Globalised or globalising technology and media companies must grapple with the intricacies of both UK and international tax law. As part of our continuing tech and media globalisation series we will be releasing a range of tax updates covering:
Technology and media companies expanding overseas (whether organically or via acquisition) can do so using a range of vehicles, though a limited liability company or overseas branch of the UK company would tend to be the norm. This is an especially important consideration for technology and media companies where seamless expansion is essential for global success.
Double tax treaties
UK companies are taxed on worldwide profits, with scope to elect for profits of an overseas branch to be excluded. Double tax treaties exist with many jurisdictions to address situations where companies and individuals could be subject to tax in two locations. The existence (or not) of such treaties needs to be considered when technology companies are planning international expansion.
Companies that are not UK resident will generally not be subject to UK tax unless they are deemed to trade in the UK through a permanent establishment. Within the tech and media sector there is often scope for debate on where income is generated or whether a company’s presence in the UK is sufficient to constitute a permanent establishment. Tax practice in this area looks set to evolve with continuing developments in technology and case law. It is also possible that current debates may see changes in the internationally agreed standards on which most double tax treaties are based.
International groups of companies need to take heed of transfer pricing rules which, essentially, adjust transaction prices to an arm’s length basis to prevent related large companies manipulating their profits to take advantage of low tax jurisdictions. Various methods exist for establishing arm’s length prices, but this can still be difficult for technology companies with their own unique IP for which no directly comparable products exist. Experience shows that companies must be mindful of the potential ‘bad press’ arising through perceived exploitation of tax rules by international corporates.
Profits can be extracted from overseas subsidiaries in a variety of ways: through management charges, payment of dividends or ultimately the sale of the entity. A UK company will be subject to UK corporation tax on management charges but will normally be exempt from any charge on dividends, and often on capital gains. We will also highlight the changes set to be implemented from January 2015 that will see increases to VAT on e-services.
No article on tax and global business would be complete without a reference to the UK’s Controlled Foreign Company (CFC) rules.
Where a non-resident company is controlled by UK residents (whether companies or individuals), an appropriate share of its ‘chargeable profits’ is taxed on any UK company that (with related parties) has an interest of at least 25%. Credit is given for any overseas tax suffered. There are exemptions for companies with low profits or a low profit margin, for those resident within various ‘excluded territories’, and (in general) for those that suffer an overseas charge that is at least 75% of the charge that would apply in the UK.
Where CFCs are not completely exempt, the ‘chargeable profits’ apportioned are only those that can be considered to have been diverted from the United Kingdom. Complex rules apply to determine this amount.
To discuss any issues relating to tax and international business in the technology and media sector, please get in touch.
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