As a consequence of more businesses trading internationally, there are an ever-growing array of cross-border transactions. These range from selling products and services to global customers, to interacting with overseas group companies. Despite this growth in conducting cross-border transactions, the tax implications of such arrangements are all too often overlooked.
Know your tax position
Recent and rapid advancement in technological development has enabled UK-based businesses to both efficiently and effectively extend their global reach further than ever before and connect with customers worldwide. The increased level of support and information at the disposal of SMEs looking to trade and expand overseas also plays a significant part in the rising level of international transactions taking place. However, even in this more informed, advanced world of business, some are still failing to give the associated tax implications the attention they deserve.
One reason why international tax considerations can often be overlooked, is the common misconception that relief for overseas taxes will always be available in the UK. This is not the case, and there may be a host of reasons why an overseas tax charge will not be capable of offset in the UK. For instance, taxes may have been incorrectly paid in an overseas jurisdiction and or may not be in accordance with the relevant tax treaty. Businesses should therefore ensure they establish a clear understanding of their tax position before entering into international contracts as unexpected tax costs can quickly erode margins.
Laws and jurisdictions
As a starting point, businesses should ensure that their internal procedures require the tax position to be clarified when negotiating international contracts. For example, if a UK company is negotiating to provide services from the UK to an overseas customer, the internal procedures should require upfront clarification of the local tax implications such as any withholding taxes, VAT and state and local taxes. If the provision of services is to be delivered on the ground in the other country, there is also the possibility of a permanent establishment being created, which in turn could generate corporate tax and payroll-related taxes.
As part of the upfront due diligence, the overseas tax implications should be considered in light of the relevant provisions of a tax treaty and how any relief may be obtained back in the UK. This will then inform the decision makers how to negotiate and draw up contracts which reflect the known tax position. This will help to avoid any tax related surprises and can also benefit businesses if they are able to pass on any additional tax costs to the customer through possibly raising prices for their services.
Engage with your customers
In terms of approach, the tax position should usually be discussed in advance with overseas customers in order to understand how they intend to treat the payment. For example, does the customer expect to withhold any tax on payment, and if so, could this be reduced under the terms of a tax treaty? Once the customers intentions are known, this should then be reviewed to ensure that this treatment is correct (and challenged if not) and the UK tax position is understood.
In a similar fashion, where groups are interacting internationally, the tax position on inter-group transactions should be assessed from a tax point of view. The tax implications will always depend on the exact nature of the transaction, and due to the parties being related to one another, will also need to be conducted on arm’s length terms from a transfer pricing perspective.
The world of international tax is continuously evolving and it is important for UK businesses to appreciate how and when they may be impacted by overseas tax rules. This requires the relevant decision makers to keep tax in their sights and, if in doubt, to make use of expert advice to ensure they stay clear of any surprises and maximise the profits earned when trading internationally.