Nick Farmer is an international tax partner at accountancy firm, Menzies LLP.
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From selling products and services to global customers to interacting with other group companies, many businesses are entering into cross-border transactions on a regular basis. Despite their growing prevalence, the tax implications of such arrangements can sometimes be overlooked.
To protect profit margins, it’s vital that businesses develop a clear understanding of their tax position before entering into international contracts and that they seek upfront expert advice.
In recent years, technological developments have enabled UK-based businesses to connect with global customers more readily. The availability of more support and information for SMEs considering trading overseas is also behind an increase in international transactions. Despite this, many decision makers are failing to give the associated tax implications the attention they deserve.
One reason why international tax considerations may not be at the top of the management agenda for many businesses is the common misconception that it will always be possible to obtain relief for overseas taxes back in the UK. This isn’t always the case and failing to consider tax issues at the right time can lead to unwelcome surprises. Tax may also fall outside the remit of those leading a company’s commercial operations and there should be clear internal policies to make sure it is not overlooked before it is too late.
To avoid this scenario, it’s important for businesses to consider their tax position carefully when drawing up contracts. For example, in some jurisdictions, such as in the Middle and Far East, UK-based companies may suffer ‘withholding taxes’ when receiving payments from a customer. Other taxes that may need to be considered include VAT and customs duties, as well as state and local taxes that may arise in a particular territory. If services have been delivered on the ground in another country, there is a risk that a permanent establishment may be created, and this could give rise to local corporate tax and local payroll-related taxes.
Before entering into a contract with overseas customers, decision makers should identify what taxes arise, and when, the tax treaty position with the relevant country and any relief that might be available in the UK. Businesses should also investigate any local tax registrations that are required in the jurisdiction they’re trading with.
Undertaking this process in advance allows for the tax implications to be clarified and included within contractual agreements. This will help to avoid any unwanted, unforeseen tax consequences, and will also enable the business to consider if any additional tax costs can be passed onto the customer by way of increased prices for products and services.
In order to agree the international tax position, it will often be relevant to discuss the matter with the overseas customer. For example, does the customer expect to withhold any tax on payment, and would any specific documentation, such as a certificate of residency, enable the business to take advantage of a lower tax treaty rate? However, it’s also vital to have the accuracy of such advice verified by a tax professional. In particular, getting support from UK-based advisers with strong international connections enables companies to experience the best of both worlds by learning about the tax implications of overseas transactions from a 360-degree perspective.
Another area of taxation that businesses need to be aware of is ‘transfer pricing’. This affects multinationals or groups that are transacting between related companies in different countries. In this case, transactions should be priced on an arms-length basis. This is a hot topic for tax authorities and may require additional reporting as part of the tax compliance process. The UK Government has also recently consulted on plans to introduce transfer pricing reporting for corporate tax returns, in a view to improve transparency and better enable HMRC to identify the tax risk on particular transactions.
The international tax landscape is changing rapidly and as overseas transactions become increasingly common, more countries will take steps to protect their tax revenues. As such, it’s crucial for UK businesses to keep a close eye on any changes and avoid making any general assumptions about their international tax position, as rules and treatments could vary widely between jurisdictions.
By carefully researching local tax laws and seeking expert support before entering into commercial agreements, decision makers can avoid any costly surprises and maximise their profit margins when trading across borders.