Overseas aspects of corporation tax Flashcards
What determines if a company is UK resident?
The company must be incorporated in the U.K. or controlled and managed from the U.K.
What are the corporation tax implications if a company is UK resident?
This means that the company will be liable to tax on its worldwide income.
How is a non resident company treated with regards to taxation?
A non resident company is only liable to UK tax if they are are trading in the UK through a permanent establishment and only the profits from the permanent establishment are taxable.
What is the definition of a permanent establishment?
A Permanent Establishment is a fixed place of business through which the business of the enterprise is wholly carried on. It should be a “place of business” e.g. buying and selling activity are taking place.
What happens if a UK company has an overseas PE?
The company may be subject to overseas tax as well as UK corporation tax on the same profits. However double taxation relief is available if this takes place.
What kind of profits will be charged to a non UK resident company that has a UK PE?
Any trading income through the PE.
Any income from property or rights used by or held by the PE.
Any chargeable gains from the disposal of UK assets situated in the UK.
What is a benefit of having an overseas PE?
If the overseas PE makes a loss, then the loss can be used to reduce the income from the UK company which will reduce corporation tax.
What are the negative consequences of electing to exempt all overseas profits and losses from UK corporation tax.
The losses can never be used as relief for U.K. income.
DTR will have a very minimal effect if overseas tax rates are high.
What are the rules for foreign subsidiaries of UK companies?
A foreign subsidiary will pay foreign tax on its profit and transfer its income via a dividend to the UK company. This income will not be liable to UK tax as dividends are not taxable by corporation tax.
Losses cannot be claimed by any non resident UK company so the foreign subsidiary losses cannot be used.
What is the general rule when deciding to choose between a permanent establishment and a foreign subsidiary?
If the overseas business is going to be loss making, then we should make it a permanent establishment. If the overseas company is going to be profitable, then we should make it a foreign subsidiary.
With regards to double tax relief. What is the exemption method?
This is where there is an agreement between the UK and the foreign country that foreign income tax will be paid in the foreign country only and therefore does not need to be included in the UK corporation tax computation.
Explain the credit relief method in the context of double tax relief?
The credit relief method is where foreign income generated is included gross of tax in the UK corporation tax computation and then the foreign tax paid on that income is relieved, but capped at the UK rate of corporation tax.
How can losses and QCD’s be used when calculating DTR?
The losses and the QCD’s can be used in the most beneficial way to the company. The way to do this is to set off the losses against UK income first and then any remaining losses/QCD’s should be used to offset foreign income.
Why does transfer pricing exist in the context of the corporation tax involving overseas companies?
A group can reduce its corporation tax by diverting its UK transactions to a country with lower rate of corporation tax. Anti avoidance legislation was created to prevent this.
What is the purpose of transfer pricing?
The purpose of transfer pricing is to reinstate pricing to arms lengths rates, so that corporation tax liabilities cannot be artificially manipulated.
