Tag Archives: transfer pricing

Doing Business in the UK

The UK

The UK has long been an ideal destination for businesses from entrepreneurs to multinationals who are attracted here for the geographical location, favourable time-zone, infrastructure and connectivity.

The government is investing in the future with the world’s first test bed for 5G technologies. As well as investing in more traditional infrastructure projects such as HS2 (the new highspeed railway link) and expansion of Heathrow airport. This interconnected forward-thinking eco-system allows people to start their businesses, scale them, exit or turn them into multimillion pound successes from the UK.

Population

The UK is the fifth largest economy in the world. Like many countries it suffered significantly in the aftermath of the 2008 global banking crisis. However, GDP has long since surpassed
pre-crisis levels and in recent years has been one of the fastest growing economies in the G7. UK unemployment stands at 4.4% which is amongst the lowest in the developed world and
is testament to UK’s highly skilled workforce and flexible labour market.

Property

It is normal for enterprises to rent their property. In London there are plenty of shared workspaces making it easy to set up a base from which to expand.

The government is seeking to expand supply and is demanding local authorities approve planning applications for new housing.

The EU referendum

In June 2016 the UK voted to leave the EU. The UK government and European Commission are currently negotiating the transitional arrangements and the future relationship.

London

London is the UK’s commercial hub.
Regardless of what the new trading relationships have in store, big business and entrepreneurs alike are making London their base.
Google, Facebook, Bloomberg and Deutchesbank have all invested in new Headquarters in London since the EU referendum. But its not just the big boys who find opportunities here. Family businesses account for a quarter of the UK’s Gross Domestic Product, employing 12 million people.
One of London’s recent success stories has been the creation of tech city which has acted as an incubator for entrepreneurial businesses looking take advantage of new opportunities within
the digital economy.

Global hub

With five airports and the rail link to the European mainland London is highly accessible for the business traveller and connected to most corners of the globe.

Doing business in the UK

Attractive tax incentives

Key tax breaks that any potential inbound investor should be aware of include:

The UK Corporation Tax Rate is one of lowest in the G20
Low Social Security Rate for employers
Attractive Capital Allowances and Annual Investment Allowance on the purchase of plant and machinery
The UK Patent Box regime with an even lower corporation tax rate possible
Incentives for innovation in the form of R&D Tax Credits for any business that can demonstrate they solved a technical challenge and where it is not possible to acquire an off-shelf alternative. We have helped businesses in a range of different sectors obtain this relief from construction to financial services

Goodman Jones

Goodman Jones is a business advisory firm, passionate about providing an outstanding service tailored to each client, and is a member firm of the Institute of Chartered Accountants in England & Wales.

We are based in a single office in central London and are now in the top 60 practices in the UK.
In addition to our own expertise in London, we can call on GMN International, our worldwide association of legally independent accounting firms.

As well as being proud to be the UK representative firm of GMN International, we are also members of the UK Advisory Network which was set up by Department for International Trade
(DIT) to provide an accessible route to high quality and trusted professional support, for foreign investors setting up in the UK.

The Network consists of business services providers across a range of disciplines which provide advice on all aspects of establishing your business in the UK. Members complete a robust application process to join the Network.

How we can help:

Structuring

We help the organisation explore which structure is most suited to their requirements – typically, but not limited to, either a UK limited company, a UK partnership or a UK-registered branch of the parent company.

Tax planning & advice

We guide investors through UK tax and anti-avoidance legislation and provide support for both the organisation and the individualsincluding:

Corporation tax compliance:

We can help you get your tax strategy right from the outset.
We can also act as your tax agent in the UK and liaise with HMRC on your behalf.

Transfer pricing:

We can look at the consideration of the proposed business model and risk allocation between parent and subsidiary to identify the nature of the return the UK operation should be seen to achieve.
We can Identify the transactions/intercompany interactions which could be covered by transfer pricing rules
We can benchmark to confirm the appropriateness of the intercompany prices charged
We can support you to ensure appropriate intercompany agreements are in place

VAT & customs duty

We explain the principles behind VAT, and advise on the need for, and arrange if necessary, VAT registration.

Accounting

We can provide your on-going UK accounting and advise on modifications required to their General Ledgers for UK purposes.

IFRS accounting

International Financial Reporting Standards (IFRS) applies whether you are required to report publicly or whether you are an SME though there are different standards for each with much fewer disclosure requirements for SMEs. We can ensure that your accounts comply.

UK audit

We are registered auditors and have considerable experience acting as auditor for the UK subsidiaries of international groups.

