The Source and Residency Rules Adopted in New Zealand - Coursework Example

Name Institution Instructor Course Date The Source and Residency Rules Adopted in New Zealand Introduction Residence is a crucial concept in the tax legislation in most countries. It is generally used to identify individuals who belong to a particular country (Zee, 2005). In many jurisdictions, people who are considered to be tax residents are normally taxed based on their worldwide income while non-residents are taxed based on their domestic income as stipulated within the taxing state. The definition of ‘residence’ is vital for many individual taxpayers especially the ones who decide to work in overseas or are required to do so due to their employment positions. It is quite difficult for most taxpayers to avoid paying taxes by claiming to be non-residents of any jurisdiction although the individuals who travel overseas may wish to be referred as non-residents in their home countries (Foyer, 2004). There are others who would want to be considered as residents in their home countries even when they reside in overseas as this may give them an opportunity to take advantage of lower tax rates or exemptions. New Zealand taxes its residents based on their worldwide income regardless of the source of income and taxes non-residents only if their income has its source in New Zealand. Residents of New Zealand are subjected to New Zealand income tax on income that is derived from any part of the world. This applies even if the income is not remitted back to Australia. An individual who wishes to settle permanently in New Zealand has to apply for a resident visa. Licensed Immigration Advisers are situated at the New Zealand Immigration department where they assess an individual’s chances of obtaining a visa based on the residency rules. The various categories that one can choose from when applying for a resident visa include Skilled Migrant Category, Business Migration, Investor Migration, Family categories, and Work to Residence. The Skilled Migrant Category is used by the applicants who have plans to be New Zealand residents by joining skilled employment (Crowe Horwath International, 2009). In order to qualify for resident application under the category of Skilled Migrant, it is paramount to attain some minimum requirements. These include having good health, good character, capable of speaking English language, having a minimum age of 55 years, and to have a point score of at least 100 through the points system. These requirements allow an applicant to be eligible for a resident visa. The application process under the Skilled Migrant Category has to main stages that include the expression of interest, and residence application. At times a third stage is also introduced where an applicant’s qualification are assessed. In the Business Migration category, experienced businessmen who wish to establish a business in New Zealand or purchase an existing one may apply for a work visa through the Long Term Business Visa Category and later apply for a residence through the Entrepreneur Plus policies. Residents in the Long Term Business Visa aim to obtain their residency by being self employed as opposed to looking for employment (Crowe Horwath International, 2009). In New Zealand self employment is defined as a lawful engagement in the management of a business situated in New Zealand, where an applicant makes a substantial investment. The applicants of the Long Term Business Visa ought to have completed a business plan that addresses all the requirements of their business proposal. It is also of great significance to have business experienced that is relevant for their proposal. The applicants should not have been involved in any form of bankruptcy or business fraud. Under the Business Migration category, an applicant is also required to obtain an occupational or professional application in New Zealand, to facilitate the operation of the proposed business. In addition to the investment capital, business migrants are required to in a possession of a sufficient capital for their own upkeep. In the period of the Long Term Business Permit, the applicant establishes the business and later applies for a residence application under the Entrepreneur Category which eventually leads to a resident visa. In the Entrepreneur Category, the objective is to attract migrants who are able to prove they have been participating in business that contributed to the development of the New Zealand’s economy (Cockfield, 2010). Any business established in New Zealand must comply with all the relevant immigration and the employment law. The main applicants and their partners and children must also meet the basic requirements of the Health and Character policy. When an individual wishes to invest at least NZ$ 1.5 million in New Zealand, the best option for applying for residence would be the Investor category. The first step under this category is to fill up the Expression of interest form (EOI). The selection of the EOI applicants follows and is based on merit with applicants with the highest number of points being considered first. After the application an applicant is then required to show evidence of meeting the investor criteria as indicated in the EOI. Everyone stated in your residence application must meet requirements on health, English language, and character. It is a requirement for the principal applicant to be less than 65 years of age and to have a minimum of three years experience in business. Other requirements for the investor criteria include having assets that are valued at least NZ$1 million. It is also vital to provide necessary evidence in the application showing that your investments and funds are owned by you or jointly owned with others (Alm & Rider, 2006). Investment funds that are unencumbered or not subjected to mortgage claims are considered and must also be earned legally.After being granted with approval in principle, an applicant then provides documents to verify that funds transferred to New Zealand have come from the assets nominated. In relation to this the investment funds must be placed in investments acceptable in New Zealand. When the residence application is approved, the principle applicant has 12 months to transfer the nominated investments funds and invest them in New Zealand. This period can however be extended