During June 2022, US Global Tax presented a series of seminars alongside Saunders & Co Lawyers. The seminars mainly covered tax issues that new US migrants to New Zealand would need to be aware of.
The second part of our seminar discusses remote working, from a US and NZ perspective.
Transcript is below:
Dave
Working remotely for a US employer. Now this is something which, prior to COVID, we used to see incredibly rare. It wasn’t very common. However now, it’s almost on a weekly basis. So we have lots of new migrants who moved to New Zealand and retain their US employment. Obviously, many employers right now are trying their best to hold onto their staff and usually won’t allow migration to get in the way of that.
Dave
But if you were physically, sat here working in New Zealand, how is it going to be taxed? Now, lots of people make the assumption, well, my employer is in the US. They’re saying, withholding taxes on my wages; I’m paying state tax, paying withholding. That’s where my tax bill is. But that’s not necessarily the case. So we’ve got Article 14 and 15 of the Tax Treaty. This essentially determines when you’ve got an employer in one country and an employee in another country, which country gets the right to tax.
Dave
Now, for both. So Article 14 is for self-employed individuals, Article 15 for employees. Now, in both cases, it does stipulate 183 days. So once you’ve been present in New Zealand for greater than 183 days, then any tax on your wages is considered New Zealand sourced. And the IRS do recognize this. Whilst they sometimes will kick up a little bit of a fuss, ask some questions, ask to see a copy of the tax treaty; even though it’s available on their website, they will accept this as a credit. So that means you’ll be paying your tax here in New Zealand and not in the US.
Dave
Now, because New Zealand tax rates are generally higher than the US, it does mean it usually offsets the tax in full. Getting employers to agree to this, on the other hand, is usually not so easy. We do see quite frequently, clients will try and get their employers to go down to a 0% rate of withholding, usually out of fear of fall and foul of their own obligations to the IRS, most employers will not agree to this.
Dave
And from a state tax level, as well, certain states require you to have been out of the state for at least two years before they will go down to a 0% withholding. If you are self-employed, then bear in mind that whilst New Zealand will have first taxing right to your income, a 15% Social Security or self-employment tax goes by both names, that will still apply in the US. So that’s a form of double taxation, and this will be paid on top of any tax you pay in New Zealand.
Julia
Yeah. So this remote working is a real problem for tax purposes. There are problems for the individuals. David’s just touched on them from the US perspective. From a New Zealand tax perspective, as David said, you’re in New Zealand working for Microsoft US, but while sitting at your kitchen bench in Auckland. So you’ve got Microsoft, too, at 0% withhold on that. How do you pay New Zealand tax? So often the clients come to us and actually one, don’t know that they were supposed to pay New Zealand tax; and two, have been doing it for multiple years. So this is when David very quickly says, oh, I’m not a New Zealand tax advisor, but I think you need some help here. And we jump on a call together. And usually what needs to happen is one, correct the situation. So that requires a voluntary disclosure to Inland Revenue, which is a legal process. Which basically you’re saying I’ve stuffed up and you’re putting your hand up and you’re saying, I’ve done the wrong thing.
Julia
I’m now telling you the right thing. And you can get a reduction in the short, full penalties. So IRD imposes penalties for incorrect filings. Now you don’t have to have even filed a tax return. If you’ve taken a tax position that you don’t owe tax in New Zealand because you’ve paid it in the US, that as I have always successfully argued that it is a tax position and therefore been able to enter the voluntary disclosure process. Most of the time, these people aren’t people who knowingly have not paid their tax. It’s an error due to just lack of understanding. And therefore, we can actually, if they’re not under audit and IRD haven’t looked at them for this, if we make a pre-notification voluntary disclosure, we can bring those penalties to zero. So that squares you up very costly, squares you up.
Julia
And then, obviously, David works alongside to try and actually get the overage tax back from the US. And there are some issues with foreign tax credits and things like that we work with as we go. But to get it right going forward and what should they have done had they have known the moment they stepped foot in New Zealand is probably register themselves as an IR56 taxpayer, which means you are putting your hand up to pay your PAYE and New Zealand tax obligations on behalf of your employer. So you’re effectively saying you are a New Zealand representative of an offshore company. And then they have to, you have to do the filings each month and pay your tax monthly. So you’re not actually just picking it all up at the end of the year, like a New Zealand prop tax payer would. So that’s quite a large undertaking.
Julia
And is quite frankly, could be beyond a number of people who are actually working just in terms of working those out. There are also complexities there with any benefits that you might receive on your US income. Contributions to 401ks, any other “perks” that you might have that may or may not be tax free in the US, probably not going to be tax free in New Zealand. So they all gross up as well. So you’re paying tax on maybe your superannuation contribution of $100 a pay, and you’re having to gross that up for tax and pay tax in New Zealand on cash that you actually don’t physically have at this point in time. Not to mention the fact that there’s foreign exchange rate fluctuations that need to be accounted for as well.
Julia
So it’s not simple. I would recommend a very good accountant and they’re, I work with a number of them, but there are a lot that don’t really understand this process. The other issue that I find is I’ve just talked about the individual, but lots of people are coming over here who are directors of entities, the really key staff of entities. And their presence in New Zealand could actually bring the US entity into the New Zealand tax net itself.
Julia
So one of new Zealand’s key taxing provisions for entities is controlled by the directors. So, or a manager that has control in New Zealand. So that’s what we call a permanent establishment or a PE. That’s a really complex topic and we’re not going to cover it in detail at all today, but it is something to be aware of. So I might get some entrepreneurs who have come to New Zealand, and they’re literally the director of a very successful company, but they’re living in New Zealand 365 days a year or thereabouts. They’re running that company from New Zealand and therefore they would have a New Zealand tax residency status.
Julia
And we would then need to look at the double tax agreement to apply the permanent establishment article of that, to see what parts, if any, are subject to tax in New Zealand. And that can even if all of your staff and clients and work is completed in the US and you don’t … nothing changes apart from the seat they sit in. This can be a really big problem. So we like to talk with these people ideally before they enter the country, so that we can look at structuring options to try and alleviate any unnecessary New Zealand tax. Because while there is a double tax agreement, there’s no such thing as no double tax. The way things are taxed in New Zealand is different to America; and therefore, there is always some element of double tax.