For the entrepreneurial owners of many SME’s, the mid to long-term objective is to grow the company in readiness for a sale. There are many aspects of the business which can be prepped for a sale and making sure the due diligence process goes as smoothly as possible is desirable.
Taking measures to ensure the company is compliant with its tax obligations is obviously a must at all times. However, it has to be acknowledged that we live in a complicated world where a complex tax code does lead to honest mistakes and inadvertent non-compliance.
Most UK companies are aware of the majority, if not all, of their UK tax obligations. But when it comes to overseas tax, there can be a blind spot where the tax code of foreign jurisdictions is worryingly ignored altogether.
For an SME, the cost of obtaining international tax advice can be seemingly high. But in a world where SME’s are transacting overseas more often, they are operating in the tax environment of other countries where failing to comply can lead to tax geared penalties and interest – providing the potential purchaser with the upper hand in negotiations.
The following are a few of the international tax issues which the owners of an SME should be considering if involving in cross border transactions;
• Corporate residency of an overseas subsidiary – due to the nature of an SME, it can be practically difficult to maintain the tax residency of the subsidiary in the overseas country of incorporation. This can lead to HMRC challenging the company as being a UK tax resident and taxing the overseas sub to UK tax on its worldwide profits
• Risk of non-reporting of an overseas permanent establishment to foreign tax authorities – failing to report and pay the correct amount of tax in an overseas jurisdiction can potentially be costly, especially when considering the overseas countries penalty regime
• Failing to fulfil foreign payroll obligations – when sending employees or workers overseas to work in a country, there may be a requirement to operate a payroll system in that country. This can include economic employers who may not be considered to be an employer under UK law
• Sales tax – in particular sales outside of the EU may result in no UK VAT being chargeable, but has the customers jurisdiction been considered? The overseas rules may differ substantially to VAT and can catch out a UK company
• Transfer pricing (TP) issues – an SME is normally exempt from applying UK transfer pricing rules, but not all countries TP rules include an SME exemption. Given the relatively low rate of UK corporation tax, there is an apparent motive in the eyes of the foreign tax authorities for a taxpayer to shift profit to the UK
There are many other issues to consider such as the UK controlled foreign company rules, foreign branch exemption, calculation of double tax relief etc. The above gives a flavour of the issues an SME operating overseas should be considering. I recommend that any SME who operates overseas undertakes a health check of their foreign tax compliance, especially if the spectre of a due diligence exercise is on the horizon.