Enjoy paying tax? Unlikely. But it would be galling if use of an overseas agent or distributor resulted in a permanent establishment, and so a taxable presence in that overseas jurisdiction.
If care is not taken, and the arrangements do give rise to a permanent establishment overseas, then the tax consequences can be extremely unwelcome. Not only may unexpected overseas tax arise; but it may only become clear some time later that such tax is due, at which point tax may already have been accounted for in the UK on the same profits or interest and penalties may have become payable, or both!
Whether you have a permanent establishment in another country will depend in large part upon that country’s local tax rules. Any or all of the following may in certain cases give rise to overseas taxation:
- acquiring or having a right to use particular premises whilst overseas (and including overseas addresses on business cards/website/adverts/stationery)
- employing senior sales persons overseas with authority to conclude contracts
- engaging third party agents overseas who are permitted to negotiate and agree pricing (including bulk discounts) or other contractual terms with customers, fulfil orders and/or deliver direct to customers
- selling products through branded areas or “concessions” within overseas department stores
In the context of appointing agents and distributors overseas, the most crucial factor is likely to be the nature of the contractual relationship with that agent or distributor.
Whether or not an overseas agent will give rise to a permanent establishment overseas will depend upon the facts. In particular, if the overseas agent has the power to, and habitually does, conclude contracts in the name of the UK principal, then the overseas agent may constitute a permanent establishment in the overseas jurisdiction, so giving rise to a taxable presence overseas for the UK principal. An important exclusion to this is where the overseas agent is truly acting independently in the ordinary course of his business.
Similarly, if the distributor is truly acting independently, buying and selling on its own account and in its own name. The distributor itself will then be liable to tax in the overseas jurisdiction on the profits arising as a result of its own sales activity in that jurisdiction.
In order to reduce the risk of a permanent establishment being created unintentionally, as first steps UK suppliers and principals should ensure when setting up contractual arrangements with distributors and agents that the distributor or agent is clearly acting in an independent capacity, and is remunerated on an arm’s length basis for the profits attributable to the activities carried on by them in the overseas jurisdiction.
If avoiding a permanent establishment overseas is not possible, then planning should focus on minimising the profits attributable to that taxable presence and/or ensuring no double taxation in the UK and overseas.
In some cases, it may even be beneficial to create a taxable presence overseas, particularly where overseas tax rates may be lower than in the UK!