05. BPT - International Expansion Flashcards
When is a company defined as a UK resident?
- Incorporated in the UK
- Centrally managed and controlled from the UK (deemed resident)
How do you determine whether the location of central management and control?
- Where the head office is situated
- Location of board meetings
- Where directors spend most of their time
What must be done if there is ‘dual residence’?
If comp is resident in more than 1 country, then a double tax treaty will act as tie breaker
- Most treaties follow OECD model agreement (comp should be resident where it is ‘effectively managed and controlled’)
How do you establish whether a PE/branch exists?
Look at whether business is carried on through a fixed place For example - Place of management - Branch or office - Factory/ workshop
All of the above give rise to a ‘taxable presence’ and therefore CT may be due on any profits arising
Why is residence and e-commerce a complicating issue?
- Issue is whether a website or server located in UK of non-res comp constitutes a permanent establishment
- Key determinant is whether a ‘physical presence’ has been established in that country
- But tax legislation states that profits arising from a PE should be taxed in country which PE is based. UK tax leg makes no ref to ‘physical presence’
- Leads to complications when a bus is carried on over the internet as UK and OECD has diff views
What is the UK view vs OECD view on residence and e-commerce?
UK view
- Website is not a PE
- Server is not a PE
OECD view
- A website is not a PE
- A server could be a PE: if it performs activities such as taking orders, processing payments and arranging delivery of goods
If a comp is a UK resident, what do they pay CT on?
- UK res must pay CT on worldwide income and gains (including profits of an overseas permanent establishment)
But the comp can make an irrevocable election for all its foreign income PE to be exempt from CT (but also no loss is avail for the losses)
If an election is made for all its foreign income PE to be exempt from CT, when does it become effective?
Effective from the start of the acc period after the one in which the election is made
What does a non-UK resident company pay tax on?
What about other UK income received by non-resident company?
If it is
- Carrying on trade in the UK through a PE
- Has profits from dealing in/ developing UK land (even if it has no UK PE)
- Has gains on assets that are either interests in UK land or UK property rich assets
- Receives UK property income
- Other UK income received by non-res company is subject to basic rate income tax (e.g. if non-UK resident comp carries on a trade in the UK without having a PE)
If an overseas company carries on a UK trade through a PE, what do they pay CT on?
- Trading income arising from/ through the PE
- Property income from property held by PE
- Gains on assets held by the PE
When is a gain arising from a disposal by non-UK res company subject to CT?
From 6 April 2019, payable if the asset was either
- UK land (residential or commercial)
- UK property rich assets whereby the non-K re comp owns a substantial indirect interest (defined as owning at least 25% of shares at the time of disposal or at some point in 2 yr period before disposal)
Define a property rich asset
An asset (likely to be shares) that derives at least 75% of its gross asset value from UK land
If the UK land is used for trade purposes of the UK company the gain is exempt
Letting property is not classed as trade
How is UK land and property rich assets taxed?
Any elections avail?
if the asset was purchased by the company post April 19, the full gain is subject to CT
If asset was purchased before April 19 its treatment depends on the class of asset
- Disposal of UK residential prop have been in charge to UK CT since April 15
When calc the gain, the MV in April 15 is treated as allowable cost
- 2 possible elections available
» Comp can make an election to replace Apr15 MV with original cost. (fi does this, a further election is avail)
» Gain based on orig cost an then be time apportioned based on prop of the months of ownership that fall after Apr 15
How is UK non-residential property and property rich assets taxed?
Any elections avail?
They have only been chargeable to CT since Apr 19 (unlike UK which is 2015)
When calc the gain, the Apr 19 MV is treated as allowable cost
Only 1 election is available
» Comp can elect to perf the calc using orig cost (calc can’t subsequently time apportioned)
If this treatment leads to loss, loss is not allowable if it relates to UK prop rich assets
How is UK property income taxed for non-resident companies?
- Until 1 Apr 20, other UK income of a non-resident company was subject to basic rate income tax e.g. letting income from UK prop
- From 1 Apr 2020, income that non-res comp receives from UK prop is changeable to CT rather than IT
- Fin costs relating to UK prop bus will also be subject to CT as NTLR (prev subj to IT rules)
Define a migration of trade
A company resident in the UK due to CM&C being located in UK becomes non-res by virtue of moving the location of its CM&C overseas
What are the tax implications of a migration of trade?
