Here's a quick overview of the new withholding tax rules for contractors which take effect from 1 April 2017, or if you haven't got your systems in place right now, you can defer it to 1 July 2017.
A labour-hire firm is defined as "an entity which has as one of its main activities the business of arranging for a person to perform work or services directly for clients of the entity." So while this appears to be a relatively straight forward definition, it is causing issues. What is clear from IRD's policy team is that the standard consulting arrangement, whereby Johnny contractor operates via his contracting company Johnny Consulting Limited and provides services to the ultimate client - say Spark, remains outside of the new rules. This is because Johnny Consulting Limited's activity is not arranging contractors for clients in the ordinary course of its business.
The upshot of the new rules is that contractors can now select their own WHT tax rate. Tax Policy has included the following table to assist us to determine the rates of WHT that may apply from 1 April 2017.
| Description | Rate | |
|---|---|---|
| Elected rate | Chosen by the payee. | 10%-100% (15%-100% for non-residents and holders of temporary visas) |
| Special rate | Payee can request from Commissioner. | Only necessary if the payee wants a rate lower than 10% ( or 15% as above) |
| No notification rate | When the payee does not provide name or IRD number to the payer. | 20% for non-resident companies 45% for other contractors |
| Prescribed rate | Set by Commissioner when the payee has not met a liability under the Inland Revenue Acts. | Cannot exceed 50% |
| Non-resident entertainer rate | This rate must be used by non-resident entertainers. | 20% |
| Standard rate | The rate for the activity or arrangement set out in schedule 4, which will apply if none of the rates set out above apply. | Vary between 10.5% and 33% depending on the type of activity or arrangement |
The new rules are meant to cover the situation where Johnny Consulting Ltd is engaged by Recruitment Labour Hire Limited to ultimately put Johnny into Spark as a contractor. In this case, Recruitment Labour Hire Limited is required to deduct withholding tax when it makes payments to Johnny Consulting Limited.
Just to add to the confusion, if Recruitment Labour Hire Ltd cannot find enough 'Johnny's on the spot', and they go to Tax & More Labour Hire Limited, then under the new rules, when Recruitment Labour Hire Ltd pay Tax & More Labour Hire Ltd, WHT is required to be deducted. When Tax & More Labour Hire Ltd pays Johnny Consulting Limited, WHT is also required to be deducted.
It seems poor old Johnny will end up working for nothing. But. ... help is at hand. IRD has said that in these cases where there is a chain of labour hire companies, a 0% WHT rate will be offered - use form Special Tax Code IR 23 BS.
There is a small, well not so small problem for clients where they want to pay Johnny a shareholder's salary, or where the attribution rules (PSAR) require that the net income of Johnny Consulting Ltd be attributed to him. If WHT has been deducted by a labour hire company, that WHT has been done so on behalf of Johnny Consulting Ltd. So the obvious question is, how do we transfer the WHT deducted to Johnny person?
Unlike income tax or GST where tax can easily be transferred between a company and shareholder etc, WHT is in the nature of PAYE, and there is currently no mechanism to allow that to be transferred from Johnny Consulting Ltd to Johnny person! Presumably, if Johnny Consulting Ltd is going to have its income attributed to Johnny, then IRD's option of a 0% WHT tax for the company will sort the problem, but we do think this needs a legislative fix.