International Tax Basics

Shaila Shastry from the University of the West of England shared some of the key lessons that UWE has learned, supported by Simon Robinson from KPMG.

The Key Considerations

• Complexities of what’s involved – What activity does the university have in the foreign territory, in particular with regard to university staff and where/who is carrying out these activities.
• False economy – if not dealt with correctly what may seem, at first, a reasonable cost for the set-up of the business activity, may go on to incur expensive penalties later on re individual income tax (IIT), corporation tax and VAT filings.
• Regulatory factors in the foreign territory – for example, the tax authorities in China differ in each region. 
• Political factors in the foreign territory – you have to abide by their terms which can lead to delays in decisions, and in some cases they will only deal with someone in person and not via correspondence.

Permanent Establishment (PE) 

The key driver to establishing whethera permanent establishment is formed, is when a fixed place of business is set up in a foreign territory. This in turn will result in a tax liability for university staff if actively working there. Therefore, potential obligations for IIT, VAT and local corporation tax should be addressed.

What other factors would indicate that a PE has been formed?   

• A dependent agent, working exclusively for the university; 
• A business activity being carried out, possibly undertaken by university staff;
• A university logo, a name possibly including the UK university’s name has to be registered and approved by the authorities, which in turn forms a PE;
• Internal factors which raise questions, such as visa applications from academics or advances for staff travel to a foreign territory. Insurance requests in relation to overseas trips for academics.

 If a PE is formed what do you need to do?

• Obtain local licenses from the authorities
• Open bank accounts in the territory
• Register for local and indirect taxes
• Compliance and returns: for IIT , CT, VAT and Social Security
• Cost of local & UK professional services
• Check tax treaties for the foreign territory to check for for tax reliefs

Even if a PE is not formed, there are still actions and obligations to consider – e.g. in China:

• Consider withholding tax, and at what rate
• If applicable withholding tax is based on deemed profit - profit margins are between 15-50%
• Corporation tax rate currently stands at 25%
• It’s likely the activity will be for education - if so it should be exempt from VAT
• Challenges for IIT in both UK and foreign territory so ensure good records are kept to support actions.

 The best way forward and suggested considerations for budget / risk / compliance / audit

• Check any plan fits with the university’s international strategy.
• Involve all key stakeholders of the business by having regular meetings in the UK, and inform counterparts in foreign entity of a timetable of what is required and when in relation to activity.
• Increase awareness in UK university of dialogue required when foreign territories are being considered.
• Identify staff travelling overseas and why -  check insurance details and what type of insurance was taken out for the trip.        
• Tax authorities in foreign territories appear to be receptive to pro-active disclosure.
• From a risk and therefore audit perspective, dependent upon materiality, are your counterparts in the foreign territory accounting for tax accurately?
• Ensure you go about a regularisation and review of any previous historic partnerships.
• Draw up a fixed plan of business for the PE if formed and, if not look at compliance /risk and budget of the activity.
• Create an overall procedural plan, of which the above should form the majority
• Inform auditors of the new business activity, to stave of potential reputation risk/damage.