lecture 9 - international tax

Question 1

what are the three options for individuals being taxed on uk/foreign income?

Answer 1

Resident of and Domiciled in the UK – taxed on Worldwide income and capital gains as earned.

Non-resident of the UK – taxed only on UK source income (but generally not capital gains). uk-based duties performed by person who is not a resident = taxpayer charged tax only on income generated in the UK.

Resident of but not Domiciled in the UK – taxed on foreign income only if remitted to the UK. — AKA non-dom.

Question 2

what basis can uk/foreign income be taxed on?

Answer 2

uk residents = arising basis
non-doms = remittance basis

all uk residents normally taxed on arising basis, i.e. what is earnt in the tax year even if not brought into UK.

remittance basis - so long as it remains overseas it will not be taxed in UK, but will attract tax as soon as remitted to the uk.

Question 3

what is a domicile?

Answer 3

possible to be resident in uk but claim another country as your permanent home. for most people same as residency. typically determined by:

Domicile of birth — where you’re born

Domicile of dependence eg child

Domicile of choice — can choose somewhere else, where you maintain a home. must be over 16 to choose. maintain a physical presence in country concerned and have evidence that you have intention to remain there indefinitely.

Can only have ONE domicile. can be tax resident for more than one country.

Question 4

what is residency in terms of tax purposes?

Answer 4

used as basis for testing if you’re liable for tax in UK. in US, they use citizenship basis i.e. wherever you are if you are a US citizen you have to file a US tax return. e.g. Boris. can get double taxation relief (see later).

for uk residents foreign income added to other uk sourced income as part of tax computation. then taxed at same rate. if tax has been paid overseas, reduction may be available in uk tax computation.

those charged tax on amounts remitted to uk pay tax on all foreign sourced income at uk rates for NSI - 20,40,45.

Question 5

what are the three tests as to whether you are a UK resident?

Answer 5

automatic uk test

automatic overseas test

sufficient uk ties test

Question 6

what is the automatic uk test for residency?

Answer 6

≥ 183 days in UK in tax year (about 6 months) — report entire year of worldwide income for UK taxation. this is the key test.

OR

Have home in the UK for > 90 days in year, spend at least 30 separate days in that home, 91 consecutive days in which don’t have overseas home (if do, spend less than 30 days in it)

OR

Work full time in UK for 365 days without break

Question 7

what is the automatic overseas test for tax residency?

Answer 7

non-resident for uk tax purposes if:

not resident in UK for prev 3 tax years and they’re present in uk for fewer than 45 days in current tax year

OR

resident in uk in one or more of prev 3 tax years, and present for fewer than 16 days in current tax year

OR

leave uk to carry out full-time work overseas, provided present in UK for less than 91 days in tax year and fewer than 31 days working in uk in tax year

Question 8

what is the sufficient uk ties test for tax residency?

Answer 8

ties: uk resident family, accessible accommodation in the uk, substantive work in the uk, uk presence in prev tax years (more than 90 days in either of the prev 2 tax years), more time in uk than any other single country

Question 9

what rules can non-doms benefit from?

Answer 9

don’t pay UK tax on foreign income or gains if either less than 2,000 or if you don’t bring it back to uk (i.e. have it paid to UK bank account)

Those not domiciled in the UK can have overseas income taxed on remittance basis.
Possible not to remit any ‘income’ — if non-dom can elect to say income earned outside of UK won’t be taxed in UK unless you bring it to UK

this subject to the RBC

Question 10

what is the remittance basis charge, RBC?

Answer 10

But those who effectively are permanent UK residents and want to be non-dom now need to pay £30,000 / £60,000 for the privilege (the remittance basis charge, RBC), or be taxed on worldwide income. could really be worth it if your income is very significant. likely disappearing soon, latest budget says it will be got rid of but unsure how right now.

30k if you’re an adult who has been resident in uk for year AND at least 7 of the previous 9 years. 60k if have been resident at least 12 of last 14 years. in both cases period of 6 years of non-residence required to reset the clock. in addition to whatever uk tax is due. won’t apply if unremitted foreign income is 2,000 or less in any tax year.

if you claim remittance basis you do not have right to uk income tax personal allowance against remitted income. can’t use capital gains tax AEA against capital gains remitted to uk either. still get 2,000 unremitted income.

can bring foreign income and capital gains into uk without paying RBC where money used for commercial investment.

Question 11

can you be a permanent non-dom?

