It is almost a tired phrase to say that the lack of clarity about Brexit is causing great uncertainty for many businesses. However, this is still true.
We are travelling headlong towards 1 January 2021 and the official end of the transitional period marking the UK’s exit from the EU. Companies are having to make decisions to ensure that the disruption caused by Brexit is kept to a minimum but places their business in the best place to thrive and grow in a post-Brexit world.
The major consequences of Brexit are the impact it has on the supply chain, combined with implications for Customs Duties and VAT; these are key areas that are exercising the minds of many finance directors.
While not so prominent in the headlines, this will also have an impact on corporate income taxes. When companies make decisions to manage and control the supply chain and ensure any duties and VAT payable are kept to a minimum, this can result in changes to the way the company carries out business. This can also result in changes to the structure.
In many cases, because the focus is usually on supply chain and the indirect taxes, it is possible for the impact on corporate income taxes to be overlooked.
A company is subject to corporate income taxes in a country if that company is tax resident there but also if it is a non-resident company carries on business in that country through a permanent establishment (PE). Where there are changes to the supply chain and structure of a company or group this can result in the company having to consider corporate income taxes in a new country.
In the model tax treaty of the Organisation for Economic Cooperation & Development (OECD) a PE is a fixed place of business through which the business of an enterprise is wholly or partly carried on. So, if it is decided for good operational reasons to establish part of the business for example an office or warehouse in a new territory this might mean that a PE has been established. Often a warehouse whose role is solely auxiliary or preparatory in nature does not trigger a PE, however it is important to check the rules of the territory in question.
Another indicator that a PE has been created is where an employee or someone other than an independent person has the power to habitually bind the company to contracts. It is important that this is something that is done habitually i.e. it is not temporary in nature.
It is clear that COVID-19 has also cast doubt and uncertainty on businesses. With the ability of technology to facilitate home working and the tight travel restrictions, many people have found that they have had a significant re-think in the way that they carry out business.
For those individuals whose previous role entailed travel between countries this may result in the company concerned triggering a PE in the country in which they are now working and this may result in corporate income tax liabilities and tax filing obligations in that country.
This could as equally apply to a UK company whose employees now live and work overseas as to a company based overseas with employees living and working in the UK.
A PE must have a degree of permanency and be at the disposal of the company concerned. The OECD has provided guidance that in their view if this has arisen because of the temporary restrictions placed by governments and the impact of COVID-19 rather than the requirements of the company this should not result in the creation of a PE. Equally where someone does conclude contracts in the country where they live and this is because of the COVID-19 related travel restrictions this does not meet the condition of that being habitual and so again no PE is created.
It is important to understand the domestic tax rules of the sovereign tax territories as these may reach a different conclusion but given the influence of the OECD this view is helpful.
As outlined in the article on corporate residence one of the key issues looking forward is how business will be conducted in the future. As we look beyond COVID-19 and settle in a world after Brexit, will the business model and the way business is carried on have changed? It seems clear that things will be different as everyone adapts to the new world.
For international companies the key corporate income tax considerations will be whether there has been any change in corporate residence but also whether this has created a new PE in a new territory.
As ever, effective and timely planning is required to reduce the potential for surprises.
For more information on how this could impact your company, contact Stuart Weekes or your usual Crowe contact.