COVID-19 residence issues – Inland Revenue and OECD guidance
On 22 April 2020, Inland Revenue issued a public statement for tax agents relating to the unintended and unprecedented consequences for the tax residence rules caused by the COVID-19 emergency. These consequences are particularly relevant for people stranded in New Zealand who were not intending to be tax resident. The current location of directors, employees and individuals also has an impact on businesses.
Inland Revenue’s public statement addresses the following issues:
- Company residence: The present emergency will not cause corporate taxpayers to be tax resident because directors of a company are confined or stranded in New Zealand. The law allows a factual consideration of how a company is managed in reality. The fact that directors are stranded in New Zealand under the present emergency does not change where the real business of a company is carried on. The occasional exercise of control by the directors from New Zealand does not make the company tax resident in New Zealand: see s YD 2(1) of the Income Tax Act 2007.
- Fixed establishments: The double tax agreement between most countries and New Zealand states that a company with a permanent establishment in New Zealand will have income tax consequences here. A permanent establishment for a business is a fixed place where the business activity is wholly or partly carried on. A non-resident company will not become New Zealand tax resident because of a fixed establishment after only a short period of time. The fixed place needs a degree of permanency, that is, the fixed place is not of a purely temporary nature. For a fixed establishment the business must be carried out on a regular basis and it must be undertaken wholly or partly through the fixed place. Whether there is a fixed establishment is determined having regard to the facts and circumstances of each case, which includes the COVID-19 emergency. A relevant consideration would be that the non-resident company did not have a fixed establishment in New Zealand prior to the present emergency and the presence of employees in New Zealand is short-term being related to current travel restrictions.
- Individuals: In normal circumstances, an individual will become tax resident in New Zealand if they are personally present in New Zealand for more than 183 days in total in a 12-month period: see s YD 1(3) of the Income Tax Act 2007. The COVID-19 emergency could result in individuals having to stay in New Zealand longer than 183 days despite their plans to leave. An individual will not become tax resident in New Zealand under the day-test just because they are stranded in New Zealand. The extra days when a person was unable to leave will be disregarded if a person leaves New Zealand within a reasonable time after they are no longer practically restricted in travelling. The day-tests are based on normal circumstances when people are free to move.
- Performance of personal or professional services in New Zealand on a short-term visit: The 92-day test provides an exemption for certain non-resident income that a non-resident person derives from performing personal or professional services in New Zealand during a short-term visit. In ordinary circumstances income earned in New Zealand by a person providing these services is subject to tax in New Zealand and PAYE must be withheld by an employer after 92 days in relation to all income derived from the time of arrival. If the visit to New Zealand is less than 92 days, the income is exempt. This removes the requirement for employers to account for and withhold PAYE in relation to employees making short-term visits to New Zealand. The COVID-19 emergency could cause service providers to have to stay in New Zealand longer than 92 days despite their plans to leave. Any extra days when the person was unable to leave and that are in addition to the 92 days will be disregarded if the service provider leaves or returns to their country within a reasonable time after they are no longer restricted in travelling.
- Schedular payments and non-resident contractors: The 92-day test excludes some payments from being schedular payments. These are payments for services provided by a non-resident contractor who has full relief from tax under a double tax agreement and is present in New Zealand for 92 or fewer days in a 12-month period. The payment is not a schedular payment because of the short-term period that the contractor is present in New Zealand. In these circumstances, the withholding tax obligations in the PAYE rules will not apply. Any extra days when a person was unable to leave New Zealand because of the COVID-19 emergency will be disregarded if the person leaves or returns to their country within a reasonable time after they are no longer restricted in travelling.
- Transitional residents: There is a 48-month test for transitional residents (see ss CW 27 and HR 8 of the Income Tax Act 2007). If this time is exceeded, transitional residents become subject to New Zealand tax on their worldwide income. The period of transitional residence begins on the first day of residence in New Zealand. It ends when the person either stops being a New Zealand resident, or on the last day of the 48th month after the month in which the person first satisfied the residence tests (whichever is earlier). Transitional residents who may have planned to leave New Zealand before the 48-month transitional resident period ended are now unable to easily leave the country. A person should not be regarded as no longer a transitional resident just because they are stranded in New Zealand due to the COVID-19 emergency conditions. The extra days when a person was unable to depart will be disregarded if the person leaves New Zealand within a reasonable time after they are no longer practically restricted in travelling.
- Student loans: There is a 184-day test for student loan repayment obligations. At 184 days, the borrower becomes overseas-based instead of New Zealand-based. Interest is charged for all overseas-based borrowers. A borrower who has a student loan will not become overseas-based just because they are stranded outside New Zealand under the COVID-19 emergency conditions. The extra days when the borrower was unable to return home will be disregarded if the person returns to New Zealand within a reasonable time after they are no longer practically restricted in travelling.
OECD guidance on cross-border issues
The OECD Secretariat has issued guidance on implications of the COVID-19 crisis on cross-border workers and other related cross-border matters. The OECD notes that tax issues have arisen where there are cross-border workers, or individuals who are stranded in a country that is not their country of residence. These issues have an impact on the right to tax between countries, which is currently governed by international tax treaty rules that delineate taxing rights.
The OECD Secretariat’s general view is that under double tax agreements between countries an individual should not become resident in the country they are stranded in. Examples taken from the OECD guidance are as follows:
Mr X is stranded for a period in a country that is not his country of residence due to the travel restrictions and quarantine measures. The challenge here is to determine the place of residence of individuals for tax purposes. In this case, the OECD Secretariat’s general view is that, under the bilateral tax treaty between the two countries, Mr X’s residence will not change due to such temporary dislocation. The OECD recommends countries of temporary residence to apply their domestic rules accordingly.
Ms F, who is a cross-border worker, is quarantined in her country of residence and temporarily out of work due to the COVID-19 crisis. Thanks to the stimulus package adopted in the country of her employer, she continues to receive her salary from her employer. The challenge in this case concerns the taxation of her salary received due to a stimulus package. In this case, the OECD Secretariat’s general view is that her income will continue to be taxed as it was prior to the COVID-19 crisis, that is, in the country where she used to exercise her employment.
The guidance also deals with issues affecting the residence of companies for tax purposes, where their management is carried out in another country due to the travel and quarantine restrictions. It examines teleworking, for instance, and the implications for companies of having cross-border employees telework in their home country and therefore performing their duties there. In these situations, the OECD Secretariat’s general view is that these special circumstances should not affect the residence status of companies under the international tax treaty rules.
©2020 CCH New Zealand Ltd