04 July 2019 
Andrea Marshall, Tax Specialist
Elizabeth Aspinall-Johns (PwC)
There was a running theme across my breakout sessions on Malaysia and Chinese WFOE’s at the BUFDG tax conference on operating internationally, and it’s one that I speak about regularly with the sector and my clients, and that’s tax governance.
Good tax governance is just as important when operating overseas as it is here in the UK. And against the backdrop of the Office for Students (OfS) transition period operating under HEFCE’s accountability framework coming to a close at 31 July 2019 and the OfS’ new regulatory framework taking effect thereafter, the themes coming out of the sessions about getting tax governance right have never been so relevant.
Along with all the people related tax impacts, add to this the wider considerations of cross border working, the closer working revenue authorities, BEPS, EU Mandatory Disclosure Regime (EU MDR), it’s feeling harder to operate internationally. When considering setting up an entity as part of the university group in another country, it’s important not to forget the tax treatment of the following actions:
How is the overseas activity going to be funded? Will the university be funding it with capital, perhaps a loan, or even cash?
If you are using university funds it’s important to consider whether these are charitable investments i.e. that the funds are being used for the benefit of the university and not for the avoidance of tax (whether by the university or any other person).
As part of your corporate tax return CT600E filings you will have either;
When setting up overseas, any investments or loans made to that overseas company would form part of the university’s Box E180 disclosure. The university needs to be satisfied, that as part of the process in setting up overseas, it has considered whether these are charitable investments, and you may like to keep on file supporting documentation for any funding of subsidiaries to evidence why you have signed off Box E180 in this regard.
How do you manage your overseas subsidiaries? Who are the key decision makers and where do they make those decisions, is it in the UK or in that country?
UK case law has developed the principle that a company that is incorporated outside of the UK may be regarded as UK tax resident if ‘central management and control’ of that company is exercised in the UK.
A lot of the Double Tax Treaties that the UK has with other countries will contain a treaty tie breaker which typically (though not always) places taxing rights with the country where the ‘place of effective management’ takes place i.e. where the day-to-day decisions are made, as opposed to the strategic decisions.
As part of the set-up process, it’s important to think about the approach the university will take to operating its overseas entity, taking into consideration the domestic tax laws of that country, and the Double Tax Treaty with the UK, in order to ensure that the correct tax filings are made. Even if this was not done at the outset, it does not prevent the university from undertaking a confirmatory check to ensure that it is satisfied that it is making the right tax filings in the right place.
In a worst case scenario, the subsidiary may be considered tax resident in both the UK and the overseas country, bringing additional compliance obligations with it. The onus of proof is on the taxpayer to demonstrate where management and control lies, subject to potential elections that can be made to manage the implications. Having documentation in place to evidence this is key should the university ever be challenged.
Do you have an overseas subsidiary that provides services to the university - such as support with recruitment activity overseas? Does the university pay for these services?
Transfer pricing legislation requires related parties (such as a university and its overseas subsidiary) to transact on arm’s length terms, i.e. as they would with unrelated parties, to ensure that taxable profits are matched with the location of functions, assets and risks generating value for the enterprise.
As part of this, particularly for universities, it’s important to consider whether it’s appropriate for any initial expenditure on expanding overseas to be borne locally (overseas), or whether this sits better in the university (in the UK) to the extent it is the university who benefits in the long-term from the expansion.
Tax Authorities around the world will expect the university to have in place sufficient contemporaneous documentation to demonstrate that all intercompany transactions in each accounting period have been undertaken on arm’s length terms and will expect the university to be able to provide this if requested - the volume and extent of this will vary depending upon the size of the activities overseas.
By way of example, as discussed at the BUFDG tax conference, the Malaysian Authorities (MIRD) do not have a concept of de-minimis as regards transfer pricing documentation and expect it to be in place by the date of the filing of the Malaysian corporate income tax return.
In order to achieve this, the university will need to first have in place a transfer pricing policy which summarises the functional analysis (activities and transaction flows) and identifies any relevant intercompany transactions whilst making clear the transfer pricing methodology that is applied. Having this in place will allow the university to prepare its transfer pricing documentation which provides an overview of the university group’s transfer pricing arrangements and describes how the transfer prices for each of the relevant intercompany transactions should be set.
Without a considered analysis and documentation, compliance issues can arise, exposing your university to corporate tax inefficiencies, labour intensive audits, increased scrutiny and penalties. It’s not too late to action this and if your policy or documentation has been in place for some time, why not give it a refresh!
The slides from the China session are here, and the Malaysia slides are here.
