Beware of foreign tax pitfalls

Written on the 9 September 2009

GOLD Coast businesses are expanding into global markets, but are sometimes unaware of income tax obligations in other countries.
Even though the business may not leave the Gold Coast, it may still trigger an income tax liability abroad.

Director of HLB Mann Judd South East Queensland Janelle Manders, advises that when dealing with global markets, it is essential to check income tax rules in advance.

“The main issue to consider is whether your business on the Gold Coast is carrying on a ‘permanent establishment’ in another country. It is not just companies that are caught; the issues raised cover all entities operating a business including individuals and partnerships as well,” explains Manders.

Under the various tax treaties Australia has with other countries, if an entity of one country has a ‘permanent establishment’ in the other country, the business operated in the ‘host’ country is subject to that country’s tax regime.

For example, a Gold Coast business sells goods through a ‘permanent establishment’ in the United Kingdom. Under the Double Tax Agreement, it may have to pay income tax in the UK based on their Income.

Tax legislation
A ‘permanent establishment’ is a fixed place of business in the other country.

There are a number of questions which determine whether one exists:
• Is there business activity in another country?
• Is there a business facility in that country?
• Does the business have a permanent place to operate in the country or spend significant time in the country?
• Does the business have management and supervisory control in the country?
• Does the business have right of use over equipment, premises?

A Gold Coast business that has managers operating from premises in another country, managing the business in that country
may well be regarded as having a ‘permanent establishment’ in that country and be targeted by their revenue authorities.

Manders says building and construction sites that last for more than 12 months would also be regarded as a permanent establishment.

“The determination of whether a ‘permanent establishment’ exists is one of degree and depends not only on the facts of each individual case but also the interpretation by the host country,” she says.

What does this mean for your business?
To protect your business from any unwanted tax consequences, keep in mind the following:
• Review what is happening overseas
• Consider whether your business is operating a ‘permanent establishment
• If the business is carrying on a number of those activities, err on the side of caution, obtain advice both within and outside Australia on whether there is an issue
• Consider your future growth plans before you start
• Planning is essential to obtain the results you require
• Do not stop thinking about your situation. What you had intended may not be what you actually implemented.
• Unexpected consequences left unchecked may prove fatal for your business overseas.


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