upon request by an applicant.If your family is residing in New Zealand and you wish to join them, the best way to apply for a residence will be through the family migration category. There is a partnership policy that permits partners of New Zealand citizens and residents to make application for residence in New Zealand (Cockfield, 2010). Partnership can either be a legal marriage or a civil union of either opposite or same sex. The applicants of the partnership policy must however provide evidence to prove they have been staying together for the last 12 months in a genuine relationship with a New Zealand resident or citizen. When your family members are residing in New Zealand and you intend to join them, a Residence Application under the Family Category may be utilized. Under the Parent policy parents are allowed to join their children in New Zealand if they have no dependent children or if all their adult children are away from the countries where their parents reside. It is a requirement for parents to be sponsored by an adult child who has been a New Zealand resident for a period of not less than three years. Children may also join their parents in New Zealand under the Dependent Child policy. The applicants must however be at least 24 years old, single, without children of their own, and fully reliant on their parents for financial support (Borges, 2008). Through the Sibling and adult child policy, siblings and adult children may join their families in New Zealand. They only qualify when they have no immediate family residing in the same country where they are living and have an acceptable employment offer in New Zealand. They must also receive from an adult sibling or a parent who has been staying in New Zealand for more than three years. It is also a requirement for the applicants to have a minimum income requirement. The Residence from work category has an objective of granting residence class visas to people who have talents required by New Zealand employers and those with exceptional skills and talents in certain fields such as sport, culture, and art. To apply for a residence under the Residence from work category is however a bit complex as one is supposed to have held a work visa for not less than 24 months under this category (Borges, 2008). The applicants are also supposed to have worked in New Zealand for a period of not less than 24 months for a credible employer while earning a minimum basic salary. The applicant must also have been employed in New Zealand in professional field that is included in the long Term Skill shortage List. There are some instances where individuals are not willing to migrate permanently to New Zealand. In this case it is important to apply for a temporary visa. The type of temporary visa to be obtained depends on the number of days to be spent in New Zealand. These visas might either be Visitor, Study, or Working Holiday visas.Generally, the visitors who do not intend to work in New Zealand may apply for a visitor visa that may have a validity of up to 12 months. Citizens coming from some countries are not required to apply for a visitor visa to enter New Zealand if they are visiting the country for three months or less (Cateris, 2011). They must however provide evidence of travel tickets and also show how they would get maintenance funds while in New Zealand. If an individual wishes to take up employment in New Zealand, an application for a work visa must be made. Any form of activity that is done for a reward is considered to be an employment. The three forms of work visas include skilled stream, family stream, and humanitarian stream. An applicant for a work visa must provide proof for the existence of such work and that it cannot be performed by a New Zealand resident (Crowe Horwath International, 2009). There are some employers who have Approval in Principle to employ people who are non-New Zealand resident workers. Applicants must also be in a position to submit evidence showing that the employers had made all the possible recruitment attempts for attracting workers from New Zealand and no citizens from New Zealand can be trained for the work offered. In addition to meeting ten above requirements the applicants are also expected to be healthy and of good character.Individuals willing to visit New Zealand for the purpose of studying may do so through the New Zealand’s student policy that facilitates the entry of genuine students in New Zealand. Applicants are required to have an offer from a learning institution that meets policy requirements (Zee, 2005). They must also have paid school fees or provide evidence of any form of scholarship offered by a learning institution in New Zealand. There are some working holiday schemes that for citizens from approved countries who are allowed to remain in New Zealand and be employed in accordance with their scheme. Some of the approved countries include Argentina, Canada, Denmark, United Kingdom, Spain, United States of America, and Sweden among others.Being from participating country does not qualify an applicant automatically for the working holiday visa as one has to have been living permanently in such a country with a passport from such country. It is also a requirement to be aged between 18-30 years old. In addition it is not allowed to bring other children with you. To ensure that an applicant is prepared enough, it is a requirement to hold return ticket or to have enough funds to buy such a ticket (Foyer, 2004). A minimum of NZ350$ per month should also be available to meet your living costs while you are there.To be issued with a Working holiday visa an applicant must be coming to New Zealand for holiday with study or work being secondary intentions. It is also against the policy to have been previously issued with a Working Holiday Scheme. Section 788(1) of the income and Corporations Taxes Act 1988 (c. 1), and section 173(1) of the Finance Act 2006 and section 788 was later amended through section 88(1) of the Finance Act 2002. This was also reflected in the section 277 of the Taxation of Chargeable gains Act 1992 (Holmes, 2007). It is the sect ion 788 of the Finance and Corporations Act that provide the mechanism for making arrangements with overseas territories to afford relief from double taxation in relation to income tax, capital gains tax, corporation tax and capital gains taxes