Staples Rodway, with help from its affiliates in the Baker Tilly International network, offers this guide on the tax complications arising from being an exporter.
Taxation issues for exporters
Becoming an exporter opens up a world of opportunity for your business. Unfortunately, such an opportunity also brings potential tax complications. However, with forward thinking and the right team of advisors, your business can successfully navigate those complications.
We outline below some of the areas you need to consider as an exporter. This is, of course, not a substitute for professional advice and our top tip for any business planning to export is to first contact their professional advisor.
Team approach
Before considering the tax issues, the most important thing to remember is that you need to take a team approach. A good tax advisor in the other jurisdiction/s who can help you navigate through the various potential pitfalls is worth the fees you will incur. Additionally, the overseas tax advisor should be in contact with your New Zealand tax advisor to work through any difficult cross border issues and to develop solutions that will help manage the tax burden to your business.
GST/VAT
GST/VAT is one of the more obvious issues facing exporters, not only in relation to the GST treatment of exports by Inland Revenue, but also in relation to the GST/VAT treatment in the overseas jurisdiction.
Exports are generally zero-rated for New Zealand GST purposes. This means your business charges a zero percent rate of GST on exports but can claim GST on any qualifying expenses. To qualify for zero rating you should ensure that (amongst other things) you (not the customer) is the exporter of record.
In the event your business becomes a major exporter, expect Inland Revenue scrutiny as you will often receive GST refunds.
You will also need to consider the GST/VAT rules of the other country/countries, particularly around the charging of GST/VAT at the border and the process by which this amount can be claimed back. Depending on these rules, your business may need to register for and return foreign GST/VAT. This can add a complication, as, unlike New Zealand, overseas jurisdictions tend to have a myriad of exemptions and differing rates, particularly for items deemed necessities.
Finally, a number of countries are tightening up their rules around low value goods.
Australia, for instance, requires offshore sellers of low value goods to account for Australian GST.
Income tax: Overseas
With cross border transactions comes the potential for overseas income tax issues. The level of complication is largely dependent on whether the other country has a Double Tax Agreement (DTA) with New Zealand. New Zealand currently has 40 DTAs, primarily with our major trading and investment partners.
The first issue is the level of connection your business has in the other country. Each country has different rules in relation to the sort of connection a business needs before it is obliged to account for income tax. If your connections are sufficiently remote, then you may not need to account for income tax and therefore do not need to consider whether there is a DTA.
However, if your business has a connection that may require it to account for income tax in the other jurisdiction, then consideration of whether there is a DTA between New Zealand and the other country is necessary. If there is a DTA, then for a business to be subject to income tax in the other country is dependent on whether they have a ‘permanent establishment’.
A permanent establishment may arise, for example, where your business has a staff member in the other country who is conducting sales and concluding contracts. Determining whether a business has a permanent establishment is complex, especially with recent rule changes, and so you should seek professional advice.
Another area of tax an export business needs to consider is non-resident withholding tax (NRWT), a tax on interest, dividend and royalty payments. While in many cases the business can claim the NRWT as a tax credit in New Zealand, there are some cases where it is not possible to claim the NRWT as a tax credit. Additionally, NRWT creates extra compliance costs.
Income tax: New Zealand
Beyond the overseas issues, there may be additional New Zealand tax rules to consider. For instance, if you choose to incorporate a company overseas to handle your export operation, then you may have a ‘controlled foreign company’ (CFC). While the short-term New Zealand tax obligation arising from the interest in the CFC is unlikely to be significant, the advanced compliance requirements can be more onerous.
Engaging in business overseas will also mean dealing in foreign currencies. Movements in foreign currencies may have an impact on your business’s income tax return courtesy of regimes such as the financial arrangements rules.
An added complication is the potential impact back in New Zealand. In some situations, effective double taxation may arise. An example of where double taxation may arise is where a company has an overseas branch. The overseas branch pays tax in the foreign jurisdiction and the company can claim the tax as a credit in New Zealand. This reduces the overall tax bill of the company in New Zealand and therefore the level of imputation credits generated. When the company wants to distribute profits as a dividend, the dividend is likely to be partially imputed and therefore the shareholders will need to make a top-up payment of tax.
Income tax: Employees
There may be situations where you have New Zealand resident employees of your business who you would like to transfer to the overseas operation either permanently or for a short-term secondment. This raises a number of questions around the tax residency of the employees and a number of tax issues that impact both on them and your business.
The primary issue for a permanent transfer is whether the employee will lose their tax residency of New Zealand and how the transition between countries can be managed.
On the other hand, a short-term secondment can raise a myriad of tax complications. Due to New Zealand’s residency tests, it is unlikely an employee on a short-term secondment would lose their New Zealand tax residency under New Zealand tax law. However, they may gain residency of the other jurisdiction depending on the rules of that country.
Many countries have their own forms of withholding on employee remuneration, and the interaction between these rules and New Zealand’s rules need to be considered.
Finally, the various components of the employee’s remuneration may be treated differently for tax purposes in different countries.
Transfer pricing
If your business has a presence in another country, whether through a branch or a subsidiary, there is the issue of transfer pricing. At a simple level, transfer pricing relates to charges between related parties for goods sold, services provided, funds lent and so on. Tax authorities are concerned transfer pricing may be used as a way of repatriating profits in a tax-free manner, and so have reasonably tight rules in this area.
Generally, tax authorities expect any intercompany services will be transacted on an arm’s length basis and a reasonable level of analysis will go into determining an arm’s length price. The analysis would be shown in documentation that would be provided as evidence should the tax authorities query it further.
Tax authorities are getting stricter with their transfer pricing documentation requirements. In this country, legislation recently enacted has tightened transfer pricing documentation requirements of any business engaging in cross border activity, including placing the burden of proof on the taxpayer.
Structuring
The negative impact of the income tax issues identified above can be mitigated somewhat by getting a good corporate structure in place prior to commencing exporting. Your business structure should be designed in such a way that double taxation is reduced as much as possible and an appropriate amount of tax is paid by your business.
Tax should not be the only factor considered in designing a structure. A good business structure also considers issues around liability, other legal obligations (for example, the need to file financial statements) and ease of day-to-day management.
A final comment
Forewarned is forearmed. While the issues discussed above are complex, your tax advisor should be able to guide you through these issues. This can form the basis of a conversation with your tax advisor when starting your export journey.
Staples Rodway is New Zealand’s seventh-largest accounting practice. It has over 400 staff nationwide, with offices in Auckland, Hamilton, Tauranga, New Plymouth, Hastings, Wellington and Christchurch. With the help of its affiliates in the Baker Tilly International network, we are able to help guide businesses through the tax complications arising from being an exporter. www.staplesrodway.co.nz This chapter is copied from the 2019 edition of the NZ Export & Trade Handbook.
