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Mark Pryce International growth

Businesses that have plans to expand overseas make for exciting times; particularly for the sales team. However, the prospects of new revenue streams can often lead to a “Tax Blindside” and failure to deal with the tax consequences arising from overseas trade early enough can easily generate a large hole in the overall financial results. Dealing with tax too late can be a trap door for the unwary. Examples of tax problems arising from international trade include:

“Net Payments” - the first alarm bells often start ringing when that first instalment on the overseas contract unexpectedly arrives net of tax into the UK bank account from the customer. 5% to 30% deduction is not uncommon. The customer will be adamant they are simply following their country’s tax rules and after some pressing will forward a tax receipt stating it should be a straightforward process to obtain a credit against the UK tax bill in due course. However, this is not always certain, in practice.

“A Knock on the Door” – Country X’s tax enforcement officer arrives, highlighting that renting office space constitutes a “Permanent Establishment” (PE) in their territory. A tax enquiry follows and subsequently leads to a large tax assessment out of all proportion to the actual in-country activities.

The back foot is a poor place to defend a tax position, and negotiate down unexpected tax liabilities and penalties. The OECD’s Base Erosion and Profits Shifting (“BEPS”) project gives additional enforcement powers and now places even more emphasis on business to comply with the rules.

Taking early action on international tax compliance reduces the risk of unwelcome tax surprises, and I would highlight: :

• Double tax agreements and the UK’s international tax treaty networks are designed to protect taxpayers to ensure profits only get taxed once. Withheld tax can often be reduced or even eliminated with applications made earlier and up front. Obtaining knowledge about the overseas tax regime in advance also helps:

• Research the headline tax rates and Permanent Establishment rules. Early identification of key tax issues can highlight situations where additional costs may need built in to customer prices.

• Demonstrate the appropriate UK/ overseas split of revenues and costs based on the commercial contract via the appropriate accounting systems. • It’s worth considering the deductibility of central UK or overseas costs in each territory and also making management recharges in some cases.

The golden rule for international trade is to factor tax planning into the deal making process.

Tax should be a consequence trade, not a cost of trade. • of

Mark Pryce is a tax partner with Campbell Dallas, accountants and business advisors.