The impact of COVID-19 and Brexit combined, has resulted in many businesses reviewing their commercial strategy, to address challenges around their supply chains, workforces, customer/ supplier arrangements and relevant regulatory requirements of their industry. The knock-on impact is the increased number of tax issues clients have had to tackle.
Larger, more complex, international corporate clients have felt the impact more than most. While there may be larger items on the agenda, companies must consider whether their tax arrangements are still fit for purpose in what has been a period of unique challenge and constant change.
We have been working with our larger international corporate clients during these challenging times to assist them with tackling a number of the tax issues brought about by COVID-19 and Brexit. Four common corporation tax areas that we have advised our clients on are transfer pricing, corporate residency, withholding taxes and permanent establishment issues.
With fundamental changes being made to many of our clients’ business models, there’s a need to consider whether their transfer pricing arrangements and supporting documentation still reflects the commercial reality of the business’s operations.
Changes to supply chain arrangements as a result of COVID-19 and Brexit mean that goods may now be rerouted via other countries with new entities being set up to manage this. The impact is new service arrangements where additional corporate entities are put in place or changes are made to existing arrangements.
Any new transfer pricing transactions need to be reflected within the existing supporting documentation and may require additional benchmarking analysis. Underlying assumptions and principals on which transfer pricing arrangements were based need to be further considered to ensure an optimal commercial position.
Travel restrictions caused by the pandemic meant many larger corporate clients have had employees stuck working in another country for a lot longer than intended. Questions and added complications for employers include: does the employee presence in that country create a permanent establishment for corporation tax purposes? If yes, is there a requirement to submit returns and pay tax on relevant business profits associated with that employee presence?
Brexit has created new corporate arrangements for businesses with other countries where consideration of the permanent establishment rules are required. Areas we have considered with our clients include new agent and employee arrangements, and purchasing or leasing a property overseas for a specific business purpose.
These scenarios also create complications in other tax areas around employees’ income tax and social security positions, as well as the company’s VAT requirements.
For many countries, the place of effective management determines the tax residence of a company. Where senior management movement is restricted this can trigger questions around whether the corporate residency of a company is impacted given the location of the most senior level of management and decision making may change. This can also be an issue from a Brexit perspective where new overseas companies have been created in a hurry to manage supply chain issues.
Both scenarios can lead to more than one country claiming that a company is resident there. In most cases, this will probably only create an additional administration burden such as looking at the relevant double tax treaty; having to deal with it comes with a financial and time cost for the business that could drag on for years.
Where additional subsidiaries are being set up to deal with supply chain challenges, or money needs to be moved between group companies to support other areas of the business, we help clients to negotiate their withholding tax requirements and administration.
Following the UK’s exit from the EU it has lost the benefit of two valuable EU Directive reliefs that reduced withholding tax on interest, royalties and dividends between the UK and another EU member state to nil.
In many situations, the UK’s double tax treaty network with other EU countries will continue to mean no tax needs to be withheld on dividends, interest and royalties. However, there are situations where double tax treaties won’t remove the withholding tax requirement completely.
Early planning can avoid unnecessary costs and administration later down the line. For our clients, in many circumstances, it’s allowed them to make well informed decisions and avoid some of the issues that can be created where fundamental changes to a business need to be made as part of dealing with two of the biggest external challenges most of us have seen in our lifetime.
If you would like advice on any of the topics covered above, then please get in touch with Andy Hawley, or your usual Crowe contact.
This article was first published in Finance Monthly, Taxation Awards 2021 edition (finance-monthly.com)