Similar to company ceasing to trade
1. End of an acc period
2. Balancing adj to P&M attracting cap all
3. Inventory will be treated as disposed of at MV
4. Utilisation of trad losses
5. Change in basis of assessment
» UK res = UK tax on WW profs
» Non-Uk res = UK tax on profits of UK PE, dealings in UK land and UK prop income
6. Loses the benefit of being in a UK group
7. Comp will be deemed to have disposed and reacquired all WW assets at MV at migration date (except all assets w/in charge of UK CT). Leads to gains arising on chargeable assets and profs on IFAs held as trading assets. (Known as exit charge)
What is an exit charge?
When there is a migration of trade, comp will be deemed to have disposed and reacquired all WW assets at MV at migration date (except all assets w/in charge of UK CT). Leads to gains arising on chargeable assets and profs on IFAs held as trading assets. (Known as exit charge)
Can you defer gains on migration of trade and profits on IFAs held as trading assets?
Yes, as long as the migration took place before 1 Jan 2020 AND
- comp is 75% subsid of UK res comp
- both companies make written election w/in 2 yrs of migration date
Profits on IFAs held as trading assets can be deferred in same way, but should keep these separate from any gains
When is the deferred gain on migration crystallised?
How is the gain calculated?
Who does the gain crystallise for?
Crystallised if
- Subsidiary ceases to be a 75% subsidiary of UK comp
- Parent company ceases to be UK resident
- Assets which gave rise to charge are sold within 6 yrs
Gain = net deferred gain x (gain at migration on asset sold / gross gains at migration)
Gains crystallise on UK parent (not the subsid)
What are the options of structure for UK resident company wishing to trade overseas ?
can set up overseas PE or an overseas subsidiary
Describe the following descriptions of an oversea PE Legal status Profits taxed overseas Profit taxed in the UK UK cap allowances Transfer of assets Use of overseas losses
> Legal status - Part of UK comp
Profits taxed overseas - Yes
Profit taxed in the UK - PE profits taxed as part of trading income, however DTR avail in the UK
UK cap allowances - full UK allowances available unless election made to exempt profits from UK CT
Transfer of assets - No gain/losses arises. No bal adj in CA pools
Use of overseas losses - unrelieved losses of the PE can be offset against UK comp trad profs if controlled from the UK
Describe the following descriptions of an overseas subsidiary Legal status Profits taxed overseas Profit taxed in the UK UK cap allowances Transfer of assets Use of overseas losses
Legal status - Separate legal entity incorporated overseas
Profits taxed overseas - Yes
Profit taxed in the UK - Only if
» Deal in UK land/ has UK property income
» trade through a UK PE
UK cap allowances - no UK cap allowances
Transfer of assets - gain/loss on transfer . Balancing adj arise
Use of overseas losses - overseas losses generally can’t be relieved to group comp
Describe the following descriptions of an oversea PE vs overseas subsidiary Legal status Profits taxed overseas Profit taxed in the UK UK cap allowances Transfer of assets Use of overseas losses
Overseas PE
Legal status - Part of UK comp
Profits taxed overseas - Yes
Profit taxed in the UK - PE profits taxed as part of trading income, however DTR avail in the UK
UK cap allowances - full UK allowances available unless election made to exempt profits from UK CT
Overseas subsidiary
Legal status - Separate legal entity incorporated overseas
Profits taxed overseas - Yes
Profit taxed in the UK - Only if
» Deal in UK land/ has UK property income
» trade through a UK PE
UK cap allowances - no UK cap allowances
Transfer of assets - gain/loss on transfer . Balancing adj arise
Use of overseas losses - overseas losses generally can’t be relieved to group comp
Why can an overseas PE incorporate?
- An overseas PE is part of UK comp and overseas P/L are auto included in CT comp in UK
- An overseas subsid is sep to UK comp and P/L are not incl in UK comps tax comp
- Where loss is expected in early years of trade, may be worthwhile to start trading as PE, then incorporate the bus into a subsid overseas when its prof making
How are overseas PE’s incorporated?
The trade and assets of the PE are transferred to the newly incorporated comp in exchange for shares
What are the implications of incorporation of an overseas PE?
- The PE ceases to trade
- Balancing adjustments on P&M attracting cap allowances
- Chargeable gains/losses arise on the chargeable assets transferred (based on MV at date of incorp)
- profs/losses will arise on IFAs held as trading assets
What can be done with the chargeable gains/profs on IFAs arising on incorporation of overseas PE?
