UK tax implications of companies doing business in the US
15th February 2017 by Tim Shaw
The first meeting between the Prime Minister, Theresa May, and the newly elected President of the United States, Donald Trump, was important for many reasons. One of the main ones was to set out the intentions of implementing a UK/ US trade agreement, following the UK’s exit from the European Union.
This trade deal will be the second most vital, after the deal with the EU itself, out of any that the UK Government negotiates, as currently the US is our biggest export market and the UK is the source of the largest inward foreign direct investment into the US.
The presence of a UK/ US trade agreement looks set to increase the ease of doing business between both countries in terms of customs tariffs, movement of capital and transfers of employees. However, UK based companies exporting goods and providing services to the US will need to be aware of the tax implications, which are likely to remain as they are.
What are the main methods of a UK company doing business in the US?
Depending on the UK company’s structure, the most common methods of operating in the US are:
- Setting up an office or hiring staff in the US contracted directly by the UK company
- UK company deals directly with its US customers
- Setting up a US subsidiary owned by the UK company
Care needs to be taken, whether trading through a US subsidiary or branch or directly with US customers, as the US concept of nexus means that the UK company can become liable to pay US state taxes in the various states in which it is doing business (whether or not it is liable to federal tax). For this reason, local US tax advice should always be sought when making a business venture into the US.
This article does not cover the FATCA (US Foreign Account Tax Compliance Act) regime, which is primarily aimed at financial entities but does affect non-financial entities as well. The general concept is to either disclose details of US shareholders to the US Internal Revenue Service (IRS) or confirm there are none, or face 30% Withholding Tax (WHT) on all payments from US customers. There are exemptions for business activities.
Also, this article does not cover the PAYE and NIC implications of sending employees to the US, which can be complicated if a US registered payroll is required.
What are the direct UK tax implications where the UK company has an office in the US?
If a UK company has a taxable presence in the US, it will be subject to US Corporate Tax on any business profits earned there, as well as in the UK.
A taxable presence arises if the UK company has a fixed place of business in the US, known as a permanent establishment. This is usually in the form of an office or branch (rented or owned), or by hiring employees who have the authority to contract on behalf of the UK company in the US. Independent agents carrying out the activities of the UK based company will not form a permanent establishment.
The UK company will need to file a US Form 1120-F (Tax Return for Foreign Corporations) to formally be assessed to tax in the US, if there is a permanent establishment there.
In the UK, the US profits arising from a permanent establishment will also be assessed in the UK Corporation Tax Computations.
The current UK/ USA Double Taxation Agreement allows the US to charge tax on profits arising from the permanent establishment situated there. The Agreement then permits UK companies to obtain double tax relief, either by deducting the US tax as an expense or by allowing a credit against the UK tax chargeable on the US profits (capped at the UK tax rate).
Credit relief would be the most tax advantageous in this circumstance, as there is a mechanism in the UK tax legislation which allows companies to carry forward unrelieved foreign tax for relief in future accounting periods, where they have a permanent establishment in the relevant country.
Alternatively, the UK company may elect that the profits of its overseas branches are treated as exempt from UK Corporation Tax. This was introduced as a simplification measure but since it requires the excluded profits or losses of the overseas branch to be calculated on a UK tax basis, it is not necessarily an easy process. What’s more, the election should not be made lightly as it is irrevocable and applies to all of the UK company’s branches, wherever they are located. This can make it unattractive where one or more of the overseas permanent establishments are loss making, as the branch losses are no longer available for offset against UK taxable profits. There are certain activities which are excluded such as companies carrying on an investment or insurance business.
What are the direct UK tax implications where the UK company deals directly with its US customers?
Where the UK company deals with US customers directly from the UK, without an office or employees in the US, in most cases, there will not be a federal taxable presence in the US.
The UK company will therefore not have a permanent establishment in the US and so the US will not have rights to tax the profits earned there, under the UK/ USA Double Tax Agreement.
However, US domestic law places a requirement on US based customers to consider whether WHT should be deducted from payments to non-US residents. Currently, the rate of WHT is 30%. Some US customers may automatically deduct WHT to ensure they meet their compliance requirements in terms of their withholding obligations.
Any WHT deducted is certified on US Form 1042-S (Foreign Person’s US Source Income Subject to Withholding).
Therefore, UK companies should be proactive and ensure that their US customers are able to make payments for goods and services without WHT. This can be done by supplying the US customer with a completed Form W-8BEN-E (Certificate of Status of Beneficial Owner for United States Tax Withholding and Reporting (Entities)) which certifies the UK company’s tax residency status and in turn acts as the claim for Treaty rate relief on the WHT (0% on business profits where there is no permanent establishment), before any payments are made.
Forms W-8BEN-E will expire after 3 years, so these will need to be reviewed periodically.
In most cases, non-financial foreign entities can simply certify their ‘NFFE’ status on Form W-8BEN-E to qualify for the exemption from WHT re-imposed from the FATCA legislation.
Where payments from US customers have been subject to the 30% WHT, credit relief cannot be obtained in the UK tax assessment where there is no permanent establishment, as the WHT will not have been deducted in accordance with the UK/ USA Double Tax Agreement.
Instead, the UK company will need to arrange with the customer to refund the WHT by lodging a Form W-8BEN-E with them as a first port of call. If it is too late to claim back WHT from the customer, the UK company can apply to the IRS to claim back the WHT. This can be done by filing the US Form 1120-F (Tax Return for Foreign Corporations), along with the supporting Forms W-8BEN-E and Forms 1042-S.
