Non-resident employers’ obligations

Now this document size is more to my preference, a 10-page Operational Statement setting out the Commissioner’s views as to the PAYE, FBT and ESCT obligations for non-resident employers in cross-border employment situations.

Those of you with a good memory may recall my AWIR article on the draft OS when it was released, and I cannot see any major changes in the finalised version from the original draft. In essence, if you have a non-resident employer approach you for advice on their New Zealand filing obligations, you should ask yourself two questions in determining the advice you provide in return:

1. Has the employer made themselves subject to New Zealand tax law by having a sufficient presence in New Zealand? And,
2. Are the services performed by the employee properly attributable to the employer’s New Zealand presence?

Usually, the FBT and ESCT obligations will follow your PAYE determination.

If your answer to both questions is yes, then the non-resident employer is likely to have New Zealand PAYE (and therefore FBT and ESCT) reporting and filing obligations, although do not forget to check whether an exemption may apply either, because the employment income is non-residents foreign sourced income, the domestic tax exemption in s.CW 19 applies, or the provision of a relevant DTA applies to relieve the non-residents New Zealand source taxation exposures.

In terms of answering the first question, the fact that New Zealand based employees of the non-resident employer exist, does not automatically correlate to the non-resident having created a ‘sufficient’ presence in New Zealand, particularly in a scenario where the employee chooses (as a matter of personal preference) to undertake their employment activities in New Zealand, where those activities have no necessary connection to New Zealand, and where this is the non-resident employers’ only connection with New Zealand. Over the past 18 months or so, I have certainly seen a huge growth in the use of remote employees by non-resident employers due to Covid, and often the non-resident employer has no connection to New Zealand other than the employee, whose preference has been to return home and to work from New Zealand.

Therefore, what you should be looking for instead is whether the non-resident employer has a trading presence in New Zealand, such as carrying on operations and employing a workforce for the purpose of trade, do they have a permanent establishment in New Zealand, a branch, or are there contracts that have been entered into in New Zealand and they are then performing those contracts in New Zealand via NZ based employees?

In terms of the second question, having determined that a non-resident employer has created a sufficient presence in New Zealand, it is then a matter of weighing up whether the particular employees activities are properly attributable to that presence and note that reporting and filing obligations could be triggered both in relation to New Zealand based employees and those based outside of New Zealand.

Now if the non-resident employer has not created a sufficient presence in New Zealand, your advice should be that the employee themselves will have an obligation to register as an IR56 taxpayer and account for PAYE payments on a monthly basis themselves. Although I often find when I suggest this option to the non-resident employer, they still wish to manage the process for their New Zealand based employee and consequently register with IR voluntarily.

My reference above in relation to a possible s.CW 19 exemption, is the 92 day rule and applies where:

• The visit is for 92 or fewer days (counting the day of arrival and departure as whole days),
• The person is present in New Zealand for 92 days or fewer in total in each 12- month period that includes the period of the visit,
• The services are performed for or on behalf of a person (which could include an employer) who is not a resident in New Zealand; and,
• The income is chargeable with income tax in the country in which the person is resident.

Alternatively, the DTA (tax treaty) reference was in relation to the 183 day rule contained in most of our treaty’s, where New Zealand will only gain a source taxing right over the employment income, if the employee is present in New Zealand for more than 183 days in a 12-month period, unless the period of presence is less than 183 days and the remuneration is borne by and deductible in determining the profits attributable to a permanent establishment which the employer has in New Zealand.

Finally, the reference to non-residents foreign sourced income, is where the New Zealand employer is paying a non-resident employee for work performed overseas. In this regard, it is the Commissioners view that the New Zealand resident employer does not have any obligation to withhold PAYE from a PAYE income payment that is ‘non-residents’ foreign sourced income simply because the Core Provisions indicate that the purpose of the Act is to tax assessable income, and income tax is generally not intended to apply to non-residents.

The document reference is OS 21/04 and contains a number of examples to illustrate the key points.

This article from the 'A Week in Review' newsletter was originally published Monday 6th December 2021. If you have any questions or would like a second opinion on any national or international tax issues, please contact me [email protected].?

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