Overview
New Zealand is seeking to simplify the income tax treatment of cross-border working arrangements. The proposals are contained in the Taxation (Annual Rates for 2022-23, Platform Economy, and Remedial Matters) Bill and aim to reduce compliance costs for those that employ or make payments to cross-border workers.
New Zealand businesses have historically sought to import specialist skills from offshore jurisdictions and the reforms come at a time when the demand for these skills is increasing. The COVID-19 pandemic and improvements in technology have also meant that there are greater opportunities for workers to adopt remote working.
Issues with the current rules
At present, New Zealand's tax rules relating to employees and contractors offer little flexibility to employers of cross-border workers or those making payments to such workers. While certain exemptions exist that relieve employers (or payers) of tax obligations, in practice it may be difficult to ensure that an exemption is satisfied.
The rules are strict, and any breaches require taxpayers to make a voluntary disclosure to Inland Revenue (IR), which can be costly and time intensive. In addition, the underpayment of tax may attract penalties and interest that often date back to ‘day one’ of the worker's presence in New Zealand.
Key law changes
The bill introduces a number of proposals to address these issues. These include:
A new definition of ‘cross-border employee’;
The introduction of a 60-day grace period for payers of cross-border workers with tax obligations; and
Further amendments to simplify the tax rules applying to cross-border workers.
An additional focus of the proposals is to improve and modernise the data IR receives in relation to cross-border workers. The intention is that this will enable IR to more efficiently enforce tax rules and facilitate the relaxation of tax obligations and compliance costs. This is particularly so for New Zealand's non-resident contractors' tax (NRCT), which applies to certain payments to non-resident contractors and requires the payer to assess whether withholding applies.
Cross-border employee definition
The bill introduces a concept of a cross-border employee. It is proposed that only employees or contractors that meet this definition will benefit from the greater flexibility offered under the new rules. The proposed definition includes:
For a person providing a service in New Zealand, an employee of a non-resident employer; and
For a person providing a service outside New Zealand, a New Zealand resident employee.
The definition extends to a secondee or a person who provides services on behalf of a non-resident.
60-day grace periods
A grace period has been proposed for employers that are in breach of their pay as you earn (PAYE) obligations, provided the employer has taken reasonable measures to manage those obligations.
Where an employee breaches a threshold for exemption under the PAYE rules, under New Zealand legislation or under a double tax agreement, the relevant employer will have 60 days to correct the amount of tax returned in respect of that employee. The grace period begins from the earlier of the date on which the breach occurred and the date on which the employer could reasonably foresee that the breach would occur. Where a correction is made within the grace period, no voluntary disclosure will be required and no penalties or interest will apply.
A 60-day grace period is also set to apply to payers of NRCT in relation to non-resident contractors.
Changes regarding NRCT
Changes are also proposed to the problematic NRCT rules:
The NRCT exemption tests relating to days of physical presence in New Zealand and the monetary threshold will only need to be considered by a payer of NRCT in relation to contracts to which they are a party. The rules can be difficult for a payer to apply in practice as they need to consider all days of physical presence and all payments made to a contractor.
Additional reporting requirements will apply for payers of NRCT. These are designed to assist IR with monitoring non-resident contractors and the thresholds and exemptions under the rules. NRCT payers should consider including an ability to source and report the relevant information in future commercial contracts.
A non-resident contractor will be able to appoint a ‘nominated taxpayer’ to meet its New Zealand tax obligations where preferable and to provide a compliance history for the group.
Next steps
Overall, the reforms in this area are welcome as the current legislative framework is often not sufficiently equipped to deal with the complex nature of cross-border worker arrangements. One aspect that is expected to meet opposition, however, is the additional detailed reporting requirements for NRCT.
Submissions on the bill close on November 2 2022.
