Working Overseas? Understanding the Resultant Tax Consequences

Our earlier blogs discussed the importance of “Understanding the Project” and “Reviewing the draft contract”, ideally before contract price negotiations commence. This blog explains how we use this information to research, analyse, understand and, where possible, mitigate, all the overseas tax consequences affecting both our client’s business and their employees.

Firstly, we analyse the domestic rules in the overseas country. Each country’s domestic law regulates when non-residents are liable to tax, e.g. UK resident companies working in an overseas country may be liable for Corporate Income tax (‘CIT’) there on the profits of a deemed “Permanent Establishment” (‘PE’) in that country. Alternatively, many countries impose a legal obligation, upon businesses resident there, to deduct “Withholding tax” (‘WHT’) when paying non-resident companies’ gross invoices. Many countries impose such WHT obligations on all payments to non-residents, whether or not they have performed any work in the overseas country!

We also consider any VAT and Customs Duty obligations our client will have in the overseas country, and how to obtain any reliefs available.

The overseas country’s domestic law also regulates the circumstances in which non-resident individuals working there are liable to Income Tax (‘IT’) and/or Social Security (‘SS’) in that overseas country.

We then ascertain whether there exists a “Double Tax Treaty” (‘DTT’) between the client’s (and/or employees’) country of residence and the relevant overseas country. DTTs, of which over 3,000 exist world-wide, aim to eliminate any double taxation of income arising in one country and paid to residents of another. If a DTT is in place between the two countries, the rules contained within it will supersede the domestic legislation in each of those countries.

The influence of DTT’s cannot be underestimated. The DTT’s dictate whether companies and individuals resident in one country, will have any CIT, WHT or IT liabilities in the overseas country concerned.

Each DTT is different, with varying definitions and WHT rates, so each requires to be studied very carefully to interpret the exact tax consequences attaching to the work patterns and circumstances of the client and their personnel. This is why it is crucial to firstly understand the details of the project as set out in our earlier blogs.

Once all the overseas tax consequences are understood, and any mitigated where possible, we must then consider any incremental tax and compliance costs that will arise, affecting the commerciality of the overseas contract.

Our next blog will discuss how we can factor such additional costs into our client’s pricing model for the work, thus avoiding erosion of hard-earned profits and passing these costs onto the client’s customer.

Please don’t hesitate to contact us for more information about the tax implications of working overseas.