Overseas tax costs may arise that exceed the UK tax costs arising on the same income. Double taxation credit relief may be available, to offset the foreign tax paid against the UK tax arising, but this is restricted to the lower of the UK tax and the foreign tax arising. So, if the foreign tax is greater than the UK tax, an incremental overseas tax cost arises.
In such circumstances, clients normally wish to factor such additional costs into their pricing model for the work if they possibly can. Of course, if the contractual terms have already been negotiated and agreed, and the contract signed, there is little prospect of being able to do so.
This is why such diligence must be undertaken before pricing negotiations are underway.
When factoring in incremental tax costs, it is necessary to consider ‘grossing up’ the amount to account for the tax due on the increased charge.
For example, a client who will suffer corporate WHT of 10% on an overseas contract, that they will be unable to recover, may consider grossing up their pricing by 100/90 to reflect this additional cost. A normal charge rate of 100 would therefore be grossed up to 111.11, which, after deduction of the 10% WHT (11.11) would result in the client receiving a net, after tax, amount of 100.
Similar principles apply when grossing up employee income tax costs in accordance with any ‘Tax Equalisation Policy’. When assigning employee’s to work overseas, such a policy ensures employees’ net salaries remain the same as if they had continued to work in the UK regardless of any differences between the foreign income tax and UK income tax payable.
We would normally also recommend factoring in estimates of professional fees for compliance, which can be expensive.
Factoring in such incremental costs, achieves our key ‘Commercial’ objective, by avoiding the erosion of our client’s hard-earned profits and passing such costs onto their customer.
Our next blog will discuss the importance of ensuring our clients and their employees fulfil all their overseas tax reporting and paying responsibilities in order to avoid any tax compliance failures.
For more information please contact Ruth MacNamee (firstname.lastname@example.org) or your usual AAB contact.