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Advisory circle
                      International Tax – Trading overseas
“Powered by Mazars”




                                         23 May 2012
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
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
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
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
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
Mazars International Tax – Trading overseas   Permanent establishment

                                              • Place of management

                                              • Branch

                                              • Office

                                              • Factory / Workshop

                                              • Mine

                                              • Building site

                                              • Dependent agent




                                                                      7
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
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
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
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
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
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
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
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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Advisory Circle - 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”) 2
  • 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. 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. 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. 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. Mazars International Tax – Trading overseas Permanent establishment • Place of management • Branch • Office • Factory / Workshop • Mine • Building site • Dependent agent 7
  • 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. 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. 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. 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. 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. 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. 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. 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

Editor's Notes

  1. Ni – if within eu – 12 months when you don’t have to pay it, just cont paying in UK
  2. 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
  3. 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
  4. Tie breaker – usually based on effective management not cenrtally managed – so could be lower level of control
  5. 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
  6. 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
  7. Mazars noteLots of exemption small profit <£50kAlso up to £500k if all trading in nature small profit exemption
  8. 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