Advisory Circle - Trading Overseas

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An introduction for businesses to trading overseas

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  • Ni – if within eu – 12 months when you don’t have to pay it, just cont paying in UK
  • If agent o/s – make sure contract condluded in UKMake sure ee doesn’t have authority to conclude o/s always subject to home countryPrice lists kept in UK If service last more than 6 months, tends to mean taxable o/s in most treatiesDeveloping countries particularly aggressive in mgmt fees on w/h tax egindia
  • Fixed term – full time 25 jhrspw & has to be at least 1 tax yearLong term – more 6 yr CGT free from UK tax P85/p86 to inform hmrc non resident No uk tax rtn unless uk source income
  • Tie breaker – usually based on effective management not cenrtally managed – so could be lower level of control
  • Definition of branch tied into permanent establisement so could be beneficial to create a PEAll branches cant chooseIf losses within last 5 years – they will claw back losses already used in UK otherwise using losses twice
  • Exemptions – small or medium – same as R&D defMed – doesn’t apply unless hmrc serve you with a tp notice if they think they are doing something dodgyHmrc website link
  • Mazars noteLots of exemption small profit <£50kAlso up to £500k if all trading in nature small profit exemption
  • Expectation jan 13Main introduction is motive test – if propostion of profits under tax avoidance, only applies to those profits, used to be if you failed test 100% profits taxed in UKApplies broadly to branches now with branch profit exemption
  • Advisory Circle - Trading Overseas

    1. 1. Advisory circle International Tax – Trading overseas“Powered by Mazars” 23 May 2012
    2. 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”) 2
    3. 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 3
    4. 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 4
    5. 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 5
    6. 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 6
    7. 7. Mazars International Tax – Trading overseas Permanent establishment • Place of management • Branch • Office • Factory / Workshop • Mine • Building site • Dependent agent 7
    8. 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 8
    9. 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 9
    10. 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 10
    11. 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 11
    12. 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 12
    13. 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 13
    14. 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 14
    15. 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 15

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