arrangements result in both set up and ongoing costs to monitor and administer the arrangements, Inland Revenue have signalled that the PAYE arrangements is not the preferred option, but they welcome feedback on this.
Non-resident employers’ obligations to deduct PAYE, FBT and ESCT
In July 2020, Inland Revenue released a draft operational statement ED0223 “Non-resident employers’ obligation to deduct PAYE, FBT and ESCT in cross-border employment situations” for consultation. Our August 2020 Tax Alert article also discussed some of the tax implications of ED0223.
Whether an obligation to deduct exists turns on the question of whether a non-resident employer has a “sufficient presence in New Zealand”.
Summary of position outlined in ED0223
Sufficient presence in New Zealand
Requirement to account for PAYE. ESCT & FBT
A sufficient presence includes:
A sufficient presence would not include:
Inland Revenue has noted that some submissions viewed the sufficient presence test as “vague and uncertain”. In response, feedback is sought on whether a threshold test that demonstrates a “sufficient presence” is desirable. If so, the proposed threshold test would be the lower of:
- NZD500,000 of gross employment-related taxes per current tax year, or
- Five employees present in New Zealand (including full- and part-time employees, whether they are tax resident in New Zealand or not).
Inland Revenue has made it clear that the proposed threshold test would not replace the sufficient presence test, rather it would support the analysis. What follows from this is that regardless of whether the employer has a sufficient presence in New Zealand, the employer would always have an obligation to apply the PAYE, FBT and ESCT rules if the threshold test was met. It is difficult to see how New Zealand’s taxing jurisdiction could be asserted over a non-resident employer who breaches this threshold test but has no other presence in New Zealand.
PAYE, FBT and ESCT obligations where there is no sufficient presence in New Zealand.
If a non-resident employer does not have a sufficient presence in New Zealand, Inland Revenue is proposing that non-resident employers could choose to transfer their PAYE, FBT and ESCT obligations to a related New Zealand local entity. The New Zealand entity would have joint and several liability for these obligations and would need to notify Inland Revenue that they are acting as agent for the non-resident employer.
If the non-resident employer chooses not to transfer the obligations to a related New Zealand local entity or there is no such entity, currently there is a secondary liability for PAYE on the employee.
This means the employee is personally required to meet their PAYE obligations. This is achieved by registering the employee as an “IR 56 taxpayer”; those working in New Zealand on a remote basis will already be familiar with this process.
The requirement to register as an IR 56 taxpayer will be made clearer. This requirement will also be extended to include FBT and ESCT. Currently, there is no provision for an employee to pay FBT and ESCT and these proposals will mean that employees will also become personally responsible for these costs. Unlike PAYE, FBT is an employer tax and unless there are arrangements with employers to address these liabilities, employees could be liable for tax on any benefits that may be provided.
Inland Revenue has suggested that PAYE flexibility should not be extended to IR 56 taxpayers. Hopefully, we will see a shift in Inland Revenue thinking on this point to recognise that remote workers are also on foreign payrolls and have the same risks regarding breaches of the day-count tests.
NRCT has long been a bugbear of business. In recognition of this, Inland Revenue are proposing various measures to assist businesses with their NRCT obligations. These measures include:
- Moving to a “single payer” view when determining whether NRCT exemptions apply (the 92-day test or the NZD15,000 de minimis test) and introducing additional reporting requirements to enable Inland Revenue to identify non-resident contractors. Currently, businesses need to seek details from non-resident contractors regarding their historical presence in New Zealand (including how many days they have been in New Zealand in a 12-month period and whether the contractor has received other payments up to NZD15,000 within the last 12 months), a business is liable for NRCT if the thresholds are breached based on other activity the contractor has had in New Zealand.
- Introduction of an NRCT code to identify NRCT payments allowing catch up payments to be made in the event of threshold breaches, provided reasonable steps have been taken to confirm the NRCT thresholds would not be exceeded.
- Allowing for the issue of retroactive certificates of exemption that would cover payments made up to 92 days before the issue of the certificate of exemption.
- Providing broader exemption certificates for up to two years where they are issued on the basis of a good compliance history.
- Enabling a New Zealand entity to act as a “nominated taxpayer” to establish good compliance history to obtain exemption certificates.
- Establishing a register of exempt non-resident contractors.
Overall, the proposals regarding PAYE and NRCT flexibility for cross-border workers are positive and should simplify some of the current difficulties when thresholds are breached. The proposed threshold test to determine “sufficient presence” for non-resident employers requires further consideration in terms of whether this addresses the uncertainties that have raised. While the extension of the IR 56 regime to include FBT and ESCT closes a gap in the current legislation, this does create some difficulties as the employee will need to fund these costs from their after-tax earnings.
Submissions on the issues paper close on 19 November 2021.
Please get in touch with your usual Deloitte advisor if you would like to discuss how these proposed changes may apply to you.
November 2021 Tax Alert contents
- Significant reporting and disclosure changes looming for New Zealand trusts
- Income tax implications for capital gains distributed to New Zealand beneficiaries through Australian discretionary trusts
- The property parent trap
- PAYE and NRCT simplification coming for cross-border workers
- Are my debt levels subject to the Arm’s Length Test?
- Updated political agreement on global tax reform
- Operational Taxes update: New W-8 series forms – are you ready?
- Snapshot of recent developments