Can be deferred through incorporation relief as long as the following conditions are met
- All trade and assets (except cash) of that foreign PE are transferred to the non-UK res comp
- Consideration is wholly/ partly in form of shares
- The UK comp owns at least 25% of the ordinary share capital of the non-UK comp
- A Claim for incorporated relief is made
Where consideration is partly shares and cash, can’t get full incorporation relief. Only a proportion of the net gains relating to the share consideration received can be deferred
When do gains on incorporation of overseas PE become chargeable on a proportionate basis?
In the following situations
1. UK comp disposes of some of the shares of the non-UK resident comp. A proportion of the remaining net gain deferred is chargeable.
As of 22 Nov 17, if the disposal is a share for share exchange as part of a corp restructure, the deferred gain won’t crystallise
- An asset transferred on incorporation is disposed of within 6 yrs of incorporation. To calc the gain chargeable, the following formula is used
Gain on asset = remaining balance of net gain deferred x (gain on asset on incorporation / gross gains on incorporation)
Similar rules exists for post April 2002 IFAs
Why does DTR occur?
When a UK resident comp has income from overseas will pay
- UK CT on its worldwide income (unless made the election to exempt the profits of an overseas PE)
- Also likely to pay overseas tax on overseas profits
Thus profits are taxed twice
What are the 2 forms of DTR?
Withholding tax (WHT) Underlying tax (ULT)
Describe withholding tax
WHT
- Also known as border tax
- Charged on overseas income as it is remitted back to the UK
- Also the overseas tax paid on the profits of a UK comps overseas PE
Describe underlying tax
ULT
- Overseas CT applied to overseas company’s profits, from which reign dividends are paid
What are the 3 ways we can alleviate double taxation with DTR?
- Treaty relief
- Unilateral or credit relief
- Expense relief
What is treaty relief?
UK has taxation treaties with many countries
- Treaties set out detailed guidelines on how the income will be taxed, if it is subject to tax rules in more than 1 country
Most countries follow the same principles set out in OECD model. i.e. agree that only 1 country will tax the income, therefore no double tax issues arise
How do you calculate unilateral DTR?
- Calc amount to be included in CT
> Overseas income should be incl in top half of CT comp, gross of WHT
> Profits are then subject to UK tax as normal - Calculating DTR
> For all sources of foreign income, calc basic DTRon source by source basis
> DTR is the lower of
– Overseas tax suffered
– UK CT attributable to the overseas income
How do deductions such as QCD, losses and man expenses interact with DTR?
- Where there are deductions avail against total profits on the face of the computation, these deductions can be offset in the most beneficial manner
e. g. First against UK income then against overseas income - If there is more than 1 source of overseas income the deductions should be offset against the source suffering the lowest rate of overseas tax first
What does UFT stand for?
Unrelieved foreign tax
What is the benefit of unrelieved foreign tax?
- UFT is created when the amount of overseas tax exceeds the UK tax
i. e. DTR is lower of overseas tax and UK CT attributable to o/s income
Is relief available for unrelieved foreign tax? (in relation to DTR)
- Relief may be available for the UFT, but is dependant on the source of income the UFT relates to
1. Permanent establishment: Where there is unrelieved foreign tax relating to an overseas PE of a UK comp, the UFT can be carried back 3 yrs on LFIO basis or cfwd indefinitely against UK CT liability of that PE
2. Other sources of foreign income: UFT on other sources of foreign income e.g. interest or rent, is lost
What is expense relief?
- Foreign income is included in UK CT comp net of overseas tax suffered and taxed at the applicable UK rate
- No relief is deducted from the UK CT liability
- This method of DTR can be useful to maximise the use of losses
How do you know which DTR to choose?
Treaty relief - give first if a treaty exists
Expense relief - give where loss/ other deductions would reduce the UK CT liability to nil as this will waste less losses
Credit relief - give in all other situations
When is DTR available on foreign dividends?
- Majority of foreign divs received by a UK comp are exempt from CT
- However, if a foreign div is taxable, DTR is available in respect on
» Withholding taxes
» Provided the UK company controls > 10% of the foreign company, underlying taxes - Underlying taxes give credit for the overseas CT which is paid on profits out of which the div is funded
- To calc ULT :
1. Gross up the div for WHY
2. Calc the ULT as: (Div gross of WHT / distributable profits) x overseas tax paid
How do you calc ULT?
- To calc ULT :
1. Gross up the div for WHT
2. Calc the ULT as: (Div gross of WHT / distributable profits) x overseas tax paid
