The Covid 19 pandemic has led to many highly skilled expat Kiwis relocating back to New Zealand, and technology advances have enabled them to continue to be employed by non-resident employers.
New Zealand (NZ) and foreign tax obligations need to be considered in cross-border employment situations.
It may be that the non-resident employer will look to deduct income tax from the salary and wages paid to their NZ employee in the employer’s home country. One approach is for the employee to accept that and look to claim a foreign tax credit against his or her NZ tax liability.
However, a foreign tax credit may not be claimable if the non-resident employer is not entitled to deduct tax under an applicable double tax agreement (DTA) with NZ. Typically, NZ’s DTA’s would not provide a non-resident employer with such a right to deduct, and in that case no foreign tax credit would be claimable against the NZ tax liability.
Getting that foreign tax refunded from the non-resident revenue authority can be challenging. If this is the case one needs to advise the non-resident employer not to deduct tax at the outset.
New Zealand Tax
As you would expect, income an employee earns from services provided in NZ is treated as NZ sourced income, and subject to NZ income tax (subject to some exceptions for short term assignments).
Normally employment income is taxed through the Pay As You Earn (PAYE) system, where the employer deducts PAYE on an employee’s earnings, reports it to Inland Revenue and pays it to Inland Revenue.
If a non-resident employer does not have a presence in NZ, there will not be a requirement to withhold PAYE for a NZ resident employee. Inland Revenue does not, in that case, have any legal basis to enforce NZ tax laws on the non-resident employer.
It is important to establish whether the non-resident employer has a trading presence in New Zealand, or a permanent establishment, a branch operation, if contracts are entered into in New Zealand or if New Zealand based employees perform contractual obligations in New Zealand. Such a presence would require a non-resident employer to register for NZ employment taxes.
In August 2020 Inland Revenue issued a draft Operational Statement (Reference ED0223) detailing non-resident employers’ obligations in cross-border employment situations. It 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. Inland Revenue concludes that where there is no particular business reason or benefit in having the employee based in New Zealand, this is unlikely to cause the non-resident employer to have a New Zealand PAYE liability.
The draft Operational Statement confirms there is no PAYE obligation for a non-resident employer if a DTA provides relief from taxation, such as where the employee is in NZ for 183 days or less in a twelve month period.
Note the Operational Statement is in draft and submissions have been made seeking further clarity on such matters as when and how employees might create a presence for the non-resident employer, and how the analysis might apply to a person already residing in NZ, so there may be some further detail.
IR 56 Taxpayers
Where a non-resident employer does not have a sufficient presence in New Zealand, and is not liable to withhold PAYE for their employee, the responsibility for doing so falls on the employee.
Inland Revenue requires such employees of non-resident employers to disclose and pay their own taxes on their earnings as what is termed an “IR 56 taxpayer”. The employee is required to register as an employer and comply with the PAYE 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, and the non-resident employer will have no such obligation or liability for any non-compliance by the employee.
Other NZ Employment taxes
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. The IRD draft Operational statement ED0023 confirms that where the non-resident 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.
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.
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.