Financial due diligence

Where groups have invested in the UK through the acquisition of a UK based enterprise, we have provided support through the acquisition process and appropriate financial due diligence.

Fund raising and banking

We can help advise on UK funding (whether grants, equity or bank finance) and the practical issues such as setting up bank accounts.

Employees

We can advise on all aspects of bringing employees, directors and partners to the UK including:

Advising on the issues regarding employment whether they are ex-pats relocating or new employment of locals.
Helping employers evaluate the position regarding salary equalisation across countries
Providing HR advice and support including creating staff handbooks and providing interview support.
Providing your payroll operation including payroll equalisation and support with P11D compliance.
Advising on auto-enrolment and pensions issues.

Property

We are experts in property and tax issues arising in the UK. We are also well connected within the sector and able to make introductions for those looking for premises, be they for occupation by the business or accommodation for ex-patriate employees.

How we’ve helped:

Provided domiciliation services for a French financial services business and provided IFRS Financial Statements
Provided an independent valuation of a British business that was being acquired by a Belgian company in compliance with International Accounting Standards.
Helping an Austrian subsidiary re employee taxation issues.
We helped a US company with the conversion of its standard US employment contract to a UK-compliant equivalent. The US business had not been aware that its standard contract
could expose it to penalty under UK employment legislation.

Going abroad in search of creative growth

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“The UK’s reputation as a leader in the creative industries means that we are in a formidable position to take advantage of international opportunities.”

Taken from the CBI website, these words ring true in my experience. Many UK creative businesses lend themselves naturally to international expansion.

There are several reasons for this. There is strong overseas demand for Britain’s creative output. Creative services are relatively easy to export. And many of the country’s creative firms are based in London, a location that’s renowned as a global business and creative hub.

At the same time, the domestic market for many creative services is becoming increasingly saturated. With growth at home sometimes more difficult to achieve, international expansion becomes the logical next step.

Home or away?

Faced with international opportunities, it may be tempting to try to service them from the UK. After all, it’s simpler and less demanding than establishing a foreign operation.

But there will be limits to how much business you can do from your headquarters in the UK.

As every creative knows, relationships are everything in this business. The purchasing decision-makers for your services will be based in the local market, and may feel more comfortable dealing with a locally based supplier.

You’ll also encounter more formal barriers: restrictions on foreign trade; import tariffs; government incentives to buy from local suppliers; and currency controls, like those currently in place India.

What’s more, with Brexit looming, and the US administration striking a protectionist tone, exporting your service from the UK looks set to become increasingly difficult to do.

Ultimately, then, you will find you need a local subsidiary to take full advantage of the international openings available to you.

Going local

When establishing a local presence, you’ll need to identify its optimal structure from a financial perspective. Taxation can be one of the more challenging aspects in this regard. In the UK, we currently enjoy a low rate of business tax, now at 19% on business profits for companies. One of your objectives should be to achieve the lowest possible real tax rate on your international dealings.
For this, you’ll need expert technical advice on two crucial – and complex – issues:

1. Transfer pricing: Designing the most tax-efficient terms of trade between your foreign entities and UK headquarters.

2. Tax regimes: Making best use of the tax treaties in place between the different countries you trade in, to find the most tax-efficient way of treating your international profits.

Getting your international structure right could save your business tens or even hundreds of thousands of pounds.

But how do you make it happen?

It’s essential to have a primary adviser in the jurisdiction in which you’re headquartered. You’ll need the technical input of an expert who can:

• understand the intricacies of international tax treaties
• recommend how to structure your overseas operations
• know how to repatriate your profits as tax efficiently as possible

Of course, you’ll also need a network of local accounting partners in each of the territories where you have subsidiaries. Without these, it won’t be possible to incorporate, meet local financial reporting requirements, and so on. Your primary adviser should be able to recommend suitable practices.

In my experience, businesses that get their international structures right create far more value than those that simply export their services from the UK – which can lead to more valuable exit events.
Goodman Jones has extensive experience of assisting creative businesses with their international trade. As well as advising on international tax matters, we can help support your strategic decision-making when considering entering a foreign market. We can also recommend in-market accountancy partners via the GMN International association of accounting firms.

Part of an international group? – better watch those cross-charges!

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Ever since the financial crash, there’s been increasing pressure on international groups whose tax bills seem too low. The word “morality” has regularly fallen from the splenetic lips of outraged politicians, furious that the tax structures their colleagues have created have been used in a way they’d claim was never intended. Behind the scenes the OECD has been looking at ways to limit the extent to which profits can be shifted from one territory to another without in any way prejudicing the right of sovereign governments to entice business to their territories by way of tax incentives. It’s a hard task, but a start has been made with BEPS Action 10.

