The way people work has transformed due to the Covid-19 pandemic, leading to an increase in remote work, including cross-border arrangements. This shift benefits employers by expanding the talent pool and employees by offering a better work-life balance, eliminating long commutes, and providing more flexibility.
However, it’s crucial to be aware that working across borders can result in tax responsibilities for both employers and employees. These obligations may be unclear at the start of the arrangement and correcting them can be costly. The rules governing cross-border work taxation are contained in the Taxation (Annual Rates for 2022–23, Platform Economy, and Remedial Matters) Bill (No 2), which was enacted in March 2023 and applies from 1 April 2023.
What is a cross-border worker?
According to the Inland Revenue Department (IRD), cross-border employees are individuals working in New Zealand for a non-resident employer or New Zealand residents working outside New Zealand.
Who is responsible for taxes?
A non-resident employer becomes subject to New Zealand employment-related obligations if they have a “sufficient presence” in New Zealand. This typically involves having a branch, a permanent establishment, an address for service or trading presence in New Zealand, or performing contracts in New Zealand. The definition of a permanent establishment can be broad, sometimes including a home office.
Additionally, a non-resident employer must register as an employer with the IRD if they provide non-cash benefits (fringe benefits) or contribute to their employees’ superannuation scheme or fund.
For non-resident employers without New Zealand employment-related obligations, the responsibility for PAYE (Pay As You Earn) falls on the employee, who must register as an IR56 taxpayer. This means the employee needs to calculate and pay PAYE and other deductions to the IRD monthly, with failure to do so resulting in significant penalties.
Because IR56 obligations are demanding, non-resident employers can voluntarily register as employers in New Zealand or delegate employment-related tax duties for their New Zealand based employees to another party, such as a payroll services provider.
What about contractors?
New Zealand-based contractors working for overseas entities do not need to register as IR56 taxpayers. Instead, they are responsible for paying their own taxes, including GST if their turnover exceeds $60,000, and filing tax returns with the IRD.
The distinction between an employee and a contractor can be rather subtle and depend on factors like who provides necessary equipment, who pays for training, and who controls how the work is done.
In the case of non-resident contractors working in New Zealand, payers must deduct tax on payments unless there is an exemption. The rate is usually determined by the type of work performed and whether the contractor has provided a completed IR330C Tax rate notification for contractors. The default rate is currently 15%, with higher rates for incomplete forms, known as ‘no-notification’ rates.
The contractors are then required to pay their own taxes and file returns with the IRD unless their income is exempt under a Double Tax Agreement between New Zealand and their country of tax residence.
Conclusion
Tax regulations for cross-border and remote work are intricate and still evolving. While the New Zealand government’s enacted Taxation Bill provides some clarity, specific tax obligations depend on the details of each arrangement. If you need assistance with these matters, feel free to contact us.