Are you remote working in New Zealand for a foreign employer? Inland Revenue’s finalised view
By Andrea Scatchard & Mihiri Nakauchi
In between catching up with friends and family, indulging in too many calories and hopefully spending some time in their favourite restful places, many readers will have time to reflect over the holiday break and maybe look for a change. For some, this will involve remote working in New Zealand for a foreign employer.
Back in August 2020, we wrote an article in relation to Inland Revenue’s draft operational statement relating to PAYE, FBT and ESCT obligations in cross border employment situations.
Nearly 18 months later, on 1 December 2021, Inland Revenue published the finalised Operational Statement “OS 21/04 Non-resident employers’ obligation to deduct PAYE, FBT and ESCT in cross-border employment situations”. Not much has changed from the draft version, although a few points have been clarified.
As mentioned in our earlier article, employment income that an employee earns from services provided in New Zealand is New Zealand sourced income. This means it is taxable here, subject to some limited exemptions, and it makes no difference whether this is paid by a NZ employer or a foreign employer. Generally, employment income is taxed in New Zealand through the PAYE regime, where the onus is on the employer to withhold PAYE on employee’s earnings, report the employment information and pay the tax to Inland Revenue.
But in some circumstances our tax laws do not apply when the employer is offshore. The operational statement clarifies that a non-resident employer is only required to withhold PAYE from employment income paid to an employee in New Zealand if:
- the non-resident employer has made themselves subject to New Zealand tax law by having a sufficient presence in New Zealand; and
- the services performed by the employee are properly attributable to the employer’s presence in New Zealand.
A sufficient presence includes where a non-resident employer has a permanent establishment, a branch, permanent office, or site in New Zealand where trading operations are performed. It also includes a non-resident employer that has an individual employee working in New Zealand performing contracts on behalf of the employer.
Where an employee works in New Zealand due to their personal preference, and not because of a requirement of their employer, then provided the employment activities have no connection to New Zealand and the employee is not representing the non-resident employer in New Zealand, it is unlikely that this will be a sufficient presence for the employer to become subject to tax laws in New Zealand.
So, what happens if the non-resident employer does not have to deduct PAYE?
The draft version of OS 21/04 caused some confusion for both New Zealand based employees and some front line Inland Revenue staff, as it did not clearly state how the PAYE rules work if the non-resident employer does not have a sufficient presence and therefore no obligation to deduct PAYE.
OS 21/04 clarifies this by explaining that the employee in New Zealand is required to calculate, return and file their own PAYE. This is called being an IR56 taxpayer. We note that Inland Revenue’s webpage on IR56 taxpayers still needs to be updated to better reflect this. It currently refers to the process applying to “a New Zealand based representative of an overseas company”, but the most common situation would be where the employee simply chooses to work in New Zealand and is not actually representing the employer in New Zealand at all.
Inland Revenue has the following example in OS 21/04:
Boston Architects (BA) is an architect firm bases in the USA. BA employs George who lives in Wellington. George participates in virtual meetings and completes all of his work in Wellington but as BA does not have any New Zealand clients, all the work is sent back to the US electronically.
Would BA have an obligation to deduct PAYE?
No. There would be no obligation to deduct PAYE as George’s employment activities have no necessary connection to New Zealand, and the only connection to New Zealand is that George lives there. George would have to account for his own tax through the New Zealand tax system.
What if a New Zealand employer has a worker based overseas?
OS 21/04 also clarifies that a New Zealand resident employer does not have any requirements to withhold PAYE from payments that are “non-residents’ foreign sourced income” for the employee. This is where the employee is not a tax resident of New Zealand (including a person that has left New Zealand and ceased being tax resident here) and the employment is exercised outside New Zealand. These employees can remain on the New Zealand payroll but would not be subject to PAYE – although there may be PAYE type obligations on the country where they are working!
OS 21/04 has added an example which explains this as follows:
Sarah is a UK resident and lives in London. She has never been to New Zealand. She is employed by a New Zealand Company that resides in New Zealand and does all her work remotely in the UK for this company.
The income she receives as an employee is considered to be “non-resident foreign sourced income” and is therefore not assessable income in New Zealand.
Sarah is not required to file a tax return in New Zealand. As this income is not assessable to Sarah in New Zealand, the New Zealand Company does not have an obligation to deduct PAYE or any employment related taxes.
The New Zealand Company would need to account for Sarah’s income as an expense in their accounts and will not be required to add Sarah to their Employment Information Schedule.
Other employment related taxes
As mentioned in our previous article, where a non-resident employer has a sufficient presence in New Zealand and is required to account for PAYE, there may also be ESCT and FBT liabilities arising in relation to the employment income. But if the employee is required to account for PAYE through the IR56 process, no FBT or ESCT is payable as there is currently no mechanism for FBT and ESCT to be imposed on the individual.
OS 21/04 applies from the date it was released, 1 December 2021, and the Commissioner states that resources will not be applied to “examine positions taken by taxpayers prior to that date”. For non-resident employers this means that if they do have a sufficient presence in New Zealand and are subject to our tax rules, they will need to comply from 1 December 2021 but can expect not to be audited for earlier periods. For individuals that have an IR56 taxpayer responsibility, again Inland Revenue may not enforce that obligation to amounts received prior to 1 December 2021. But this does not mean the amounts are not taxable – those individuals will still need to return the amount pre 1 December 2021 in their income tax returns and pay tax on assessment of the return.
And finally, this may all change! OS 21/04 is based on the current legislation. Inland Revenue has also been consulting on possible law changes relating to non-resident employers and when they will be subject to PAYE, FBT and ESCT in New Zealand, so watch this space as we may see further developments in 2022.
Please contact your local Deloitte advisor if you have any queries.