BEPS Action 10

An OECD discussion document succinctly titled “BEPS Action 10: PROPOSED MODIFICATIONS TO CHAPTER VII OF THE TRANSFER PRICING GUIDELINES RELATING TO LOW VALUE-ADDING INTRA-GROUP SERVICES” has just been issued. Its 20 pages seek to define low value-adding intra-group services, how they should be documented, and the appropriate margins. Furthermore, it defines what is described as “shareholder activities” which shouldn’t be cross-charged in the first place.

This document raises some interesting points. Its description of Shareholder Activities includes the phrase “an intra-group activity may be performed relating to group members even though those group members do not need the activity (and would not be willing to pay for it were they independent enterprises)”. It goes on to say “This type of activity would not be considered to be an intra-group service, and thus would not justify a charge to the recipient companies”. It lists examples, which include “costs relating to reporting requirements (including financial reporting and audit) of the parent company … and costs relating to the preparation of consolidated financial statements of the MNE (however, in practice costs incurred locally by the subsidiaries may not need to be passed on to the parent … where it is disproportionately onerous to identify and isolate those costs)”

Whilst the logic behind the first phrase is undoubtedly sound, the second one rings alarm bells. A quoted parent company will typically have quarterly reporting requirements that oblige its subsidiaries to undertake work and be subjected to quarterly review by their auditors. Those auditors will bill their client – the subsidiary – for their efforts. Those bills are readily identifiable. The auditor’s client would most certainly, were it independent, be unwilling to pay the charge as it arguably receives no benefit from the service performed. I have never seen such charges recharged to the parent, nor have I seen them disallowed in computations of taxable profits. Yet the implication of the bracketed comment is that these will no longer be allowable expenses of the trade of the subsidiary.

Duplicate Services & Incidental Benefits

The document then discusses duplicate services (if genuinely a duplication of what the group member has already done, no cross-charge), and incidental benefits (where benefits flow to a group member as a by-product of services targeted at another group member or members, again no cross-charge) The latter includes not only the benefit of enhanced credit-worthiness resulting merely from being a member of a substantial group, but also the boost to its trade from group reputation-building achieved by global marketing and PR campaigns.- the implication being that the parent should bear all the costs of brand promotion whilst the beneficiaries (its various subsidiaries) bear none. That seems more than a little draconian.

Centralised Services & “On call” Charges

The document also discusses centralised services and “on call” charges, prohibiting neither, but saying the fact of payment being made or liability recorded for intra-group service provision does not provide evidence that such service has been supplied, any more than their absence is evidence that no such service has been supplied. This would seem to imply that if proof of supply existed even where no cross-charge had been rendered, a tax deduction might still be possible – more likely, however, is the alternative implication that where a supply can be seen to have been made but no charge rendered, the supplier should be deemed for tax purposes to have some level of undisclosed income.

The document then discusses pricing – no surprises there, equivalent arm’s-length is best, but in many cases can’t readily be achieved. The result is indirect-charge methods.

Low value-added Intra-group Services

The real meat of the document relates to its suggested simplified technique for MNE’s to quantify and allocate low value-added intra-group services. The simplified technique should be applied on a consistent group-wide basis across all countries in which the MNE operates. It summarises low value-added services as being supportive in nature, non-core activities, not utilising unique and valuable intangibles, and relatively low-risk. By topic, it suggests these will include:

Accounting and auditing
Budgeting
Accounting processes
HR
Health and safety and other regulatory compliance
IT services
Communications both internal and external including PR support, group legal services group tax services
General admin/clerical services

The simplified technique requires the MNE to calculate on an annual basis a pool of all such costs, by category and by accounting cost centre. The pool should exclude costs benefitting solely the company that incurred them, and costs benefitting solely one other group company.

Having established the pool of low value-added costs, the MNE should then establish appropriate allocation keys per category (payroll provision – staff numbers, IT support– computer expense, accounting services – transaction volumes, and so on).

The MNE should then apply a mark-up. – No less than 2%, no greater than 5%.

These steps should all be documented, and the documentation made available on request to relevant tax authorities. The documentation should explain:

What services are involved and why the MNE considers them to be low value-added
The rationale for pooling service provision across the members of the MNE
Description of expected benefits
Description of the allocation keys used and why those keys should produce outcomes related to benefits received, and confirmation of the mark-up applied.

The documentation should also include:

Written contracts or agreements for the provision of these services from participating group members
Calculations of the pool, and of the application of the allocation keys.

