27 June 2018
We have found that clients who are trading within the EU, or are about to start to look at markets outside the UK, are having to review their strategy and consider the tax implications along with the commercial aspects.
Clients trading within the EU are concerned about the associated cross border tariffs, which will make their products more expensive. There are also EU quotas to consider, which currently do not affect our clients but are likely to apply once we leave the EU.
To open to new markets, most businesses initially start by selling goods into the new market which can potentially cause VAT related issues or sales taxes. In the USA there has been a recent court case with the result that if you sell online, sales taxes apply where your customer is based.
The next issue businesses face is whether to create a base in the country they are selling to, commonly called a permanent establishment. Each country has its own rules around what creates a taxable permanent establishment and tax treaties can provide protection. As an example, warehousing in another country tends not to be classed as a taxable permanent establishment in most tax treaties, but without the treaty it would create a taxable presence.
Once a business has a tax presence they are required to register for taxes to avoid penalties. This can be difficult as associates’ documents may need to be translated or certified. As UHY have offices in 98 countries globally we are able to assist in making this process easier.
Some clients want to have a fixed base in another country which means they need to decide whether they wish to have a branch or a subsidiary. The implications can differ depending on the country where the business is to trade from. From a UK perspective, you can elect for a branch not to be taxed in the UK whilst overseas companies are generally not taxed in the UK unless it is caught by various anti-avoidance provisions.
One of the key issues for a subsidiary not to be taxed in the UK is that it is not controlled and managed in the UK. Sometimes this is difficult to achieve and can result in additional costs on management travelling for board meetings.
A commercial issue if opening a bank account in the other country is this can take some time.
Once you have an overseas base you are likely to have issues with transfer pricing. Transfer pricing legislation is trying to find a method of pricing which is at arm’s length between connected parties. Under the legislation it involves the provision of documentary evidence of the transfer price but also the group structure.
The Organisation for Economic Co-operation and Development (OECD), as part of their base erosion and profit shifting program (BEPS), and in an attempt to ensure transfer pricing is at arm’s length for large groups there is a reporting requirement to show a country by country report to their tax authorities with the idea this is shared between the other tax authorities involved. It is too early to see the complications of this.
The above is a quick guide and UHY International’s website has business guides for the majority of the countries UHY have offices in. Before you expand into new markets, or the effects of Brexit become clearer, it is important to be aware of the tax implications and here at UHY we have the experience to assist you.