Amongst the many changes that COVID-19 has brought to our ordinary lives, one which frequently has tax implications is the rise of remote working.
During the previous 18 months, we at US Global Tax have seen a phenomenal rise in instances of remote employees working in New Zealand or Australia for a US based employer, or vice-versa.
The concept of working in one country, with an employer based in another country, can leave many confused as to where the tax should be paid.
It would be reasonable to expect that if you lived in New Zealand (but had an employer in the US), that the IRS would still expect taxes to be paid there, since that is where the job is based, right?
Well, we also have to look at it from the IRD perspective, in that someone living in NZ is benefitting from taxpayer funded services here, and IRD would also expect tax to be paid in NZ.
Fortunately, this issue is dealt with in both the NZ-US and Australia-US tax treaties. From here onwards, I will refer to NZ only.
Articles 14 & 15 of the NZ-US double taxation treaty specify which country has the right to tax income, when work is conducted remotely. This generally determines which tax department (ie the IRD or IRS) has “first taxing right” on income for a remote employee.
For a waged employee, Article 15 stipulates that once you have been working remotely from any country for greater than 183 days in any rolling 12 month period, then the country where you’re physically located (and performing the work) has the first taxing right. This essentially means that an employee living in New Zealand, but employed from the US, would pay tax to NZ before the US. This is dealt with (in the US) through a tax treaty disclosure on Form 8833, and then either Form 2555, or 1116 (foreign earned income exclusion or foreign tax credits).
This doesn’t necessarily mean that the country where the employer is based would not tax at all however, and the intricacies of local taxation would also be taken into account.
This can result sometimes in a complicated system regarding the order of tax payments, and tax advice should be sought.
One possible complication to arise from this situation, is the risk Permanent Establishment being created for the employer. By having staff “on the ground” in another country, it is possible it may give the country (where the employee is based) the right to tax earnings deemed to be locally sourced. This is especially relevant for those who are employee of their own businesses.
For those working remotely as a sole contractor, the rules are roughly similar, however further consideration is needed. Depending on the citizenship of the worker, self-employment tax may be owed in the US, despite the work not taking place there.
If you have been offered the opportunity to work remotely, or are already doing so, it pays to seek advice as early as possible. Both the “back-filing” and “voluntary disclosure” processes in the US and NZ respectively, can be expensive, with penalties as well as compliance costs. Resolving the correct taxation order early can avoid problems later down the line.
We work with local partners in both NZ and Australia, to ensure our clients have the most tax efficient set up, not only for the US, but also locally. For further advice, contact us today: https://www.usglobaltax.com