International growth from the uk the tax aspects - rachel lockwood, oury clark - 25 january 2012


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International growth from the uk the tax aspects - rachel lockwood, oury clark - 25 january 2012

  1. 1. International Growth Strategies for SMEs: The Tax Aspects RACHEL LOCKWOOD BSC ACA CTA Oury Clark Chartered Accountants 25 January 2012 Repatriation of Profits UK Subsidiary • Default • The profits generated by a UK subsidiary are taxed in the UK as described in the first session • Option • “Check The Box Routine” • UK and US results consolidated for tax purposes in the US • Irrevocable Repatriation of Profits Flow Through Entity • Profitable • Allows all of the income and deductions (including foreign taxes) as being treated as earned directly by the US parent entity. As a result, the foreign taxes are considered direct taxes and are available for credit to the owners • If not elected S corporations and partnerships cannot claim the deemed paid (indirect) tax credit. That is, the taxes paid by the foreign subsidiary are not available for credit to the owners thus creating double taxation • Loss Making • Allows US parent to net UK losses against US profits in the year they are made • Obtains tax relief immediately
  2. 2. Repatriation of Profits Non Flow Through Entity • Profitable • Do not elect for Check the Box • UK Profits are then only taxed in the US when repatriated • Company can either keep profits in UK and reinvest or pick and choose when to repatriate to the US depending on the US company’s profit levels and tax rates etc • Loss Making • Allows US parent to net UK losses against US profits in the year they are made • Obtains tax relief immediately Repatriation of Profits UK Profits • The UK profit is arrived at after transactions with the US parent company • These transactions are only fully tax deductible if on an arm’s length basis • If they are not on an arm’s length basis you can end up with mandatory adjustments enforced by HMRC in the UK which is not adjusted for in the US parent company thus resulting in a tax disadvantage group wide. Transfer Pricing Intra-Group Trading/Charges • Value using transfer pricing regulations • Large co or member of a large group – formal transfer pricing agreement required • All other companies – must be able to justify pricing policy to HMRC
  3. 3. Transfer Pricing Intra-Group Trading/Charges • Methods: Cost Plus Mark-up Where intra-group services are charged, for example accounting/finance/marketing etc. An appropriate method is cost plus mark up, say 5% For example where the US parent company’s accounts department also manage the UK company’s books and records a cross charge of cost plus a mark up is appropriate Comparable Uncontrolled Price Compares the price charged for the same/similar goods to a third party. This is considered the most reliable method available For example, where you sell the same product/service to a third party you would sell to a group member at the same price Profit Split Calculates the profit and splits those profits based on the contribution of each entity and as such consistent with what would have occurred at arm’s length. For example the final profit margin made on a product will be split amongst the group members involved on a reasonable basis Interest Intra-Group Loans • Charge commercial rate of interest • No WHT on interest paid to US • Level of loan = reasonably expected to be obtained from a third party • Thin capitalisation • UK company funded by greater amounts of debt in comparison to equity than would be normal in an arm’s length funding arrangement. • Decreases UK profits by excessive interest payments • UK tax advantage obtained • Interest is disallowed under transfer pricing rules Dividend Dividends •No WHT on dividends paid to US
  4. 4. Royalties Royalties • Right to receive a payment on a sale made by another person • Double tax agreement exempts from deduction of tax at source • Only if application made in advance • If no application – 20% deduction at source Research & Development Definition • R&D is defined as comprising ‘creative work undertaken on a systematic basis in order to increase the stock of knowledge and the use of this stock of knowledge to devise new applications’. • R&D must fall into the field of science or technology. • R&D tax relief is only available on expenditure of a revenue nature. • 100% Capital allowances available on capital expenditure used in R&D • There are different schemes and reliefs available depending on the size of your company. • Do not have to own any 'intellectual property' (IP) attributable to its R&D expenditure as a condition of being able to claim. Research & Development SME – Definition • Up to 500 staff • Turnover up to €100m • Balance sheet total up to €86m