in New Zealand. Section 173 of FA 2006 offers the mechanism for providing information required for the enforcement of any tax. The introduction of the Double Taxation Conventions aims to eliminate the double taxation of income from a particular country and paid to residents of another country. This is done by dividing the taxing rights possessed by the treaty partners under their domestic law. Taxpayers are protected against discrimination in tax administration. The convention is of main benefit to taxpayers as it reduces compliance burdens. The convention also provides the Exchequer with protection by indicating provisions to combat any tax evasion. New Zealand’s Double taxation Conventions follows the approach adopted in the OECD’s Model Tax Convention on Income and on Capital (Kobetsky, 2011). Article 25 of the Convention gives rules that govern the exchange of certain information concerning taxes between two countries. No information that is contrary to public policy is to be published between any financial institutions in the member states. Article 25A offers a provision in the Convention that provides rules under which countries assist each other in collection of their taxes. Paragraph 1 of this article states that countries ought to assist each other in the collection of taxes owed to them through the revenue claim. Paragraph (3) of this article stipulates that a revenue claim that originates from one country may be accepted for the facilitation of collection by competent personnel in other country. The collection is done in accordance with the revenue claims laws applied in the other country. Permanent residents in New Zealand have permanent residency visas although they are not citizens of New Zealand. Individuals who hold permanent residency visas may stay in New Zealand for an indefinite period of time. A Resident Visa with a validity of 2 years is issued alongside the permanent residency (Harris & Oliver, 2010). The visa holder has freedom to leave and enter New Zealand until the expiry of the initial visa. An individual holding a permanent resident visa is allowed to stay in New Zealand indefinitely even after the expiry of the initial visa. Persons who stay for too long outside New Zealand may have their permanent resident visas revoked by the Minister for Immigration especially if there is involvement in any criminal misconduct. Permanent residents are eligible to become citizens of New Zealand and may enjoy rights and privileges such as voting, and accessing free health and education. Controlled Foreign Corporations rules are features contained in income tax system put in place to put limitations on artificial deferral of tax by use of offshore low taxed entities. The tax law in many countries does not tax a shareholder of a corporation based on the corporation’s income unless the income is distributed in form of dividend.The UK Controlled Foreign Company rules that are used in New Zealand do not apply to individual shareholders in a company. New Zealand resident companies are subjected to tax on undistributed income from foreign companies where they are shareholders. This kind of control is factual but not mechanical. A shareholder is however considered to have control of a corporate upon owning 40% or more of the total shares and voting rights. A controlled company is considered to be a controlled foreign company if it is a tax resident out of New Zealand and is subjected to a tax less than it would have been if it was a New Zealand resident company. In calculating the corresponding tax, lower rates of tax are considered to small companies.A foreign company will not be considered to a controlled foreign company if for instance it distributes 90% of its earnings every year. This will also apply if a foreign company is publicly quoted in a securities exchange market that is recognized. The main mechanisms applied for the Double Taxation Relief in New Zealand are based on the Malta law and constitute the Treaty relief, unilateral relief, and the Flat Rate Foreign Tax Credit. For the Treaty Relief Malta entered into agreement concerning Double Taxation with forty eight countries that include New Zealand (CCH, 2010). The agreements are based on the Organization for Economic Cooperation and Development (OECD) Model. Treaty relief is offered as an ordinary credit with per-country and per income limitation. The tax charges incurred overseas are limited to the Malta tax charge on income and are allowed as a credit against the tax chargeable in Malta. Relief from double taxation can also be implemented on a unilateral relief basis. This occurs where tax is suffered overseas on an income that is earned from a country that has not entered into agreement with Malta. Any overseas tax suffered in limitation to the Malta tax charge on income is allowed only as a credit against the tax charged in Malta. This ordinary credit is also subjected to per country and per income limitations. At time an indirect foreign tax credit is given for tax suffered in a foreign distributing company with at least 10% of the voting power in related company either directly or indirectly. A Malta company that is empowered to receive foreign source income may also be entitled to a double taxation relief in form of a Flat Rate Foreign Tax Credit when in possession of a foreign source income allocate to a foreign income account of a Malta company (CCH, 2010). This type of double taxation relief is a notional credit and does not refer to the actual tax paid overseas. This form of double taxation relief is utilized when a corporate organization is not able to provide evidence of the overseas tax to the Commissioner of Inland Revenue. The company must also prove to the Commissioner of Inland Revenue that the mentioned income is allocable to the foreign income account. The calculation of the Flat Rate Foreign Tax Credit is done at 25% of the income gained in overseas or in Malta. The income and the notional tax is subjected to Malta income tax at a rate of 35% where credit is given to the deemed tax (Borges, 2008). Any claim of double taxation relief by a Malta company on income allocated to Foreign Income Account determines the amount of refund that a shareholder of a company registered in Malta can claim upon reception of dividends from the said account. The double tax agreement (DTA) between New Zealand and