Tax treaties and Covid-19
If you undertake a little bit of cross-border advisory work in your day to day, or you just like to keep abreast of what’s happening in the international tax community because that’s the type of person you are (a.k.a you have too much time on your hands), then I would suggest signing yourself up for the OECD tax updates (it’s free!).
Last week I found a very useful article had just been released, which analysed and reported on what action a number of jurisdictions, including New Zealand, had undertaken with respect to interpreting various articles within their tax treaty agreements, which the effects of Covid-19 potentially now called into question.
Early in April 2020, the OECD Secretariat issued a guidance statement on the application of international treaty rules in circumstances where cross-border workers or individuals were stranded in a jurisdiction that was not their jurisdiction of residence. The latest article is not only an update to the earlier guidance, but as I aforementioned, a commentary of individual jurisdictions action taken to provide guidance to taxpayers and their advisers, post the April 2020 release.
The article covers the topics of permanent establishment triggers, tax residency issues for both entities (in older treaties often based on the ‘centre of effective management’ test) and individuals, and income from employment issues (stranded workers, teleworking from abroad (a.k.a working remotely).
The full article can be located here – http://www.oecd.org/tax/treaties/guidance-tax-treaties-and-the-impact-of-the-covid-19-crisis.htm
Payments for employees working from home
You may recall in the early days of the pandemic (doesn’t that seem like forever ago now?), the release by IR of Determination EE002, ‘Payments to employees for working from home costs during the Covid-19 pandemic’. The Determination provided guidance on the extent to which payments made to employees who were now working from home due to Covid-19, could be paid tax free.
Determination EE002 was to apply to payments made to employees through 17th March 2020 until 17th September 2020, however once IR appreciated that Covid-19 was not going to simply be an overnight stay, Determination EE002A was released to extend the payment period through until 17th March 2021.
Now Determination EE002B provides a further extension to the original version, the Commissioner’s policy able to be used for any payments made to employees through until 30th September 2021.
The original requirements of Determination EE002 remain unchanged, being:
- an employer must make a payment to an employee
- the payment must be for expenditure or a loss incurred (or likely to be incurred) by the employee
- the expenditure or loss must be incurred by the employee in deriving their employment income and not be private or capital in nature (the capital limitation does not apply to an amount of depreciation loss)
- the payment must be made because the employee is doing their job and the employee must be deriving employment income from performing their job, and
- the expenditure or loss must be necessary in the performance of the employee’s job.
Excluded from the determination are:
- expenditure on account of an employee
- any payments made for a period after an employee ceases to work from home
- all amounts paid under a salary sacrifice arrangement, and
- payments made to an employee to compensate the employee for the conditions of their service.
As always with most IR guidance documents, you are entitled to completely ignore the Determinations, and instead in this case to use the provisions of section CW 17 to pay employees what you consider are fair and reasonable amounts tax free.
Resurgence support payment
Hot on the heels of the latest mini lockdown for Auckland, the Government has passed under urgency the Taxation (Covid-19 Resurgence Support Payments and Other Matters) Act 2021, which provides for a new resurgence support payment for any business affected by a resurgence of Covid-19.
The RSP as it will be known, kicks in when there is a move to Level Two or higher anywhere in New Zealand, and where that higher level remains in place for seven days or more. Businesses who have experienced a reduction in revenue over a seven-day period of at least 30% compared to the typical weekly earnings in the six-week period preceding the change in alert levels, will be entitled to apply for the RSP (seasonal businesses must show a 30% revenue drop compared with a similar week the previous year). A business located anywhere in New Zealand who meets the qualifying criteria will be able to apply (so the RSP is not regionally based), and businesses will be able to apply each time there is an alert level change from Level One to a higher level, and the higher level lasts more than seven days.
Pre-revenue businesses who have experienced at least a 30% reduction in their capital raising abilities over a seven-day period post an alert level increase, may also apply for the RSP.
Businesses with more than 50 employees will also be eligible to apply for the RSP however any claim will be capped at 50 employees.
The RSP is calculated as the lesser of:
- $1,500 plus $400 per FTE employee up to 50 employee max; or,
- 4x the actual revenue drop experienced by the applicant.
The RSP is not subject to income tax, which naturally has the consequence that any expenditure funded by the RSP will be non-deductible. GST will however apply to the payments, which equally means GST input tax remains claimable on RSP funded expenditure.
Applications for the RSP will be able to be made from 23rd February, and an application period will close one month post the date of return to Level One. IR will manage the RSP regime, targeting to have the payments released to the applicant’s bank account within five working days. Tax agents with the requisite authority will be able to apply on behalf of clients.
And a final note, the RSP is an additional Covid-19 support package announced by the Government, with existing support packages such as the Small Business Cashflow Scheme and the Leave Support Scheme remaining available to businesses as well.
If you have any questions or would like a second opinion on any national or international tax issues, please contact me firstname.lastname@example.org