If adopted, the OECD believes BEPS Action 10 should satisfy tax authorities across the world that all such cross-charges have been allocated appropriately and that no profit-shifting has occurred to the detriment of any individual territory.

We can but hope.

Transfer Pricing – Coming out of the OECD

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The OECD put it quite succinctly when they stated that “in an increasingly inter-connected world, national tax laws have not kept pace with global corporations, fluid capital and the digital economy, leaving gaps that could be exploited by companies to avoid tax in their home countries by pushing activities abroad to low or no tax jurisdictions.” This undermines the fairness and integrity of tax systems. The project, which quickly became known as BEPS (Base Erosion and Profit Shifting), looks at whether or not the current rules allow for the allocation of taxable profits to locations different from those where the actual business activity takes place, and what can be done to change this, if they do.

The project, driven by the G20 nations, commenced in July 2013 with an Action Plan identifying 15 Actions which would help governments address this challenge. The Action Plan is provided for implementation in three phases between September 2014 and December 2015.

In respect of the SME market, whether an inbound investor into the UK or a UK headed outbound group, Action 8 (changes to transfer pricing rules in respect of intangibles) and Action 13 (changes to the transfer pricing rules in relation to documentation requirements) are the most relevant. The intangibles Action will be re-enforced by further detail to be released in the next 15 months. As such there is uncertainty about parts of the intangibles report which may be clarified in due course. This Action acknowledges that intangibles can be hard to value and there is emphasis on detailed function analysis, application of databases and the assumptions around risk profiles.

Action 8 suggests that the arms-length principles may not be relevant for intangibles. There may be measures to eliminate cash box entities which often transact at arms-length rates. The OECD is considering treating these as lenders in a group structure.

Action 13 covers transfer pricing documentation and country by country reporting.

The OECD accept that transfer pricing requirements can differ between jurisdictions. Standardisation of approaches and documentation is therefore beneficial to both tax authorities and international business

The three objectives of this Action are to ensure that taxpayers consider appropriate costs, provide tax administrations with sufficient information to perform risk assessments and provide tax administrations with sufficient information to conduct initial enquiries. This tries to balance the tax authorities’ needs for relevant, reliable, data whilst managing compliance costs for the MNE.

The conclusion is a single master file and a number of local files. The master file will provide a summary of the entirety of the organisation; from organisational structure to intra-group activities and international tax profiles.

This will be supplemented by a local file which meets local tax jurisdictions requirements and provides local tax authorities with evidence to substantiate charges affecting the local country. A country by country report then allows local jurisdictions to understand the impact of transfer pricing within the cumulative results of the group.

Although these proposals may not change the transfer price adopted by a country it may require greater background evidence to be retained by local jurisdictions. The OECD have not given a feel for the process to phase in Action 13.

In conclusion; intangibles have always been a difficult area and it is not surprising that the OECD’s response still requires clarification. The use of a master file, with local variations, is welcome as a start to international harmonisation of compliance requirements.

Transfer Pricing and Recent Pronouncements

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I’ve blogged in the past on Transfer Pricing issues and the public perception that the likes of Starbucks and Google don’t pay their fair share of tax in the UK. I’m out on a limb on this one – I don’t believe business has some moral obligation to pay more tax than is legally required.

So when I heard about the change to the acronym GAAR from General Anti-Avoidance Rule to General Anti-Abuse Rule, I assumed the political class had sought to pay due homage to public angst about multinationals. Quite how it could achieve this by classifying unilaterally as abuse, arrangements covered by OECD guidelines on Transfer Pricing, was beyond my comprehension.

As it happens, Transfer Pricing issues aren’t addressed by GAAR. Google can continue to sign off UK contracts in Eire and declare profits there rather than here, Starbucks can carry on supplying coffee to its UK stores from the coffee-growing republic of Switzerland, Amazon’s delivery operations can remain in exotic locations – GAAR isn’t interested. In the context of GAAR, these structures are quite simply not an abuse.

But whilst they may not be an abuse under GAAR, the OECD has recognised its rule book may well be out of date. It recently published a report, Action Plan on Base Erosion and Profit Shifting which considers the implications and issues arising from the evermore digitalised world and the scope that provides to multinationals from “the increasing sophistication of tax planners in identifying and exploiting the legal arbitrage opportunities and the boundaries of acceptable tax planning”.

Its opening commentary on the background to these issues states “Taxation is at the core of countries’ sovereignty…”. Whilst it goes on to explain that frictions and disparities between different domestic taxing structures create the opportunities for tax arbitrage, at no stage does it seek to challenge the fundamental principle of national sovereignty.

