Contracting with non-residents? Don’t overlook NRCTTax Alert - October 2009 |
It is reasonably common for New Zealand businesses to engage non-residents to perform work or provide services in New Zealand. For example, a non-resident contractor might visit New Zealand to assist with installation projects or to provide services. In certain situations New Zealand companies may have obligations to withhold tax (generally at 15%) from contract payments made to non-residents. We refer to this tax as “non-resident contractor tax” or NRCT. The rules stem back to “think big” projects in the late 1970s when a lot of non-resident contractors were engaged to carry out contract work in New Zealand. Over time the rules have been extended.
The liability will arise where any work is physically performed in New Zealand or any services are rendered in New Zealand. It will also arise if a non-resident provides personal property for use in New Zealand (for example, provides the lease of any type of equipment for use in New Zealand). Generally the payer must withhold the amount of tax from contract payments made to the non-resident contractor and pay this to Inland Revenue.
The following types of payments are specifically excluded from these rules:
- royalties as defined;
- payments that merely reimburse a non-associated party for costs; and
- payments that are for labour-only building work
The tax is not required to be withheld by the payer in the following circumstances:
- where the non-resident has full relief from tax under a double tax agreement and is present in New Zealand for 92 days or fewer in a 12-month period; or
- Where the total contract payment paid in a 12-month period is $15,000 or less; or
- Where the non-resident produces a valid certificate of exemption to the payer. For example, a nonresident is able to apply to the Commissioner for an exemption certificate where the non-resident and income type is eligible for treaty relief under a double tax agreement.
Generally it is the longer term, large value contracts that are at most risk here. Failure to withhold this tax will result in the Inland Revenue grossing up the payment made to the non-resident contractor. The Commissioner can recover any deficient tax from the payer, the non-resident or both concurrently. Where a non-resident contractor has left New Zealand, the Commissioner is likely to seek payment from the payer because that will be the easiest route of collecting the tax. Therefore the New Zealand party to such contracts needs to be mindful of these rules and inquire of any exemptions that may be relevant, determine what rate applies or if exemption certificates should be applied for before any payments are made. It also pays to be aware of this issue when negotiating contract payments so any taxes can be taken into account.
As an aside, Inland Revenue has issued a draft interpretation statement on this topic (Non-resident contractor schedular payments) in the context of the rewritten 2007 Income Tax Act as terms have changed. The Income Tax (Withholding Payment) Regulations 1979 which previously dealt with these rules have been repealed and the rules are now located within subpart RD of the Income Tax Act 2007. This has consequently led to changes in terminology, for example, withholding payments are now termed “schedular payments”.
The following examples are typical situations which would fall within these rules (subject to any exemptions that may then apply depending on facts).
- A non-resident expert is engaged to come to New Zealand to install new plant and machinery
- A New Zealand company contracts with a non-resident to lease equipment for use in New Zealand
- A New Zealand company engages the services of an Australian company to undertake consultancy services which are performed in New Zealand
If you would like further information on these rules please contact your usual Deloitte tax advisor.