Expanding your business internationally

Where a permanent establishment (PE) is created, obligations to register for local corporate income taxes, file returns and pay taxes usually follow.

Whilst each country will have its own local rules, many territories adopt the OECD model tax treaty for their agreements. Under the OECD model, a PE can include (but is not limited to):

• a place of management
• a branch, office, factory, service facility or workshop
• building sites (often where work spans 12 months).

Certain activities such as storing and displaying goods, and activities of a preparatory or auxiliary nature are frequently excluded from creating a PE where these activities are conducted in isolation.

A dependent agent can also create a PE where they are acting on behalf of the UK company and habitually exercise authority to conclude contracts in the name of the UK company.  

In our experience this is commonly where we see most issues arising, as these arrangements are often detected late – perhaps as the authority of an individual evolves over time.

With the moral shift over recent years to ensuring companies that trade internationally do not avoid tax or reduce their tax burden by shifting profits between territories, the OECD has set out a global framework - BEPS (Base Erosion and Profit Shifting) of various preventative actions.

Action 7 focuses on PE’s and sees more countries moving towards considering the substance of a dependent agent scenario and looking more closely at where contracts are materially negotiated rather than where they are concluded.

We therefore expect to see an increase in overseas permanent establishments being created, as more oversees tax authorities challenge the position, and seek to get their slice of the global tax cake.

There are many different VAT systems around the globe and it is an increasingly popular source of taxation for governments. Whilst the individual rules of each country need to be considered, there are often consistent themes which apply across territories.  This is particularly the case for the EU Member States where there is a common set of rules arising from the EU VAT Directive and EU Regulations, albeit that local differences in interpretation still arise.

To determine where supplies might be subject to VAT, the specifics of each supply must be considered.  This will include understanding:

• where is the supplier located?
• are we supplying goods or services?
• who is the customer – business or individual and where are they located?
• is the customer registered for VAT? In which countries?
• what is the physical path the goods take to reach the customer?
• are any additional goods or services provided? e.g. installation of goods.
• if we provide our customer with more than one thing, are we making a single sale subject to one rate of VAT or are we making multiple sales each potentially subject to different rates of VAT?

‘Where’ is a supplier or customer located?

The VAT law refers to the concepts of ‘business establishment’ and ‘fixed establishment’ when considering ‘where’ the supplier and customer are located. These terms are different to the corporate tax concept of Permanent Establishment.

A ‘business establishment’ is the principal place of business. It is usually the head office or ‘seat’ from which the business is run. There can only be one business establishment.

A business though can have multiple ‘fixed establishments’. Fixed establishment is not defined in the primary law so case-law has provided definitions; a fixed establishment has both the technical and human resources necessary for providing or receiving services on a permanent basis. Whilst this appears straightforward whether or not a fixed establishment has been created is regularly a subject of dispute with tax authorities and local interpretations of the same facts can vary.

In considering the 'where' questions noted above, it is necessary to consider where the supplier and customer are located i.e. where they have business or fixed establishments. Where either has more than one establishment it is necessary to consider which establishment is actually making/ receiving the service; this is normally the one that is most directly connected with the supply. This is also a subjective test and open to alternative interpretation or minor differences in the factual position resulting in a change to the position. For this reason, businesses are encouraged to document their conclusions as to why they consider they are or are not VAT established in a particular country and whether or not that establishment is making or receiving the supplies in question.

Over recent years there has been a shift towards more informal and fluid employee mobility. This increases the risk of a taxable presence being created from an employment taxes perspective. As wherever an employee conducts their duties within another country this could potentially lead to a permanent establishment risk arising.

Employer position

Where an employee conducts their duties overseas (unless they are on a formal secondment/assignment and providing their duties wholly for the host entity only), their will commonly be obligations for the UK employer to register for and withhold employment taxes and social security in the overseas country. In addition, they may also continue to have obligations in relation to the employee in the UK.

In theory, any kind of employee mobility scenario can give rise to a taxable presence risk in the overseas country. In particular, the following types of arrangements may require attention:

• an employee working in territory where the employer currently has no taxable presence
• business visitors or those employees who have multi-country or regional roles
• senior executives or management who perform duties outside of their main home country
• commuters or assignees / secondees who do not work exclusively for a host entity alone
• employees that work from home offices or other (none office) places of work.

In some instances, international treaty agreements might override the local country requirements, but commonly this requires some compliance action by the employer enabling them to get relief under the international agreement. Relief is rarely given automatically.

Consideration should therefore be given to the risk of creating a foreign taxable presence whenever employees are moving to another country or are globally mobile. Issues to consider should include:

• what activities will the employees be performing and in relation to whom whilst abroad?
• what management authority or capacity do the employees hold?
• how many employees are being sent abroad to work on a particular project or over a period of time?
• how long will they be “in territory” individually or collectively?
• how are employees representing themselves on business cards and letterheads, what addresses do they use and which employer appears on them?

Employee position

Employees may also have to register for taxes and social security personally in the overseas territory and ensure that they have appropriate permits or visas to legally be able to work in that territory.

Not dealing with employees correctly at the outset can frequently lead to unexpected costs, significant management time and effort in resolving the situation and potentially reputational risk both with employees and commercially.

Companies operating in another territory or trading cross-border need to have an awareness of the risks of non-compliance with local tax requirements.

It is important that the finance team within any company ensure that their wider business teams – especially commercial and sales team are alert to the potential for creating a taxable presence. Particularly, as treaty benefits typically need to be applied for in advance and are not automatic.

In many territories there is also no de-minimus level of activities that triggers a taxable presence and the repercussions for failing to register, file or pay can be serious – these commonly include fines and penalties but can extend to reputational damage, prosecution and being prohibited from operating in the territory.

In our experience, managing a business’s taxable presence, tax risk and overseas set up successfully is a bit like completing a jigsaw.

To be able to complete the jigsaw efficiently you need to:

• plan up front and allocate the appropriate time for completion
• visualise the global picture you are trying to piece together and the local activities to be conducted
• have identified the key pieces of the jigsaw (taxes) including:
  • the straight pieces (local rules and regulations)
  • corner pieces (treaties)
  • identified the key colours of the picture (activities and other local requirements)
• have considered what assistance you may need with the difficult bits!

It is not uncommon for finance teams to find out about the overseas arrangements after they have been put into place and so are left to pick up the pieces in scenarios where, had the tax requirements been known up front, the structuring could have been improved or might have been considered commercially unviable.

International activities are also a key focus of due diligence questions during a company sale process and any issues identified at this stage will likely have a detrimental impact on the sale price for the shareholders.