  5. 5. Research & Development SME – Key Points • 200% enhanced deduction (additional relief of 100% on top of the relevant expenses themselves, therefore total relief of 200%) • Expenses qualifying for enhanced deduction: • Staff costs excluding benefits in respect of worker employed in research and development. Costs of support/admin staff is NOT included. • Software or consumable items including fuel, power and water. • Tax credit payable if loss making • Can claim for expenditure on R&D it sub-contracts to others (sub- contractor does not have to be based in UK and can be connected) Research & Development Large – Key Points • 130% enhanced deduction (additional relief of 30% on top of the relevant expenses themselves, therefore total relief of 130%) • Qualifying expenses as per SME scheme • No tax credit payable • Can claim for contributions to independent research carried out by charities, universities and scientific research organisations Research & Development Developments • An increase in the rate of R&D tax credit under the SME scheme to 225% • Removal of the Pay As You Earn (PAYE)/NICs cap on the amount of payable credit that can be claimed under the SME scheme • Removal of the minimum expenditure rules (i.e. £10,000 of qualifying R&D during the company’s accounting year)
  6. 6. Patent Box Regime Patent Box Regime • 10% rate of corporation tax on profits attributed to patents • Regime will apply from 1 April 2013 • Conditions to qualify for regime: 1. Hold IP Legal Ownership Beneficial Ownership Exclusive licence Participation in cost share agreements 2. Actively engage in qualifying development Activity which creates or contribute to the creation of the patent Activity which develops the patent Activity which incorporates the patent 3. If part of a group – Active ownership condition Company must perform significant amount of management activity in relation to all/almost all of qualifying IP rights held by the company VAT – Useful Information VAT • Indirect tax charged on most goods and services • VAT registered businesses can generally reclaim VAT they have paid • Rates of VAT: Standard Rate 20% Reduced Rate 5% Zero Rate 0% VAT – Useful Information Registration • Limited Company • Compulsory if taxable supplies >£73,000 • If taxable supplies <£73,000 you can voluntarily register for VAT • If you are registered for VAT your invoices must include certain details to ensure they comply with VAT legislation e.g. Sequential invoice number, date of supply etc • Permanent Establishment • All above applies in the same way to the PE • If US company is invoicing the customer rather than PE then requirement falls to US company
  7. 7. VAT – Useful Information UK Limited Company Goods - Import • Importing goods to the UK • Pay irrecoverable import duty • Pay VAT – recoverable if VAT registered • Distribute across Europe using UK’s strong transport links avoids paying any further import duty/irrecoverable VAT in other EU countries if not registered there VAT – Useful Information UK Limited Company Goods – Selling • Sell to UK • Charge applicable rate of VAT on your product • Sell to EU VAT Registered business • Reverse charge mechanism • Obtain customer’s VAT number and proof of export • Sell to EU Non-VAT Registered customer • Charge applicable rate of VAT on your product • Sell to Outside EU • Outside the scope of UK VAT VAT – Useful Information UK Limited Company Services • Basic rule is that the place of supply depends on whether or not the customer is a business • Business – supply is where customer belongs • Non business – supply is where supplier belongs • Exceptions to the rule: • Services relating to land – where the land is situated • Supplies of cultural/entertainment performances – where the performance takes place • Passenger transport – where the journey takes place
  8. 8. VAT – Useful Information Trade Direct • Goods Trade directly in the UK Importing goods to the UK with onward sale to a UK customer Need to register for VAT if you exceed the £73,000 threshold Trade directly with the UK Selling to a UK customer with the customer importing the goods No requirement to register for VAT VAT – Useful Information Trade Direct • Services To UK VAT registered business UK Company uses reverse charge mechanismto account for VAT No requirement for US company to register for VAT To UK non-VAT registered business/ individual US Company would have to charge VAT if threshold breached Requirement to register for VAT if £73,000 threshold exceeded VAT – Useful Information Distance Selling • Where you sell to the end user/non VAT registered business in another EU country • Must monitor the VAT thresholds in each individual EU country and register for VAT in each country if/when the threshold is breached. • Administrative burden which unfortunately is unavoidable across the EU
  9. 9. Rachel Lockwood London Thames Valley USA 10 John Street 58 Herschel Street 101 California Street, London Slough Suite 2450 PMB058, WC1N 2EB Berkshire, SL1 1PG San Francisco, CA 94111, USA +44(0)20 7067 4300 +44(0)1753 55 1111 +1 (415) 946 8984