It then goes on to comment on the need for “coherence of corporate income taxation at the international level” – but not specifically mentioning rate differentials; the need for certain territories to tighten their Controlled Foreign Company rules; the need to tighten the regime on interest deductibility; the need to modify rules to address the use of multiple layers of legal entities inserted between the residence country and the source country; tightening definitions of permanent establishment; transfers of intangibles to low-tax regimes at undervalues; excess capitalisation; and perhaps most importantly, the need to increase transparency, in the form of greater disclosure to revenue authorities.

To my untutored eye, the document appears to identify the principal concerns that flow from global trading and profits attribution. By implication, it suggests that if these issues are addressed, then perhaps public concerns that multinationals “get away with it” may be assuaged. But I think this overlooks the elephant in the corner, the statement’s opening words, ““Taxation is at the core of countries’ sovereignty…”. For as long as any one country is able to use fiscal means to achieve politically acceptable outcomes – primarily encouraging economic activity in its territory in preference to its neighbour’s – legitimate planning strategies to limit overall tax burdens will inevitably be exploited by multinationals.

The Case for the Defence

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Some years back one of my clients established an Indian subsidiary to undertake ongoing programming work that had been undertaken in the UK. My client was a loss-making business, VC backed, in a technology sector, and it decided to outsource these functions to India to reduce its cash burn rate.

We were staggered to receive a report from the Indian division of a Big 4 firm advising that the profits the Indian authorities would expect the Indian subsidiary to declare were the profits that would be made by a US firm providing the same service. That sounded to me like nonsense – if the notional US firm made a 10% uplift on a $2m cost base comprising staff cost and little else, the Indian authorities, on a cost base equivalent to no more than $400K, would be required to make a 50% uplift. I couldn’t believe that independent software companies in India were winning overseas business that would generate anything like that kind of number.

And so it transpired. Working with another Indian accountant, we identified a collective of local independent software businesses offering the same type of service. We analysed their results, we adjusted them to reflect the fact that our Indian company was fully protected by its parent against almost all business risks to which they were exposed, and we concluded the profits the Indian company should declare were equivalent to a 10% mark-up on cost.

Strictly in accordance with OECD guidelines. Obviously we’d have been on stronger grounds were India a member of the OECD, but at least we had a result based on an analysis justifiable by internationally recognised standards. Importantly, we had a result that would be acceptable in the UK as well as being defensible in India.

Roll the clock forward a few years, and what do we find? Here, in the UK, a founder member of the OECD, we have politicians grandstanding about global companies not paying their fair share of tax, we have protest movements invading multinationals’ retail outlets and cajoling consumers to purchase elsewhere. Why? Because the global companies concerned, operating strictly in accordance with OECD guidelines on Transfer Pricing, appear to suffer a lower rate of Corporation Tax on UK-generated business than that suffered by indigenous businesses operating only in the UK.

Take Amazon as an example. It has significant UK turnover – £7.6Bn in the past 3 years – on which it’s paid next to no Corporation Tax. It achieves that turnover because large numbers of UK citizens rate its service as excellent – it’s simply that much better than its competitors. But does it earn its profits here? Its business is predicated on its technology platform, which wasn’t developed here, isn’t owned here, and isn’t maintained here. Without that platform it has no business. It works on tight margins only improved through global purchasing procedures, again not based here. So why should profits attributable to facilities operating outside the UK be taxed here? The simple answer is they shouldn’t. If the UK seeks to tax those profits here, then what about the territories where those profits are being earned? Should they just accept a UK unilateral declaration that it is taking over taxing powers on profits attributable to them, or should they turn round to Amazon and continue levying tax as they do currently? Should Amazon be required to pay tax twice on the same profits?

Exactly the same scenario applies to Google. It’s the world’s favourite search engine, but it isn’t here and an insignificant proportion of its profits are attributable to UK activity. So why should it be subject to anything other than an insignificant amount of UK Corporation Tax?

But the grandstanding doesn’t stop at multinationals. The latest in the firing line is The Ritz Hotel. Mentioned in a BBC article. Why? Because its shareholders aren’t resident here, and the company, whilst profitable, pays no Corporation Tax.

But the UK business tax regime has never taxed profits as they appear in a company’s accounts. It taxes adjusted profits figures, and once those adjusted profits are determined, it allows tax losses in one group company to be offset against tax profits of another. Has that suddenly become a sin?

It’s time the media and the politicians found some other outlet for their spleen. Seeking to tarnish the names of legitimate commercial enterprise because the result of their obeying the rules doesn’t satisfy some ill-thought-through sense of what’s right simply establishes in the observers’ mind the sheer stupidity, even cupidity, of the protagonists.