Returning to tax and how much you pay abroad

Company taxation is a controversial area as global giants seek to minimise liabilities, writes Rachael Singh, who offers a guide to overseas tax strategies

Emerging markets constitute some of the major growth opportunities for companies, but the complex web of international tax liabilities can be an expensive mistake for those who underestimate its importance.

A company has a duty to shareholders and investors to adopt the right tax strategies to ensure it is not overpaying on liabilities.

However, adopting the right strategy in emerging markets, such as Brazil and Africa, can cause difficulties because they do not have the historical tax infrastructure of developed countries.

The UK has one of the lowest corporate tax rates in the world at 24 per cent, set to decline to 22 per cent in the next fiscal year, making it competitive when compared to emerging markets, such as India, which has a tax rate of 40 per cent, China 25 per cent, and Brazil 34 per cent.

But a company will only have to pay liabilities in those countries in which it has a permanent establishment, such as a sales office or warehouse, explains Stephen Herring, senior tax partner at international accountancy firm BDO.

The UK has one of the lowest corporate tax rates in the world at 24 per cent, set to decline to 22 per cent

The Organisation for Economic Co-operation and Development (OECD) has defined what constitutes a permanent establishment and companies must weigh up the expense of having one.

If a permanent establishment is needed, the business will pay liabilities on the difference between the UK and the foreign country.

If an establishment is set up in Russia, but the company is headquartered in the UK, it will pay the 20 per cent Russian rate, then a further 4 per cent in the UK bringing the total to 24 per cent.

Alternatively, a company can have a preparatory office, which would allow a small operation of personnel to conduct a service of the business, such as marketing, but not sales of a product or service, without having to incur extra liabilities, according to OECD discretionary rules.

A company can also choose to franchise its operation and allow local entrepreneurs to run the operation at a fee, which will incur no tax liabilities for the group. However, the local franchisee must pay royalties to the parent company as well as local tax charges.