New Zealand relaxes its rules for offshore employers with globally mobile cross border New Zealand workers

2020 has been an extraordinary year. One of the most significant features of 2020 has been the number of people who have worked remotely because of Covid-19 restrictions. For tax, this has created challenges as an employee, working remotely for an offshore employer, can trigger tax risks for their offshore employer such as permanent establishment (PE) and employment tax risks. In New Zealand, this has been particularly acute, with a significant number of people, either physically unable to leave New Zealand or coming to New Zealand due the relatively Covid-19 free environment, and while continuing to work for their offshore employer. The number of people working remotely in New Zealand is expected to increase. In response to these challenges, the New Zealand Inland Revenue have made two changes.

Inland Revenue's temporary relief for unintended tax consequences caused by Covid-19

The first change, in the middle of New Zealand's Level 1 lock-down, was to issue guidance (published on the Inland Revenue's website) that the Inland Revenue would take a concessionary approach in relation to tax residency issues triggered as a result of persons being stuck in New Zealand due to Covid-19.

Generally, where an non-NZ resident employer has an employee in New Zealand for more than 92 days in a 12-month period (including days of arrival and departure) their employer can be liable to register for and operate employment taxes (pay as you earn (PAYE), fringe benefit tax (FBT) and Employers Superannuation Contributions Tax (ESCT)) in respect of their New Zealand employees.

In the guidance, Inland Revenue has confirmed that where Covid-19 had unintended tax consequences, such as where individuals were required to stay in New Zealand, then extra days would be ignored and would not count towards determining whether they are required to register for New Zealand employment taxes provided the employee were to "leave New Zealand within a reasonable time after they are no longer practically restricted in travelling".

For non-NZ resident employers with employees stranded in New Zealand, the announcements were welcome relief. This meant that those extra days would not be counted towards the normal day count tests. In many cases, this meant the usual rules did not apply.

The guidance also included additional helpful concessions in relation to: permanent establishments (PE); non-resident contractor's tax; corporate and individual residence; and transitional residence. The Inland Revenue guidance can be found here.

Inland Revenue's draft guidance for foreign companies with employees working in New Zealand - Operation Statement ED0223

The second change was the release by the Inland Revenue of draft guidance, Operation Statement ED0223, for offshore companies with non-resident employees in New Zealand. The Inland Revenue's draft ED0223 suggests that there will be circumstances where an offshore non-NZ resident employer with an employee in New Zealand would not be required to register for New Zealand employment taxes.

ED0223 set out a test to determine whether an offshore employer has an obligation to register for employment taxes. The test consists of two parts:

• first, does an employer have a permanent establishment (PE) or 'sufficient presence' in New Zealand, and
• second, are services performed by the employee 'properly attributable' to the employer's presence in New Zealand.

While 'sufficient presence' is not defined it includes a PE, a branch and entering and performing contracts in New Zealand. Inland Revenue have also suggested that a New Zealand address for service is also an indication of a sufficient presence. However sufficient presence does not include a situation where an employer's only connection to New Zealand consists of where 'an employee chooses (as a matter of personal preference) to undertake their employment activities in New Zealand' and the activities have no necessary connection to New Zealand.

The implication of this draft guidance is that where an employee is working remotely from New Zealand for an offshore company and their work is not related to the offshore company's operations in New Zealand, then the company will not be required to register for New Zealand employment taxes. The draft Inland Revenue operational statement can be found here.

Employee's tax responsibilities

Irrespective of whether an employer will have a liability to register for employment taxes, the employee may still be liable to pay income tax. If an employee is resident in New Zealand, generally where they are in New Zealand for 183 days or more in a 12-month period, they will become New Zealand resident and have a requirement to pay income tax on their income from the first day of their arrival (possibly with a credit for overseas tax paid). That tax would generally be included in that individual's year end income tax return or be paid via the IR56 - taxpayer method

Next steps

Inland Revenue are expected to continue to consult on draft Operation Statement ED0223, particularly as there has been some criticism.

Many argue that the statement does not go far enough, and that there should be legislative change which allows a non-NZ resident employer to rely on the draft statement without being punished, for example if an employee triggers a sufficient presence in New Zealand, resulting in a requirement that any underpaid employment taxes to be backdated to the first day of the employee's arrival.

Further, the sufficient presence test has been criticised as practically difficult to apply. As circumstances change over time this presents a risk for non-NZ resident employers of accidental non-compliance. In particular, an employee could potentially trigger a permanent establishment by operating something as minor as a semi-permanent home office, which could bring their employer into the New Zealand tax net.