Lecture 7: International Tax Flashcards
What is country of residence for tax purposes?
Entities normally pay taxation on their worldwide income in the country in which they are deemed to be resident.
An enterprise is deemed to be resident for tax purposes either in the place of incorporation or the place of central management and control (location of head office or where board meetings are held.
What is the source country for tax purposes?
A non-resident company is often chargeable to tax in a country where it carries on trade through a permanent establishment.
What is a permanent establishment for tax purposes?
Could include a factory, workshop, branch, office, or place of management. (not a website, not a warehouse.
What are the UK rules for residency?
Corporation tax is charged on the worldwide profits of UK-resident companies, and on the UK profits of a permanent establishment in the UK of a non-uk resident company.
When is a company a resident of the UK?
- It is incorporated in the UK, or
- Its central management and control is situated in the UK.
A UK company can elect that the profits of all its overseas permanent establishments are exempt from UK Corporation Tax. The election is irrevocable.
What is a controlled foreign company?
A company is deemed to be a CFC if:
- it is resident outside of the UK
- it is controlled (>50%) by a person or persons resident in the UK.
- It is subject to a lower level of taxation (less than 3/4 UK tax) in the territory in which it is resident.
What are the consequences of being a CFC?
Profits of the CFC are apportioned to a UK company with an interest of 25% or more in the CFC, and that UK company will be assessed to corporation tax on these apportioned profits.
What are the exemptions to treatment as a CFC?
Exemptions of the above treatment include:
- Exempt period - the 1st 12 months in which a CFC is under UK control
- Excluded territories - the regulations include a list of territories which are automatically excluded from the CFC charge, provided that the CFC satisfies some residence and income conditions.
- Low profits - foreign subsidiary has chargeable profits of no more than £50,000, or no more than £500,000, of which no more than £50,000 represents non-trading income. - Low profit margin - CFC is exempt if its accounting profits do not exceed 10% of its operating expenditure.
What is double tax relief?
Foreign income is often taxed twice. In order to prevent double taxation of income, countries enter into bilateral tax treaties. The OECD has produced a Model Tax Convention (treaty). Provision is also available for unilateral relief. This is normally given by allowing a tax credit for tax paid in the other country.
How to calculate double tax relief?
Double Tax Relief (DTR) =
Lower of
- UK tax on foreign income, and
- Foreign tax
Foreign tax deducted at source = WITHHOLDING TAX
Gross income = 100/(100-foreign tax rate) x net income
How are losses and charges treated for double tax relief?
A company may allocate losses and charges in whatever manner it likes for the purposes of computing DTR.
If a company has several sources of overseas income, losses and charges should be allocated first to UK profits, and then to overseas sources which have suffered the lowest rates of overseas taxation.
What is transfer pricing?
Transfer pricing occurs when group companies trade with each other. In order to prevent companies trading at artificially low (or high) prices, companies are required to compute their profits for tax purposes using an ‘arm’s length’ price. Determining an arm’s length price can, however prove difficult.
Arm’s length - the price you would charge if you were dealing with someone outside of the group.
In a high tax country, might want to artificially reduce sales price. Purchase price is usually the same. Pay less tax
What is diverted profits tax?
Diverted Profits Tax (DPT) was introduced by FA2015 to deter and counteract contrived arrangements used by large multinational groups that divert profits from the UK, resulting in the erosion of the UK tax base.
When does diverted profits tax arise?
DPT arises if
- A large UK company (or overseas company with a permanent establishment in the UK) enters into a transaction which has ‘insufficient economic substance’ (no commercial purpose) and which results in an ‘effective tax mismatch outcome’ or
- A non-UK resident company carries on activities in the UK but enters into arrangements which are designed to avoid a UK permanent establishment.
Insufficient economic substance = test of commerciality. Was the transaction designed to secure the tax reduction?
Effective tax mismatch outcome = tax saving in UK company greater than tax payable in corresponding company
What is the rate of diverted profits tax?
DPT is payable once HMRC has issues a charging notice. It is charged at 25% of the diverted profits.
Used more to change behaviour. UK wants to attract companies.
