SMEs and International Tax

Expanding a business overseas can be a new and exciting chapter for a business but in order to transact successfully overseas, the business must understand the various tax considerations to ensure they don’t miss out on profits and don’t fall foul of foreign tax regulations.

One of the main issues arising from overseas business transactions is Withholding Tax.

Withholding Tax (WHT)

WHT is a tax deducted at source by the customer in the overseas company. The local tax regulations of the country will determine the percentage deducted. SMEs must understand the implications of this and factor in ways to mitigate this tax otherwise it can become an absolute cost to the company.

First thing is to consider the rate that could be applied, the overseas country may have a double tax treaty with the UK and this means that the rates of WHT can be reduced to the treaty rate which is generally lower than the countries standard rates or in some cases reduces the WHT percentage to 0%. If a company is charged in excess of these rates, an application can be made to recover the difference. The success of an application will depend on the relevant countries’ procedures and deadlines.

The other way of mitigating the tax is by double tax relief. Double tax relief works by offsetting the tax withheld against the UK tax charge. This can mean in some instances the whole of the WHT can be offset and the UK liability is reduced to nil conversely however if there is a small amount of CT chargeable or the WHT tax rate is in excess of the UK CT rate (currently 19%) then the difference is again going to be a cost to the company.

What’s the answer?

It is important to create a dialogue with the customer at the beginning to understand what they are planning to deduct. Often problems can arise if there are disagreements as to the nature of the service, and therefore which rate to apply.

It may be that a gross up clause is included in a sale agreement which would effectively negate the WHT, This could create problems however if a customer does not wish to accept the increased values.

Further Advice

If you would like to discuss this article in more detail or you would like to speak with a member of our team, please call us on 01772 821021 to be put in contact with a member of our Tax team.