Establishing operations abroad

Mary Nyhan, Principal, Nyhan Tax Advisers

18/09/2014 1

Summary • Tax implications

• Structure abroad: Subsidiaries, agents, new businesses abroad

• Related Financial implications

• Risks, benefits and landmines

• Case study

18/09/2014 2

General principles• Time spectrum

• Keep it simple

• Tax should not solely dictate your structure/approach

• Leverage off Irish support bodies and other Irish companies

• Don’t start from scratch

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General principles

•Do background research and know your goals/problems before speaking with external advisers - price for time but make sure you manage their time

•Local face to face knowledge is key

•Balance the additional revenue-v-costs of overseas location

•Be aware of constant changes

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Taxation • Corporation Tax

• VAT

• HR issues and Payroll Taxes

• Other taxes

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Corporate Structure – initial

• Initially marketing and business development

• No fixed place of business

• Independent agents

• No corporation tax or VAT presence

• If not broken, don’t fix

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Corporate Structure – establishing

a presence

• An office or warehouse

- Corporation tax or VAT/Sales tax presence?

- Less than 6 months?

- Limited human presence

- Employees but not concluding contracts

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Corporate Structure – establishing

a presence

• Remote servicing

- Constant change

- Presence of server/website not sufficient

- Credit card sales processed in Ireland

- Limited human presence

- Worked example

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Corporate Structure – establishing

a presence

• Branch

- Independent agents become employees

- Start concluding contracts

- Fixed place of business with non-ancillary activities

- Registration

- Losses against Irish corporation tax

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Corporate Structure – well

established

• New company

- local shareholder required ?

- Tax residence

- Board of directors

- Strategic presence

- Tendering process

- Reporting obligations

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Corporate Structure – well

established

• Agency agreement with local partner

- Key benefit evaluated

- Read the small print

- Testing the waters

- Agreement is key

- Exit arrangements

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Corporate Structure – well

established

• Agency agreement with local partner

- Restrictive covenants

- Common brand

- Guarantees and risk

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Corporate Structure – well

established

• Acquiring overseas business

- Evaluate benefit

- Historic Risk

- Set up new JV company

- Joint contribution preferred

- Deferred consideration, if any

- Charge into JV for Irish time and materials – mark-up

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VAT and Sales Tax

• Easier to have a presence for VAT/Sales Tax than corporation tax

• Competing with local service providers

• Beware of timing of VAT refunds

• 2015 VAT changes

• Sales tax: Subject to constant change

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US Sales Tax

• Exemption if product is onsold to the customers

• Retail sales

• Vendor or customer

• Presence in the State – vendor

• Warehouse creates presence and possibly local independent agent (affiliates)

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US Sales Tax

• Amazon: New York

• Illinois: Favour of retailer

• New Mexico & Oklahoma: where no nexus

• Rate varies per state

• Be aware of sales tax and effect on cash-flow

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2015 VAT changes

• Electronically supplied services to private individuals

• Digital video, eBooks and music

• Currently, place of supply is Ireland

• From 1 January 2015: EU state

• Mini One Stop Shop Alternative but no VAT recovery if used

• Review of systems now

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Corporate Structure – US example

• Irish company

• US customers place online orders

• Retail sales

• Warehouse

• US bank account – personal attendance

• Initially, independent agents for retail fairs etc.

• PO box for cheques and profile, business cards

� Profit attributable

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International HR issues

• Importance of a written policy

• Gives consistency

• Manages employer risk

• Greatest “risk” area

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0verseas income tax

• > 183 days and costs borne by local entity

• Who is responsible for the taxes – employee or employer

• Corporate governance perspective

• Local payroll providers

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0verseas income tax

• Due to modern commuting and shorter-term projects, risk of Irish tax continuing to remain.

• Clear communication.

• Employee agreement

• Critical to have a procedure to collect the second layer of taxation applying and ensuring that this amount is refunded back to the company

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Illustrative example

• Joe works for an Irish company but works from the company’s UK branch.

• He leaves Ireland every Monday morning and returns to Ireland on Friday evening to spend the weekend with his family.

• On average, Joe is in Ireland for 160 days each year.

• Joe’s salary will be subject to Irish tax given that he is Irish tax resident. An individual is Irish tax resident if he spends more than 183 days in Ireland in a tax year or 280 days between the current and previous tax year.

• Joe will be subject to UK tax as he is working in the UK

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Illustrative example

• Irish Salary 100

• Irish Tax 45

• UK tax 35

• Individual receives 55

• Company pays 45

• Income tax return required to claim refund 35

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Illustrative example – solution?

• Change employer to UK company

• Irish PAYE does not apply

• No double withholding

• Cash-flow position improved

• Split contracts?

Employee position can influence corporate structure

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UK tax residence • Change from 6 April

• Based on ties to the UK - accommodation, work > 40 days, family, > 90 days

• Treaty override still applies

• 4 ties:46 days

• 2 ties: 121 days

• 1 tie: 183 days

• Still 60 day test and cannot be part of greater period

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HR Policy

• Policy on equalisation:

- Same as never left Ireland?

- Company gets benefit of overseas tax rates?

- Individual gets benefit of lower tax rates

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HR Policy

• Policy on equalisation:

- Same as never left Ireland?

- Company gets benefit of overseas tax rates?

- Individual gets benefit of lower tax rates

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Social Security

• Irish Social security

• E101 procedure to remain on the Irish system : Irish employer

• Factor when deciding on a branch or a subsidiary

• Transferability of benefits between EU only but subject to restrictions

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Reimbursement of expenses

• Actual-v Irish civil service rates

• Away from “temporary” place of work

� Affects company-v-branch decision

• Greater than 6 months, day civil service rate reduced by 50%

� £26 is 50% for London

• Records are key

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Reimbursement of expenses

• Local rules

• Some local rules do not reimburse temporary expenses e.g. Poland

• Need to factor into package to the employee

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Reimbursement of expenses – UK

• Similar criteria to Ireland

• Dispensation so that employee tax returns not required

• Working rule agreements for particular sectors and in terms of norms

• No specific flat rate

• 24 month definition of temporary

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Financing structures

• Keep it simple

• Dutch financing structures are not for everyone!

• One tax relief for interest sufficient

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International holding companies

• Benefits of the Irish regime

• Avoid unnecessary layers of taxation

• Match companies to country of trading

• Separate group for international operations – to manage risk?

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International allocation of profits

• Keep it simple

• Arms’ length

• Risk linked to profit

• Transfer pricing reports – benchmarking requirements

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International allocation of profits

• Get benefit of Irish 12.5% rate

• Technology and IP in Ireland

• Licencing arrangements

• R&D tax credits in Ireland

• UK – 21%

• US – 35% plus

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Financial implications

• Evaluate cash-flow on after-tax basis

• Tax benefits should not turn an overseas project from loss-making to profitable

• Temporary VAT and Payroll VAT costs

• Allow margin for changes to tax regime such as Sales Tax

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Financial implications

• Withholding taxes (usually on Revenue)

• Contract terms

• Specific local taxes

• Foreign exchange risk to the extent we cannot match

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Questions

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Contact Details

Mary Nyhan

Tel: 01 5240294

mary.nyhan@nyhantaxadvisers.com

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Thank you

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