Answer 11

Permanent Non-Dom status ceased from April 2017. now, if resident in UK for > 15 of last 20 years = deemed domiciled in UK
Also, restricts ability for children of UK Domiciled parents

where individual becomes ‘deemed domicile’ under 15 year rule, become subject to income tax and CGT on normal arising basis. to avoid becoming a deemed domicile must cease to be resident in the UK in year 14.

for CGT, non-dom means only gains arising in UK or remitted here are taxed in uk. subject to payment of RBC

Question 12

how does corporate residence work for main bodies of companies?

Answer 12

companies don’t have domiciles, only residence status.

Company resident if:
Incorporated in UK — easy catch all
Central management and control in the UK — safety net clause. — aka central mind and mgment

Taxed on worldwide income - in principle, but, benefit from many foreign income exemptions…becoming much more of / effectively a territorial system.

Question 13

how are foreign subsidiaries of uk companies taxed?

Answer 13

if have subsidiaries in other countries, this is separate legal entity that hasn’t been inc in uk and has its own mgment team. earns profits in other country. they will be taxable in foreign country and not in uk. if and when subsidiary pays divs to uk, divs will be exempt too. therefore can earn elsewhere and remit to uk this way and not pay any tax.

Question 14

how are foreign branches of uk companies taxed?

Answer 14

unless elected for foreign profits to be taxed in uk (but it will also be taxed overseas), will be taxed in that country only and not in uk. might want branch income in uk if there’s sig losses, because you can report the losses (but why would you still have it at this point).

Question 15

what is permanent establishment?

Answer 15

Non resident companies are subject to UK tax if they trade through a Permanent Establishment = a fixed place of business located in the UK for the ‘long term’ (> 6 months). represents minimum level of activity required in order to give taxing rights to country in which its located. if level of activity falls below threshold for PE, no tax charged in country where activity takes place and only UK tax will be payable.

Pay tax on profits attributable to UK establishment

only taxed on profits earned in uk through your PE. need to have presence where you have significant influence for long time. creates interesting incentive, to have PE in northern ireland and sell into UK to benefit from 12.5% rate.

PE doesn’t include warehouses or inventory.

income from property or rights used or held by UK PE of a foreign company is chargeable to corp tax as there are many chargeable gains on disposal of assets situated in the UK.

uk companies can elect to exempt foreign PE profits and losses from uk tax. this is permanent, so should be careful. if location of PE has lower rate than uk and makes profits there will be tax saving. however if it makes a loss it cannot be offset against uk profits.

Question 16

what should be considered when choosing whether to start a branch vs a subsidiary?

Answer 16

branch/PE:

branch of UK business not treated as separate taxpaying entity. profits will need to be included in uk HO trading income and so will be liable for uk corp tax in year in which earned, same as profits of uk based business. unless company elects for branch profits exemption. losses can also be offset

subsidiary:

separate legal entity for tax purposes, and there is no profit consolidation required. losses cannot generally be surrendered for group relief and so may not be able to offset. divs from overseas subs generally exempt from uk corp tax.

Question 17

what does the company vs the revenue authorities want to get out of the international tax game?

Answer 17

Company

Minimising company tax costs through reducing or deferring tax payable

Revenue Authorities

Maximise legally prescribed tax take
In international tax, two or more authorities involved
Therefore, compete with each other over who gets biggest tax share over allocation of profits & taxing rights, e.g. by taxing cash outflows through withholding tax that payer deducts when making payment to a person outside the country

Question 18

how does the uk handle transfer pricing issues?

Answer 18

Transfers between connected companies must occur at the equivalent ‘arm’s length price’. onus is on companies to show that this happened at arms length price.

given flexibility transfer pricing across tax borders offers to companies, HMRC has been given power under UK law to substitute an arm’s length price for any prices they consider to be artificial. applies to trading activities, but also: sale or purchase of fixed assets, letting or hiring of property, loan interest, patent royalties, management charges.

transaction prices also have to be arms length if both residents of UK.

Question 19

what do companies do to try and beat transfer pricing rules?

Answer 19

Companies tend to avoid transferring goods/services with an active market and use hard to price services such as research and development, management services, royalties, etc.

unique to firm and don’t tend to also sell to other firms. rarely with commodities.

if caught, can end up in double taxation loophole

Question 20

what is an advanced pricing agreement? (transfer pricing)

Answer 20

Advanced Pricing Agreement option available toward providing certainty and protection over such transfers

can limit probability of being caught in double taxation if one country doesn’t like your transfer price.

usually enetered into bilaterally, so not just with HMRC but wiith another countries tax authority so both countries commit to accepting company’s method for working out TPs.

Question 21

what is thin capitalisation?

Answer 21

thinly capitalised company = lots of debt compared to equity.

In the UK (and many other countries):
Interest expense is deductible; dividends are not deductible. — in most countries, not all. Provides a financing incentive toward debt.