Alternatively, relief by deduction can be claimed in the UK, by deducting the WHT as an expense of the taxable profits, providing all reasonable attempts have been made to reclaim the WHT. HMRC usually accepts that filing a claim with the relevant country’s tax authority is a reasonable attempt. If the WHT is eventually repaid by the relevant foreign tax authority, HMRC should be notified within 12 months of the repayment in order to withdraw the deduction relief.
What are the direct UK tax implications of setting up a US company owned by the UK company?
A UK company carrying out its US business activities using a US subsidiary will mean that the US based company will need to file a domestic US Corporation Income Tax Return (Form 1120) to pay tax on the profits earned there.
The US tax system is highly complex and it is advised that a local accountant is engaged to assist with the filing of the Tax Return. There may be separate filing requirements in the State the US company was incorporated or operates in and we are able to provide contacts through our international network in these circumstances.
The US company may transfer the profits earned in the US via a dividend to the UK company. WHT may be deducted from this dividend paid. The current the UK/ USA Double Tax Agreement restricts the rate of WHT to 5% where the beneficiary has more than 10% of the voting rights, so the subsidiary should deduct WHT on any dividends paid to the UK company unless it is eligible for the following exemption. Under this provision, dividends can be paid from the US subsidiary without WHT, where the UK company has owned at least 80% of the voting rights in the subsidiary for a 12 month period ending with the date the dividend is declared.
Although any WHT on dividends may be charged in accordance with the Double Tax Agreement, additional relief will usually not be available in the UK Corporation Tax assessment in respect of the recipient UK company, as in most cases the UK Corporation Tax dividend exemption will apply and so no UK tax will be payable on foreign dividend income, providing certain conditions are met.
If the group has 250 or more employees and either total revenue of more than €50 million or total balance sheet assets of than €43 million, then the UK’s transfer pricing legislation will apply. Any transactions between the UK and US companies will need to be computed on an arm’s length basis in the UK Corporation Tax Computations, so this will need to be considered when supplying intra-group goods, services or finance.
The use of a more than 50% owned subsidiary will also mean that the Corporation Tax quarterly instalment payment limits for the UK company are reduced by dividing the threshold by the number of subsidiaries at the end of the last accounting period. The thresholds are £1.5 million for a second consecutive period or £10 million for immediate entry into the regime.
What are the UK VAT implications of doing business in the US?
For a VAT charge to apply to a transaction, the supply must take place in the UK, must be a taxable supply (insurance and financial services are generally exempt) and be made by a trader who is UK VAT registered (or liable to be VAT registered), in the course or furtherance of their business.
There are different rules for supplies of goods and services made within the EU and outside of the EU. As the US is outside of the EU, the article looks at the VAT implications for this scenario.
The place of supply for goods leaving the UK will be the UK. Where a UK trader sells goods to customers outside of the EU, the VAT liability of the goods exported will be zero-rated (subject to certain conditions being met) irrespective of the type of goods.
The exporter will need to provide evidence of the goods being removed from the UK; this could be a bill of lading or air-waybill, within 3 months of the time of supply.
UK traders buying in goods from the US will be charged UK VAT at the appropriate rate on the ‘importer value’ of the goods when they are taken out of port to be transferred to the UK trader’s premises. Import VAT is deductible in the same way as input tax. Sometimes UK traders use an import agent to handle the documentation and import VAT upfront; it is important that the UK trader is shown as the actual importer and its EORI number quoted on the import entry so that the entitlement to claim input tax is available to the UK trader.
The VAT rules for the place of supply of services are different to the rules on the supply of goods. Since 2010, the general rule is that the place of supply is where the recipient belongs in respect of business-to-business (B2B) services, and where the supplier belongs in respect of business-to-customer (B2C) services; there are certain exceptions to this general rule, such as services relating to land, e.g. architectural services, which are deemed to take place where the land is physically located, and other exceptions specifically for certain B2C services supplied to recipients belonging outside of the EU, such as consultancy, and the services of accountants and lawyers, which are taxable where the recipient belongs and in this case would therefore be outside the scope of UK VAT where supplied to a US non-business customer.
The place of belonging for an individual is his or her usual place of residence, and for a business, is usually where the head office or branch is located. If a business has more than one establishment, it is the establishment which is most directly connected to the supply that is relevant in determining the place of supply.
Where the place of supply is outside of the EU, the service will not be liable to UK VAT.
Where the UK trader supplies services to a US business customer, the place of supply will generally be the US (where the recipient belongs) and so the services supplied will not be liable to UK VAT (subject to certain exceptions).
UK traders will need to be careful where they buy in services from a US business, as the place of supply will generally be the UK (where the recipient belongs). The VAT chargeable is accounted for as a reverse charge, so the UK trader effectively charges themselves VAT but this is recoverable as input tax (subject to the usual VAT recovery rules), so overall, there is no tax effect for the UK trader provided that none of their supplies are exempt from UK VAT.
In conclusion, the US may be a land of opportunity for UK businesses, maybe even more so in the light of the proposed new trade deal, but there are also plenty of traps that could catch the unprepared. As with any new business venture, we would always recommend taking up-front advice to ensure that you adopt the best possible structure and practices for your business.
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