To address these concerns Inland Revenue has released an Officials Issues Paper “Cross-border workers: issues and options for reform” with a range of proposals aimed at providing greater certainty for foreign employers and New Zealand businesses who engage cross-border workers.

These proposals include:

• Introducing flexible PAYE arrangements for employees who remain on a foreign payroll.
• Clarifying when PAYE, FBT and ESCT obligations arise for non-resident employers and when these obligations transfer to the employee.
• Allowing non-resident employers to transfer PAYE, FBT and ESCT obligations to a related New Zealand entity.
• Changing the NRCT withholding thresholds to a “single” payer requirement, introducing a non-resident contractor reporting requirement and making NRCT more flexible.
• Taxing contributions to foreign superannuation schemes under the PAYE regime rather than the FBT regime.
• Repealing the PAYE employer bond provisions as these are rarely used.

Catch up payments

Inland Revenue is proposing to allow “catch up payments” to be made for employees on a foreign payroll where an employee breaches the day-count threshold (92 days/183 days), provided the employer reasonably believed that an exemption would apply.

This removes the penalty and interest exposures that typically arise once these breaches are discovered and will reduce the compliance costs associated with remedying the positions.

The employer will have 28 days to correct the position once the employer first becomes aware that this day count threshold has been breached. Our experience suggests that it may be difficult to meet the 28-day requirement. In practice, there can be delays with obtaining Inland Revenue numbers for cross border employees who may not have or do not intend to open New Zealand bank accounts, meaning that it could be difficult to meet the 28-day requirement. The additional time it may take to collect compensation information from outsourced service centres and for this information to then be provided to local country payrolls should also not be underestimated. This is something that requires further consideration.

It is also proposed that this flexibility should also be available to New Zealand businesses who make payments to non-resident contractors, as similar issues arise when it subsequently transpires NRCT obligations arise due to a change in circumstances.

Inland Revenue example: Estella, a Brazilian tax resident, comes to NZ on a ten-week assignment (70 days) to work on a construction project. A New Zealand company manages the project and takes responsibility for the employees. At the outset of Estella’s assignment, it is anticipated that the 92-day exemption under New Zealand domestic law will apply. New Zealand does not have a double taxation agreement with Brazil.

Unfortunately, two weeks after Estella’s arrival, the project managers are told that equipment necessary to complete the work Estella is undertaking will be delayed arriving in New Zealand. This delay means that Estella’s time in New Zealand will extend to 14 weeks (98 days). At this point, the New Zealand company expects the threshold to be breached so it puts Estella on the shadow payroll. A catch-up PAYE payment for the first two weeks is made, and PAYE is applied thereafter.

PAYE arrangements and in year square ups

Inland Revenue has recognised that there are complexities involved with cross-border worker arrangements. Tax equalisation arrangements, gross up calculations, collecting and reporting employment information and foreign exchange all make it difficult when managing PAYE obligations for workers on a foreign payroll.

To address these issues, two options have been proposed:

In-year square ups

• Employers will be allowed to make adjustments during the year and make a catch-up payment.
• Final adjustments to be made in the employee’s tax return.
   

PAYE arrangements

•  Employers enter into a PAYE agreement with Inland Revenue.
• The agreement is subject to certain conditions, such as being tax equalised with an in-year review to capture material changes.
• Final adjustments to be made in the employee’s tax return.
• This method is currently available to non-resident employers in special circumstances. The current proposal is to clarify when these arrangements can be applied to cross border workers. However, as PAYE arrangements result in both set up and ongoing costs to monitor and administer the arrangements, Inland Revenue have signalled that the PAYE arrangements is not the preferred option, but they welcome feedback on this.

In July 2020, Inland Revenue released a draft operational statement ED0223 “Non-resident employers’ obligation to deduct PAYE, FBT and ESCT in cross-border employment situations” for consultation. Our August 2020 Tax Alert article also discussed some of the tax implications of ED0223.

Whether an obligation to deduct exists turns on the question of whether a non-resident employer has a “sufficient presence in New Zealand”.

Summary of position outlined in ED0223

NRCT has long been a bugbear of business. In recognition of this, Inland Revenue are proposing various measures to assist businesses with their NRCT obligations. These measures include:

• Moving to a “single payer” view when determining whether NRCT exemptions apply (the 92-day test or the NZD15,000 de minimis test) and introducing additional reporting requirements to enable Inland Revenue to identify non-resident contractors. Currently, businesses need to seek details from non-resident contractors regarding their historical presence in New Zealand (including how many days they have been in New Zealand in a 12-month period and whether the contractor has received other payments up to NZD15,000 within the last 12 months), a business is liable for NRCT if the thresholds are breached based on other activity the contractor has had in New Zealand.
• Introduction of an NRCT code to identify NRCT payments allowing catch up payments to be made in the event of threshold breaches, provided reasonable steps have been taken to confirm the NRCT thresholds would not be exceeded.
• Allowing for the issue of retroactive certificates of exemption that would cover payments made up to 92 days before the issue of the certificate of exemption.
• Providing broader exemption certificates for up to two years where they are issued on the basis of a good compliance history.
• Enabling a New Zealand entity to act as a “nominated taxpayer” to establish good compliance history to obtain exemption certificates.
• Establishing a register of exempt non-resident contractors.

Overall, the proposals regarding PAYE and NRCT flexibility for cross-border workers are positive and should simplify some of the current difficulties when thresholds are breached. The proposed threshold test to determine “sufficient presence” for non-resident employers requires further consideration in terms of whether this addresses the uncertainties that have raised. While the extension of the IR 56 regime to include FBT and ESCT closes a gap in the current legislation, this does create some difficulties as the employee will need to fund these costs from their after-tax earnings.

Submissions on the issues paper close on 19 November 2021.

Please get in touch with your usual Deloitte advisor if you would like to discuss how these proposed changes may apply to you.