For Multinational Companies operating in countries with different tax rates, debt = opportunity to shift profits from high to low tax jurisdictions,

Group companies in high tax jurisdictions financed largely with ‘debt’ sourced from other group companies operating in low tax jurisdictions

Interest as a deductible expense = relief obtained (say) at 40% whilst interest received in low tax jurisdiction is taxed only at (say) 20%

Question 22

what are the uk thin capitalisation rules?

Answer 22

UK has Thin Capitalisation Rules

Worldwide Debt Cap to restrict amount of interest expense (between group companies) that will be allowed as a deduction for tax purposes.

Interest on ‘excessive debt’ will not be allowed as a deduction.
Debt that would not normally be provided by an arm’s length party.

Thin Cap rules are now contained within Transfer Pricing legislation, and consider interest rate charged

Question 23

what is the diverted profits tax?

Answer 23

AKA google tax

Where a company avoids UK Tax by:
Avoiding having a ‘Permanent Establishment’ in the UK and/or
Makes payments that lack ‘economic substance’ (to get profit out of UK)

Treasury can recharacterise payments, and the company will be liable for UK tax of 25% on the profits that have been diverted. fairly aggressive response due to lots of media attention on companies like starbucks, amazon etc.

Question 24

what is the digital services tax?

Answer 24

address misalignment between where profits taxed and place where value is created. 2% tax on revenues of search engines, social media services and online marketplaces which derive value from UK user. where group’s worldwide revenues are more than 500mil and more than 25mil from uk users. first 25mil not taxed. paid annually.

Question 25

what is a controlled foreign company?

Answer 25

CFC is a company which is: resident overseas but controlled by UK residents, and subject to taxation in country of residence where tax rate applicable is less than 75% of uk’s corresponding tax rate.

having sub where uk parent has controlling interest presents opportunities for at least the deferral of some tax, and maybe some tax savings. profits of sub don’t attract uk tax unless remitted. divs usually exempt. if sub has low tax rate overall savings can be made. where taken to extreme, this is seen as tax avoidance.

to make deferring tax by leaving profits in hands of some foreign companies less attractive, uk legislation has controlled foreign company rules

Question 26

what do the CFC rules allow HMRC to do?

Answer 26

if controlled foreign company rules applied, HMRC has power to apportion profits of CFC to corp shareholders and charge profits to corp tax in uk even if not remitted - as divs or in another form.

Question 28

what are information access and exchange agreements?

Answer 28

HMRC has power to obtain info from taxpayers to determine extent to which they are telling the truth about taxable activity overseas. cover a large number of major trading countries where individuals or companies are likely to invest their wealth. release of number of leaked docs about monies placed in tax havens has led to increased public pressure to tackle tax evasion through tax havens.

Question 29

what are the OECD BEPS 2.0?

Answer 29

base erosion and profit shifting

Pillar One:

A Revenue based allocation of residual profits to end-market jurisdictions toward taxation based on where goods and services are consumed
designed to make sure profits of large digital service companies are fairly taxed, taking into account where those services are used.

Pillar Two:

Implement a Global Minimum Tax on Profits of 15%
designed to combat base erosion and tax competition.

Question 30

what is double taxation?

Answer 30

Double Taxation = the liability for tax on the same profits at the same time across two jurisdictions.

A disincentive to overseas investment - therefore not liked by anyone

Question 31

what are the two main methods of double taxation relief?

Answer 31

credit system where home gov taxes overseas income but allows a credit or reduction in tax payable for at least some of the tax paid overseas. (worldwide system)

exemption system where home gov chooses not to tax foreign income at all, treated as exempt (territorial system)

Question 32

what are double tax treaties?

Answer 32

as a rule, UK tax was calculated on gross worldwide income and then double tax relief deducted from liability

if no treaty, uk tax rules also contain provisions which allow for unilateral (one sided) relief for at least some of double tax. requires foreign income included in taxable income or TTP for company, grossed up for foreign tax suffered.

May involve negotiation between tax authorities

Advanced Pricing Agreement option – can negotiate across tax authorities

Question 33

how does double taxation relief work for dividends?

Answer 33

companies that recieve divs from foreign sub companies in which they own more than 10% of shares are exempt. this means divs from subs generally not taxed in uk. where exemption doesn’t apply, uk shareholder entitled to double tax relief.

when foreign company pays divs to uk resident shareholders, the country where foreign company located is likely to levy WHT, which is tax at fixed rate on divs leaving that country to go to foreign shareholders. uk resident companies receiving divs from foreign companies will usually be entitled to DTR for WHT.