Australia states that you will be a resident of the country where you have a permanent home. In a situation where you have a permanent home in both countries then you will be a resident of the country where your economic and personal relations are closer. There are also some instances where a person lacks a permanent home in either of the countries. In such circumstances you become a resident of the country that you live in. If a company is incorporated in the New Zealand Companies Act 1993 then it is considered to a resident in New Zealand. A company can also be resident when the control by the directors is done in New Zealand or its headquarters is in New Zealand (Holmes, 2007). According to the DTA between New Zealand and Australia, a company that has its permanent establishment in New Zealand must have its tax requirements addressed in New Zealand. If taxation is not monitored appropriately, multiple taxations may occur on the same economic gain of a corporation in the hands of different tax payers. Double taxation occurs when a corporation is taxed on its income and the shareholder is also charged through the distribution of the dividends (Cateris, 2011). The exemption of this in most instances is when a shareholder is resident in a different than the corporation. In this case the taxation in the shareholder’s country of residence may be deferred if the dividends are not distributed. If a company is a resident in a source or host country that country retains the right to tax both the profits of a company on the basis of source and residence and the dividends of the company n the basis of source. The tendency of a shareholder being taxed by their countries of residence is usually relieved by establishment of standard mechanisms of foreign tax relief. The residence and citizenship are different in New Zealand. When you are granted a residence as an applicant you retain your original citizenship and can only apply for a New Zealand citizenship and passport after living in New Zealand for some years. The requirements for new citizenship were effected in April 2005 and required one to have lived in New Zealand for five years before making an application for citizenship. A company may however lack permanent establishment if it only utilizes the facilities in New Zealand for certain activities. If one is in New Zealand for more than 183 days, you are considered to be a New Zealand tax resident. The calculation of the 183 days does not need to consecutive as being in New Zealand for a part of a day is considered to be a whole day. Another factor that qualifies an individual to be a New Zealand tax resident is having the ‘permanent place of abode’ in New Zealand. A permanent place of bode refers not just to the dwelling but also other aspects such as physical, social, and economic links with New Zealand.In the year that an individual ceases to be a tax resident in New Zealand it is necessary to fill in the Individual tax return (IR3) up to the date of departure. The return is filed before the end of the tax year and should include all the income received from all sources to the date of departure from New Zealand (Kobetsky, 2011). You can also mention that you are leaving New Zealand permanently by filling in a refund application form and then sending it with your return. When an individual expects to continues receiving New Zealand even after stopping being a tax resident, then it is vital to file an Income tax return-Non-resident individual (IR3NR) return until the end of the tax year (Harris & Oliver, 2010). Both the worldwide and the New Zealand income received after that date must also be indicated in the tax return forms. From January 2006 the citizenship by birth policy was implemented where children born in New Zealand, Cook Islands, Niue or Tokelau could acquire New Zealand citizenship at birth. It is however a requirement for one of their parents to be a New Zealand citizen or to have permanent residency for New Zealand, cook Islands, Tokelau or Niue. Multiple citizenships are allowed in New Zealand, making it possible for applicants to retain their current citizenship if they wish. The country that you come from must be having a multiple citizenships policy for you to be eligible for such an arrangement. Conclusion According to my opinion, the current regime in New Zealand government should be allowed to stay as it has shown a lot of effort in introducing residency rules that are favorable to both the New Zealand residents and the new comers from different parts of the world. The strict legislation requirements for residency have ensured that all the individuals in who visit New Zealand can be accounted and their activities monitored to ensure they engage in lawful activities. The approved countries whose citizens are allowed to stay in New Zealand through the working holiday scheme seem to be discriminative as it has not involved African states. The current regime should therefore focus in improving the New Zealand international relations in matters of residency with more countries as this may foster economic development. References Alm, J., & Rider, M. (2006). The challenges of tax reform in a global economy. New York: Birkhauser. Borges, R. (2008). The Acte Clair in EC Direct Tax Law. London: IBFD. Cateris. (2011). Guide to International Transfer Pricing: Law, Tax Planning and Compliance Strategies. Boston: Kluwer Law International. CCH, Editors. (2010). New Zealand Master Tax Guide for Students 2009. Wellington: CCH New Zealand Limited. Cockfield, A. 2010. Globalization and its tax policy and international investments. Toronto: University of Toronto Press. Crowe Horwath International. (2009). International master tax guide 2009/10. Melbourne: CCH Australia Limited. Foyer, M. (2004). Kolor. Journal on moving communities. Vol. 4, Issue 2. Harris, P., & Oliver, D. (2010). International Commercial Tax. Cambridge: Cambridge University Press. Holmes, K. (2007). International tax policy and double tax treaties: and introduction to principles and application. New York: IBFD, 2007. Kobetsky, M. (2011). International Taxation of Permanent Establishments: Principles and Policy. Cambridge: Cambridge University Press. Zee, H. (2005). Personal income tax reform: concepts, issues, and comparative country developments, Issues 2005-2087. New York: International Monetary Fund, 2005. Read More