Over the years I have been fortunate to work with a number of businesses who have traded successfully overseas. As the UK’s fortunes depend increasingly on the global economy, expanding overseas can be a golden opportunity for many companies. Like all things this expansion needs to be properly managed. One of the areas I see companies can struggle with is international tax. If not properly thought through, this can prove to be a troublesome and costly problem. Below, I highlight some common areas that I regularly come across:
• Controlled foreign companies: Setting up an overseas company in a lower tax jurisdiction may seem an attractive proposition. However, the controlled foreign company rules seek to tax the corporate shareholders on the profits of certain companies that are controlled from the UK (though there are exemptions to be considered first).
• Permanent establishment: A simpler route might be to establish a sales office or branch overseas. Where your footprint in another country is considered to be a permanent establishment, a portion of the profits it earns may be taxed in the overseas jurisdiction.
• Residence: While you operate an overseas company, if the trade is effectively managed and controlled from the UK it may be considered tax resident in the UK in any event. As well as documentation that may be in place, HMRC will also look at the facts of how the business is actually run to establish whether or not it is UK resident.
• Transfer pricing: The prices charged across borders between related companies can dramatically alter the profits arising in each company. Many jurisdictions, including the UK, have in place transfer pricing regulation which follow the ‘arms length’ pricing principle and include a duty to maintain transfer pricing records.
• Repatriation of profits: There are a variety of ways that a company may do this (such as dividend) but tax may be levied in both the country of origin and the UK, potentially with a tax credit in the UK for the foreign tax. But do not assume that you will always get full relief automatically for any double tax and note new rules affecting corporate shareholders.
When you’re planning to trade overseas these matters may not intuitively spring to mind. However, getting them wrong can be both burdensome and costly. Indeed, understanding the tax position is a vital ingredient to any business case. Early attention to these matters will make sure you avoid any pitfalls.