How to solve a problem like cross-border workers

The COVID-19 pandemic is of course largely to blame, causing thousands of workers to seek refuge closer to family or in ‘safer’ countries.

In New Zealand, we have seen a large number of expats return over the last 18 months in particular, driven by their desire to be closer to home, and many of whom are continuing to work for foreign employers.

Likewise, New Zealand employers are adopting more flexible approaches to ensure employees with overseas family can return to their home locations for extended periods and hiring offshore talent into New Zealand based roles with interim arrangements for remote working.

Cross-border workers are not a new phenomenon, nor are the issues they bring for global tax authorities. In recent times, tax authorities have instead focused their efforts on implementing rules which promise a better return for taxpayers. And with ever reducing budgets and limited resources, you can understand why.

But with the number of cross-border workers now significantly increased and the acceptance by employers of virtual working to which we have now all become accustomed, the time has come for a re-think and it’s left Inland Revenue wondering…“how to solve a problem like cross-border workers?” 

It should be noted that some of New Zealand’s tax laws which deal with cross-border workers aren’t clear in their operation, which leaves many scratching their heads as to what’s required. Most employers are likely blissfully unaware that they even have an obligation.

To address matters, Inland Revenue has released an officials’ issues paper, Cross-border workers: issues and options for reform, through which they are seeking public feedback on cross-border worker issues. The paper largely builds upon themes explored in Operational Statement 20/0X Non-resident employers’ obligations to deduct PAYE, FBT and ESCT in cross-border employment situations, which although released in July 2020, is yet to be finalised (our previous Taxmail discussing OS 20/0X can be found here).

This paper is full of clarifications on matters which have for years left employers, payers and individuals confused. At the same time there are several proposals which, in Inland Revenue’s opinion, are designed to maintain the integrity of the tax system, are practical, and allow employers, payers and cross-border workers to meet their tax obligations.

In addition to pay-as-you-earn (PAYE) withholding, the paper discusses fringe benefit tax (FBT), employer superannuation contribution tax (ESCT) and non-resident contractors’ tax (NRCT) withholding.

Inland Revenue’s main proposals include:

• more flexibility in the way shadow payrolls can operate in recognition of the additional complexity of payment and reporting arrangements where remuneration is delivered abroad. Options include a specific PAYE arrangement or in-year square ups.
• introduction of a threshold test to determine whether non-resident employers have “sufficient presence” in New Zealand. Where the threshold (proposed to be the lower of $500,000 gross employment-related taxes or five employees in New Zealand) is met, non-resident employers would always have an obligation to apply the PAYE, FBT and ESCT rules.
• equalising the treatment of resident and non-resident employers with regards to their FBT and ESCT obligations, aligning these taxes with PAYE
• allowing related New Zealand entities to discharge the employment-related tax obligations of non-resident employers. This looks likely to be implemented by way of agreement only (rather than automatic transfer of the obligations), although Inland Revenue wants to be notified if it does occur.
• adoption of a “single payer” view when it comes to determining if the exemptions from NRCT withholding applies. This means the payer would only need to consider the thresholds relating to their contract with the non-resident contractor, compared to the current “all circumstances” view where payers have to consider matters unrelated to the contract payment in question (such as work performed for another payer or holidays).
• improving the flexibility of the NRCT regime by permitting:
  • retrospective exemption status (i.e. where an exemption certificate was issued after the date of the first contract payment, the exemption would also cover payments made before its issue date if within 92 days)
  • where an exemption certificate is granted based on a good compliance history, the certificate should have a broad application (i.e. cover all activities by that contractor) and should be issued for a two-year period
  • allowing catch-up payments by payers without attracting penalties and interest where they can demonstrate they took reasonable steps to confirm that either the NRCT 92-day or $15,000 exemptions applied.

The release of this officials’ issues paper is welcome in the hope that the tax treatment of cross-border workers in New Zealand and abroad can be clarified and, where possible, simplified. It goes some way to providing these clarifications.

For example it confirms that where a non-resident employer doesn’t have “sufficient presence” in New Zealand, the tax reporting and PAYE withholding obligation falls to the employee via the IR 56 regime, an approach known to tax advisors specialising in cross-border employment issues, but little known by many people currently working remotely in New Zealand.

In addition, some of Inland Revenue’s proposals are pragmatic solutions, such as the proposal to allow the transfer of employment related tax obligations to a New Zealand related entity. This is an approach many non-resident employers have traditionally implemented, albeit without legislation supporting it. The removal of the bond provisions for both non-resident employees and non-resident contractors due to them being rarely used, also evidences Inland Revenue’s focus on practical outcomes.

But that is not to say the issues paper, or the proposals described within, is the holy grail that employers, payers and cross-borders workers have been waiting for. Inland Revenue has ruled out some approaches, such as year-end calculations for employees on shadow payrolls which would simplify the compliance associated with this sort of arrangement as well as enable employers to “report once, report right” rather than continually having to amend payroll reporting in prior periods.

The scope of the issues paper itself is also limited and fails to address some critically important issues. For example, the creation of permanent establishments for non-resident employers in New Zealand by reason of remote workers, the issues affecting New Zealanders working abroad, or other employment obligations such as ACC levies and KiwiSaver. These areas are complex and also need to be addressed.

Furthermore, Inland Revenue also notes in the paper that these proposals are very much unilateral solutions which do not consider the approaches adopted (or to be adopted) by other countries. In particular, any additional guidance on cross-border worker issues released by the Organisation for Economic Co-operation and Development (OECD) should be taken into account.

We have also identified a number of practical challenges associated with employees working remotely from New Zealand for multinational businesses. This arises where both New Zealand and the offshore employer’s location assert taxing rights over the employment income, ignoring agreed bilateral tax treaty positions.    

Such approaches, particularly in locations like Indonesia and China, can have adverse impacts for the person’s New Zealand tax return. Firstly, they are required to gross up the foreign tax paid to recognise the amount as employment income in New Zealand. Secondly, they cannot offset any foreign tax paid on their behalf against their New Zealand tax liability as New Zealand does not recognise the foreign tax levied as being allowed under our tax treaties.

The issues paper does not address such challenges other than to acknowledge that the pandemic has challenged the fitness of the current double tax treaty tests for employees and those working across borders.   

If you are an employer with cross-border workers, engage non-resident contractors or are a cross-border worker yourself, and you would like advice with regards to your tax obligations, please contact Rebecca Armour or Nick Cooke.