Are you remote working in New Zealand for a foreign employer?
Tax Alert - August 2020
- Is my income from my offshore based employer subject to tax in New Zealand?
- How is the New Zealand tax paid?
- What other tax implications might there be?
- Are you affected?
By Andrea Scatchard and Mihiri Nakauchi
We know that over 20,000 Kiwis have come home to New Zealand in the last 5 months, and many of them will be competing for a decreasing number of local jobs. But a select few will be lucky enough to be able to continue working remotely for their foreign employer. Level 4 lockdown showed many employers that remote working can be very successful, and in many cases it does not really matter whether the home an employee is working from is close to their usual workplace, or on the other side of the world.
The technology that allowed remote working to be so successful during Level 4 lockdown and beyond has been available for some time now. Even before COVID-19 we had seen a rise in the number of Kiwi employees who have been able to negotiate contracts that allow them to work from home in New Zealand for overseas employers.
It is fair to say that this will only increase in future because, as we know, New Zealand is a great place to be right now. As with most things, it is best to get the finer details of such arrangements nailed down from the start so there are no unexpected outcomes. One area that can be easily overlooked is the New Zealand tax obligations that arise from cross border employment arrangements, and we address these below. So if this is you, or if you know anyone in this situation, keep reading.
Is my income from my offshore based employer subject to tax in New Zealand?
Employment income that an employee earns from services provided in New Zealand is New Zealand sourced income and therefore is taxable here, subject to some limited exemptions for visits under 93 days. It does not matter whether the employment income is paid by a New Zealand or foreign employer, whether the foreign based employer has a presence in New Zealand or not, or whether any PAYE type tax has been deducted in the foreign employer’s country. It also does not generally matter if the employee is a tax resident or non-resident of New Zealand, although there are some exemptions available under double tax agreements (DTA) for non-residents – refer to our article on tax residence in this edition of Tax Alert. However, the rule of thumb is - as the employment income is earned in New Zealand it will be taxed here.
So the employee will need to file an income tax return in New Zealand. Generally a New Zealand tax resident is subject to tax on their worldwide income and any tax that has been deducted by a foreign employer and paid to the Inland Revenue equivalent overseas may be able to be claimed as a credit in the employee’s New Zealand tax return.
But beware - just because tax has been paid in the other country does not mean a foreign tax credit is automatically available in New Zealand. There must have been a requirement for the individual to have paid tax in the other country, and in many cases where there is a double tax agreement the foreign country will have no ability to impose tax on the New Zealand sourced income if the individual is tax resident in New Zealand. The solution in such cases is to stop the foreign PAYE deductions in the first place.
How is the New Zealand tax paid?
Generally, employment income is taxed in New Zealand through the PAYE system, where the onus is on the employer to withhold PAYE on employees’ earnings, report the employment information and pay the tax to Inland Revenue. For employees that are working remotely in New Zealand for their offshore based employer, there may or may not be a liability for the employer to withhold PAYE.
Inland Revenue has recently released a draft operational statement “ED0223 Non-residents employers’ obligation to deduct PAYE, FBT and ESCT in cross-border employment situations”, intended to give guidance on when a non-resident employer is required to withhold PAYE. It concludes that if the employer has a sufficient presence in New Zealand, and the services performed by the employee are attributable to the employer’s presence in New Zealand, the non-resident employer will have an obligation to withhold and account for PAYE. Conversely, if the employer does not have a sufficient presence in New Zealand, Inland Revenue has no legal jurisdiction over the employer and cannot enforce our tax laws on it. In this case PAYE is not payable by the employer.
The draft statement notes that a non-resident employer will have a sufficient presence if it has a trading presence in New Zealand, if it has a permanent establishment, including a branch, in New Zealand, if contracts are entered into in New Zealand or if New Zealand based employees perform contractual obligations in New Zealand.
It also states that an employer will not have a sufficient presence in New Zealand solely because an employee chooses to live and work in New Zealand as a matter of personal preference. So for a returning Kiwi negotiating remote working from New Zealand, where there is no particular business reason or benefit in having the employee based in New Zealand, this is unlikely to cause the foreign employer to have a New Zealand PAYE liability.
We note that due to COVID-19–related travel restrictions, employees may be stranded in New Zealand. OECD guidelines confirm that non-resident companies should not be deemed to have a fixed establishment merely because employees are confined due to these travel restrictions, and the New Zealand Inland Revenue has confirmed it will follow this principle. However such concessions are unlikely to be able to be relied on where employees have chosen to return to New Zealand for COVID-19 reasons as they have not been stranded here unexpectedly.
Where the non-resident employer does not have a sufficient presence in New Zealand, and so is not liable to withhold PAYE for the employee, the responsibility for doing so falls on the employee instead. Inland Revenue requires such employees of overseas companies to disclose and pay their own taxes on their earnings as what we call an “IR 56 taxpayer”. The employee is required to register as an employer and comply with the payday filing rules and PAYE payment rules. The employee will also be subject to the usual penalties and use of money interest for non-compliance with these rules.
What other tax implications might there be?
Ordinarily any non-cash benefits provided to an employee in New Zealand, such as health insurance, availability of a motor vehicle and amounts paid into a non-New Zealand pension scheme, would create a fringe benefit tax (FBT) liability for the employer. ED0023 acknowledges that where the foreign employer is not required to account for PAYE no FBT will be payable on non-cash benefits as there is no mechanism for FBT to be paid by the employee in place of the employer.
Generally employers are required to pay KiwiSaver employer contributions in relation to their employees and an employee who is present in New Zealand and entitled to live in New Zealand permanently will be eligible to join a KiwiSaver scheme. However, while an IR 56 taxpayer may voluntarily elect into KiwiSaver and pay personal contributions from their tax paid income, they are not able to require a compulsory employer contribution.
All employees in New Zealand must pay the ACC earner’s levy to cover the cost of non-work related injuries. This is withheld from earnings and as part of the PAYE amount, and this is no different for IR 56 taxpayers. IR 56 taxpayers also are required to pay additional ACC levies as an employer, which will be invoiced by ACC after the end of each employment year.
Are you affected?
These rules can be quite complicated and we have seen many instances where the employer and the employee did not fully understand or consider the New Zealand tax implications of their remote working arrangements. Rectifying this can be quite costly, especially if the employee has been present in New Zealand for an extended period of time. While Inland Revenue has been able to exercise discretion in a number of areas for COVID-19 related tax oversights, we expect this will be lessening as travel and other restrictions ease, so now is the time for your, or your employer’s, tax affairs to be sorted out if you are working in New Zealand for your overseas employer.
Please contact your local Deloitte advisor if you would like further information.
August 2020 Tax Alert contents
- Are you remote working in New Zealand for a foreign employer?