An introduction for businesses to trading overseas

1. Advisory circle
International Tax – Trading overseas
“Powered by Mazars”
23 May 2012

2. Mazars International Tax – Trading overseas Agenda
• Setting up overseas for the first time
• Worldwide debt cap
• Foreign branch exemption
• Transfer pricing
• Controlled Foreign Companies (“CFC’s”)
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3. Mazars International Tax – Trading overseas Setting up overseas for the first time
• Payroll obligations
– Where are the duties of the employment?
– Social security rates – often very high!
– Within EU – 12 month exemption from overseas SS
– Double tax treaty?
• VAT obligations
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4. Mazars International Tax – Trading overseas Is there a trading presence?
• Is there a taxable activity?
• Goods
– The place of sale
– Where the contract is concluded
• Acceptance
• Delivery
• Services
– Where the work is done
– Unless reduced or eliminated by treaty
– Beware withholding taxes on management fees
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5. Mazars International Tax – Trading overseas Personal tax residence
• Ceasing to be UK resident?
• Becoming tax resident overseas
• Fixed term contract of employment
• Tax planning whilst out the UK?
• Responsibility for reporting?
• UK resident owning non-resident company – CGT trap
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6. Mazars International Tax – Trading overseas Corporate residence
• Generally:
– where it is incorporated
or
– where it is centrally managed and controlled
• Tie breaker usually available in Double Tax Treaty
– Usually based on “effective” management
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7. Mazars International Tax – Trading overseas Permanent establishment
• Place of management
• Branch
• Office
• Factory / Workshop
• Mine
• Building site
• Dependent agent
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8. Mazars International Tax – Trading overseas Branch vs Subsidiary
• Often a commercial decision as much as a tax one
• Customers prefer dealing with a recognised entity (subsidiary)
• Investors prefer to limit their exposure (subsidiary)
• Filing requirements often more onerous, eg UK (branch)
• Losses available to UK company (branch)
• Generally avoid branches unless:
– Commercial reason for not doing so
– Likelihood of losses
– Foreign branch exemption elected for and host jurisdiction is low tax
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9. Mazars International Tax – Trading overseas Worldwide debt cap
• The net financing cost should be no greater than the worldwide groups
consolidated gross finance expense
• De-minimus levels (includes intra-group):
– Net loan’s £3m
– Net interest £500k
• Gateway test applies to prevent the dept cap applying where UK average
net debt is less than 75% of average worldwide gross debt
• Applies for accounting periods commencing on or after 1 January 2010
• Each period needs to be tested in turn
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10. Mazars International Tax – Trading overseas Foreign Branch Exemption
• Elect for all branch profits and losses to be taxed in overseas jurisdiction
and not in the UK
• Must elect before start of accounting period
• Irrevocable
• Applies to all branches, cannot pick and chose
• Anti-profit diversion rules
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11. Mazars International Tax – Trading overseas Transfer pricing
• “A transfer price is the price at which a company undertakes transactions
with associated enterprises”
• Small & Medium sized companies excluded
• Associated enterprises:
– where one enterprise controls another
– two or more are under common control
– “control” can be as low as 40% in JV’s
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12. Mazars International Tax – Trading overseas Arms length principle
• The principle which allocates profits between group member by reference
to conditions which would have been obtained between independent
enterprises in comparable transactions and circumstances
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13. Mazars International Tax – Trading overseas Controlled Foreign Companies (CFC’S)
• Not resident in the UK
• Subject to a lower level of taxation (broadly tax rate of less than 75% of
UK rates)
• Controlled by persons resident in the UK
• “Control” = 40% as other party has at least 40% but not more than 55%
• Control is broadly defined “by virtue of any powers conferred by articles
of association”
• CFC profits charged on any UK company with a 25% or greater share
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14. Mazars International Tax – Trading overseas Consequences of being a CFC
• Unless 90% of Income is paid up within 18 months of year end, profits of
CFC are taxed on parent
• Gains of CFC are not taxed on parent
• Small profits exemption £50k
• Small profits exemption £500k if all profits are trading
• Practical difficulties of CTSA
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15. Mazars International Tax – Trading overseas CFC’s – New Proposals
• All income is excluded unless it passes through the “gateway”
• Only income passing through gateway taxed in UK (previously all income
tax in UK)
• Three tests to pass through the gateway
– Separation of key assets and risks from management activity
– Tax motivation (“one or main purpose = tax avoidance”)
– Would not have been entered into between independent entities
• Various safe harbours
• Various exemptions based on entities
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