Advisory circle “Powered by Mazars”

International Tax – Trading overseas

23 May 2012

Maza

rs I

nte

rnati

on

al

Tax

– T

rad

ing

ove

rseas

2

                                       

Agenda

• Setting up overseas for the first time

• Worldwide debt cap

• Foreign branch exemption

• Transfer pricing

• Controlled Foreign Companies (“CFC’s”)

Maza

rs I

nte

rnati

on

al

Tax

– T

rad

ing

ove

rseas

3

                                       

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

Maza

rs I

nte

rnati

on

al

Tax

– T

rad

ing

ove

rseas

4

                                       

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

Maza

rs I

nte

rnati

on

al

Tax

– T

rad

ing

ove

rseas

5

                                       

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

Maza

rs I

nte

rnati

on

al

Tax

– T

rad

ing

ove

rseas

6

                                       

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

Maza

rs I

nte

rnati

on

al

Tax

– T

rad

ing

ove

rseas

7

                                       

Permanent establishment

• Place of management

• Branch

• Office

• Factory / Workshop

• Mine

• Building site

• Dependent agent

Maza

rs I

nte

rnati

on

al

Tax

– T

rad

ing

ove

rseas

8

                                       

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

Maza

rs I

nte

rnati

on

al

Tax

– T

rad

ing

ove

rseas

9

                                       

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

Maza

rs I

nte

rnati

on

al

Tax

– T

rad

ing

ove

rseas

10

                                       

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

Maza

rs I

nte

rnati

on

al

Tax

– T

rad

ing

ove

rseas

11

                                       

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

Maza

rs I

nte

rnati

on

al

Tax

– T

rad

ing

ove

rseas

12

                                       

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

Maza

rs I

nte

rnati

on

al

Tax

– T

rad

ing

ove

rseas

13

                                       

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

Maza

rs I

nte

rnati

on

al

Tax

– T

rad

ing

ove

rseas

14

                                       

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

Maza

rs I

nte

rnati

on

al

Tax

– T

rad

ing

ove

rseas

15

                                       

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