The application of New Zealand taxes to foreign entities is a complex issue. Certain New Zealand taxes only apply if the foreign entity has a sufficient presence in New Zealand. Other New Zealand taxes can apply in circumstances where the foreign entity has no presence in New Zealand at all.
Where a foreign employer employs a New Zealand-based employee, the conventional approach has been to treat the foreign employer as subject to New Zealand’s employment tax withholding regimes, unless certain specific relief applies. But that is set to change, if Inland Revenue’s draft operational statement (Statement) OS 20/0X (nonresident employers’ obligations to deduct pay-as-you-earn (PAYE), fringe benefit tax (FBT) and employer superannuation contribution tax (ESCT) in cross-border employment situations) is finalised in its current form.
The conventional approach
New Zealand’s PAYE rules require employers to make tax deductions from salary and wages paid to their employees. Based on the narrow guidance available to date, many foreign employers with New Zealand based employees will have treated themselves as subject to the PAYE withholding obligations, unless:
- their New Zealand based employees are:
- visiting New Zealand for less than 92 days;
- not present in New Zealand for more than 92 days in each 12-month period that includes the period of the visit; and
- subject to income tax on the income they earn under the employment arrangement in their home jurisdiction,
- in which case the payments to them are specifically excluded from the definition of “salary and wages,” and are therefore not subject to PAYE; and/or
- a double tax agreement applies to relieve the foreign employee from a New Zealand employment tax liability.
Proposed territorial interpretation
The Statement proposes a territorial interpretation to applying the PAYE rules (and other employment tax obligations) to foreign entities.
In broad terms, it is arguable that New Zealand laws are confined to those nonresident persons with a presence in New Zealand unless a contrary intention is expressly enacted. The Statement interprets the territoriality principle in a PAYE context, explaining that a foreign employer is not liable for New Zealand employment taxes unless it has a “sufficient presence” in New Zealand.
Inland Revenue says that merely having New Zealand-based employees would not itself constitute a sufficient presence to impose employment tax obligations on a foreign employer. Employment tax obligations should only apply if a foreign employer has a New Zealand based employee, and:
- the foreign employer has a trading presence in New Zealand, such as carrying on operations and employing a workforce for the purpose of trade;
- the foreign employer has a permanent establishment or branch in New Zealand; and/or
- the foreign employer enters into and performs contracts in New Zealand with employees based in New Zealand.
From a technical perspective we have some doubt over this analysis, but there is some support in case law for the interpretation. The Statement cites the following cases in support of the territorial interpretation:
- Alcan New Zealand Ltd v. CIR (1993) 15 NZTC 10,125 (HC), which concerned whether a “group of companies” could include companies incorporated elsewhere; and
- Clark (Inspector of Taxes) v. Oceanic Contractors Inc  1 All ER 133 (HL), which concerned whether a company incorporated in Panama and involved in petroleum mining operations in a portion of the North Sea treated as part of the U.K. for tax purposes was subject to U.K. payroll tax obligations on payments to employees involved in its operations.
Implications for foreign employers
Assuming the Statement is finalized in its current form, it will provide welcome relief from New Zealand employment tax obligations for many foreign employers. In particular, given the current global environment, we expect the territorial approach will help facilitate flexible working arrangements where New Zealand citizens employed by foreign organizations may wish to return to New Zealand and work from home for a time. The Statement says that where:
- an employee chooses (as a matter of personal preference) to undertake their employment activities in New Zealand; and
- those activities have no necessary connection to New Zealand and the nonresident employer has no other connection to New Zealand;
then those activities will not cause the foreign employer to become subject to New Zealand employment tax obligations.
That said, it is important to note that the Statement is still in draft form, and does not currently apply. The Statement is also lacking in detail in some parts (for example, as to the circumstances that will give rise to a sufficient presence in New Zealand). Given the Statement departs from the conventional interpretation, we would not recommend relying on the Statement until it is finalized. The Statement also raises some important questions that need to be addressed.
1. Who will account for the employment related taxes?
Assuming the Statement is finalized in its current form:
- a foreign employer would not be liable for New Zealand payments; and
- New Zealand employees would themselves need to account for tax on the wages they receive.
We expect the requirement for New Zealand employees to personally account for tax on their wages in these circumstances will burden many employees, who may not otherwise have any personal tax filing or payment obligations. Communication will be key to ensure all New Zealand employees understand their responsibilities.
2. What are the implications for foreign employers who have accounted for PAYE, but may not need to under the concessionary approach?
The Statement is intended to apply from the date it is finalized. Inland Revenue does not intend to allocate resources to investigating tax positions adopted by foreign employers prior to that date.
That said, it is not clear what foreign employers who have been accounting for PAYE should do going forward, if they are no longer required to account for PAYE under Inland Revenue’s new interpretation of the rules. We would like to see an elective approach adopted, where foreign employers who wish to continue accounting for PAYE can continue to do so in order to avoid exposing their employees to New Zealand tax compliance obligations
3. Does the territoriality principle apply in other contexts?
- The Statement opens the door to a closer analysis of the territoriality principle in other contexts, including:
- in respect of other tax types; and
- in respect of other law, e.g. New Zealand employment law generally.
Given the significant implications of a territorial approach to interpreting New Zealand law, more guidance is needed.
Submissions can be made on the Statement until 1 September 2020.
This article first appeared in Bloomberg Tax.
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