When we think of international tax, our attention tends to be drawn to the activities of large multi-national enterprises that have been in the press over recent years.
And whilst this has also been the focus of governments, tax authorities, and commentators it is important to understand that many of the issues faced by these large organisations can equally apply to smaller businesses who are making their first forays into international trade. It should also be noted that whilst global trade, communications and technology have developed exponentially in recent years, the rules of international tax have been slow to adapt and can therefore seem unwieldy in comparison.
As with any tax issue, it is always preferable to seek advice before final decisions are made. Beginning expansion plans overseas attracts its own set of potential tax issues and upfront planning enables these to be both considered and, where possible, mitigated. That is not to say that tax considerations should drive commercial decisions, but understanding the potential tax impact ensures that the company is aware of any requirements and can meet its compliance obligations without incurring excessive fees or penalties.
Key areas to watch out for include:
CORPORATE RESIDENCY
In the UK a company is considered to be UK tax resident if it is either incorporated or ’centrally managed and controlled’ in the UK. In broad terms, centrally managed and controlled refers to where the key executive decisions are made; an example of this may be board meetings. If a company is incorporated overseas but key executive decisions are made in the UK, this can lead to a company being both overseas and UK tax resident and having
to pay tax in both countries. While this “double taxation” can often (although not always) be resolved, it can be a lengthy and expensive process. Appropriate planning can prevent the issue arising in the first place.
COMPANIES DOING BUSINESS OVERSEAS
Where a company carries on a business overseas, there may be local compliance and reporting obligations which, if not met, can result in substantial penalties, such as in the United States.
Whether a company pays tax overseas or in its host country on overseas business is usually determined by whether it has a permanent establishment (PE). This is a taxable presence without a legal entity; for example a branch of a company. It is a tax construct which looks to define the point where a company moves from doing business with a country to doing business in a country.
Depending on the activities being undertaken a PE can arise where a UK company has premises or access to premises overseas, or even sends an employee overseas. The tax consequences of proposed locations of assets, activities and personnel should be factored into decision making.
TAXATION OF INDIVIDUALS
Sending a UK employee to work overseas may lead to a requirement to register for employment taxes. From a double tax treaty perspective this often only applies when an employee is overseas for more than 183 days, but can apply immediately if the employer is deemed to have a permanent establishment in the overseas state, and that PE is considered to have borne the cost of the employee. There may, however, be local compliance requirements; for example, in the UK there is an obligation to report short term business visitors to the UK.
TRANSFER PRICING
Whilst the UK has the small and medium enterprise (SME) exemption for transfer pricing, this is not the case for most other jurisdictions. At the level of the small company, transfer pricing does not have to be an onerous task but it is worth considering the company’s future plans in order to ensure that decisions made in the early stages don’t adversely impact the future. For example, if an overseas company is reporting tax losses in say a start-up phase, this may indicate that it is bearing a greater proportion of risk in anticipation of higher profits sin the future when the business takes off i.e. as a reward for bearing that risk.
Finance Act 2019 has introduced new legislation in respect of ’avoidance involving profit fragmentation arrangements’ . This legislation has the potential to affect SME companies who would ordinarily not fall within transfer pricing regulations, if a UK group company is transacting with a group company in a lower tax territory. If your business is looking to expand overseas, whether it be a leap or a more modest dipping the toe in the water, Hazlewoods can help you to navigate the international tax landscape. We have an in house tax team, which includes international tax specialists, and access to the expertise of our colleagues across the global HLB network to ensure a joined up and proactive approach.