Doing business overseas? Are you confident that the company has control over its tax exposures in the foreign markets in which it operates?
With the increasing internationalisation of business and foreign governments keen to collect taxes on profits and income connected to their territories, companies should regularly review their policies and procedures in relation to international business. This is particularly important with emerging markets, as it is not unusual for tax law to change rapidly or for local implementation of the tax law to be different to how it might be interpreted.
While I see a number of clients with withholding tax and VAT issues, the key areas of risk are usually around employment taxes and having a taxable footprint in the foreign territory. This taxable footprint is referred to as a permanent establishment (PE) and is defined in tax treaties. It usually denotes a degree of permanence in the foreign territory, and undertaking activities more than seeking out sales opportunities. The treaty also refers to activities that would not create a PE, e.g. a fixed place of business that is used only for storage, display or delivery of goods belonging to the enterprise, or for the purchase or collecting of information for the enterprise.
The Organisation for Economic Cooperation and Development (OECD) has been very busy over the last few months, producing a number of papers in relation to the Base Erosion and Profit Shifting (BEPS) initiative. This initiative is likely to result in significant changes to the international tax landscape.
In the last few weeks, the OECD has issued two further public discussion drafts; preventing the artificial avoidance of permanent establishment status, and transfer pricing guidelines relating to low value-adding intra-group services.
Key changes proposed in the recent discussion draft on PEs seek to lower the threshold for creating a taxable presence in a territory, increase the requirements for an agent to be considered independent, and to tighten the definitions of the activities currently allowing exemption from PE status.
The discussion draft on transfer pricing guidelines for low value intra-group services is broadly proposing to provide additional guidance on a standard definition of low value adding intra-group services, appropriate mark ups on those services, cost allocation methodologies and transfer pricing documentation requirements.
Other work streams under the BEPS initiative impact both of these discussion drafts and it remains to be seen how they interact. What is clear is that the already difficult process of establishing whether a PE exists will likely become more complicated and result in disputes with tax authorities.
What does this means for local business? We are still not clear on whether there will be a carve-out for small and medium sized businesses in relation to transfer pricing.
Businesses should therefore monitor developments in conjunction with their advisors and look at their business models to determine likely impacts of the proposals.
In addition, businesses should develop processes where these do not already exist, ensuring that they provide guidance to employees conducting business in foreign territories to minimise a taxable presence being created.
Companies can expect to see significant changes coming in to place following summer 2015.