advisory circle - trading overseas
DESCRIPTION
An introduction for businesses to trading overseasTRANSCRIPT
Advisory circle “Powered by Mazars”
International Tax – Trading overseas
23 May 2012
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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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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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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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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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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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Permanent establishment
• Place of management
• Branch
• Office
• Factory / Workshop
• Mine
• Building site
• Dependent agent
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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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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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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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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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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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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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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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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