1. International Growth Strategies
for SMEs:
The Tax Aspects
RACHEL LOCKWOOD BSC ACA CTA
Oury Clark Chartered Accountants
25 January 2012
Repatriation of Profits
UK Subsidiary
• Default
• The profits generated by a UK subsidiary are taxed in the UK
as described in the first session
• Option
• “Check The Box Routine”
• UK and US results consolidated for tax purposes in the US
• Irrevocable
Repatriation of Profits
Flow Through Entity
• Profitable
• Allows all of the income and deductions (including foreign taxes) as
being treated as earned directly by the US parent entity. As a result,
the foreign taxes are considered direct taxes and are available for
credit to the owners
• If not elected S corporations and partnerships cannot claim the
deemed paid (indirect) tax credit. That is, the taxes paid by the foreign
subsidiary are not available for credit to the owners thus creating
double taxation
• Loss Making
• Allows US parent to net UK losses against US profits in the year they
are made
• Obtains tax relief immediately

2. Repatriation of Profits
Non Flow Through Entity
• Profitable
• Do not elect for Check the Box
• UK Profits are then only taxed in the US when repatriated
• Company can either keep profits in UK and reinvest or pick and
choose when to repatriate to the US depending on the US
company’s profit levels and tax rates etc
• Loss Making
• Allows US parent to net UK losses against US profits in the year
they are made
• Obtains tax relief immediately
Repatriation of Profits
UK Profits
• The UK profit is arrived at after transactions with the US
parent company
• These transactions are only fully tax deductible if on an arm’s
length basis
• If they are not on an arm’s length basis you can end up with
mandatory adjustments enforced by HMRC in the UK which is
not adjusted for in the US parent company thus resulting in a
tax disadvantage group wide.
Transfer Pricing
Intra-Group Trading/Charges
• Value using transfer pricing regulations
• Large co or member of a large group – formal transfer pricing
agreement required
• All other companies – must be able to justify pricing policy to
HMRC

3. Transfer Pricing
Intra-Group Trading/Charges
• Methods:
Cost Plus
Mark-up
Where intra-group services are charged,
for example
accounting/finance/marketing etc. An
appropriate method is cost plus mark up,
say 5%
For example where the US parent
company’s accounts department also
manage the UK company’s books and
records a cross charge of cost plus a
mark up is appropriate
Comparable
Uncontrolled
Price
Compares the price charged for the
same/similar goods to a third party. This
is considered the most reliable method
available
For example, where you sell the same
product/service to a third party you
would sell to a group member at the
same price
Profit Split Calculates the profit and splits those
profits based on the contribution of each
entity and as such consistent with what
would have occurred at arm’s length.
For example the final profit margin
made on a product will be split amongst
the group members involved on a
reasonable basis
Interest
Intra-Group Loans
• Charge commercial rate of interest
• No WHT on interest paid to US
• Level of loan = reasonably expected to be obtained from a
third party
• Thin capitalisation
• UK company funded by greater amounts of debt in comparison to equity than would be
normal in an arm’s length funding arrangement.
• Decreases UK profits by excessive interest payments
• UK tax advantage obtained
• Interest is disallowed under transfer pricing rules
Dividend
Dividends
•No WHT on dividends paid to US

4. Royalties
Royalties
• Right to receive a payment on a sale made by another person
• Double tax agreement exempts from deduction of tax at source
• Only if application made in advance
• If no application – 20% deduction at source
Research & Development
Definition
• R&D is defined as comprising ‘creative work undertaken on a
systematic basis in order to increase the stock of knowledge and
the use of this stock of knowledge to devise new applications’.
• R&D must fall into the field of science or technology.
• R&D tax relief is only available on expenditure of a revenue nature.
• 100% Capital allowances available on capital expenditure used in
R&D
• There are different schemes and reliefs available depending on the
size of your company.
• Do not have to own any 'intellectual property' (IP) attributable to its
R&D expenditure as a condition of being able to claim.
Research & Development
SME – Definition
• Up to 500 staff
• Turnover up to €100m
• Balance sheet total up to €86m

5. Research & Development
SME – Key Points
• 200% enhanced deduction (additional relief of 100% on top of the
relevant expenses themselves, therefore total relief of 200%)
• Expenses qualifying for enhanced deduction:
• Staff costs excluding benefits in respect of worker employed in
research and development. Costs of support/admin staff is NOT
included.
• Software or consumable items including fuel, power and water.
• Tax credit payable if loss making
• Can claim for expenditure on R&D it sub-contracts to others (sub-
contractor does not have to be based in UK and can be connected)
Research & Development
Large – Key Points
• 130% enhanced deduction (additional relief of 30% on top of
the relevant expenses themselves, therefore total relief of
130%)
• Qualifying expenses as per SME scheme
• No tax credit payable
• Can claim for contributions to independent research carried
out by charities, universities and scientific research
organisations
Research & Development
Developments
• An increase in the rate of R&D tax credit under the SME
scheme to 225%
• Removal of the Pay As You Earn (PAYE)/NICs cap on the
amount of payable credit that can be claimed under the SME
scheme
• Removal of the minimum expenditure rules (i.e. £10,000 of
qualifying R&D during the company’s accounting year)

6. Patent Box Regime
Patent Box Regime
• 10% rate of corporation tax on profits attributed to patents
• Regime will apply from 1 April 2013
• Conditions to qualify for regime:
1. Hold IP Legal Ownership
Beneficial Ownership
Exclusive licence
Participation in cost share agreements
2. Actively engage
in qualifying
development
Activity which creates or contribute to the creation of the patent
Activity which develops the patent
Activity which incorporates the patent
3. If part of a group
– Active ownership
condition
Company must perform significant amount of management activity in
relation to all/almost all of qualifying IP rights held by the company
VAT – Useful Information
VAT
• Indirect tax charged on most goods and services
• VAT registered businesses can generally reclaim VAT they have
paid
• Rates of VAT:
Standard Rate 20%
Reduced Rate 5%
Zero Rate 0%
VAT – Useful Information
Registration
• Limited Company
• Compulsory if taxable supplies >£73,000
• If taxable supplies <£73,000 you can voluntarily register for VAT
• If you are registered for VAT your invoices must include certain
details to ensure they comply with VAT legislation e.g. Sequential
invoice number, date of supply etc
• Permanent Establishment
• All above applies in the same way to the PE
• If US company is invoicing the customer rather than PE then
requirement falls to US company

7. VAT – Useful Information
UK Limited Company
Goods - Import
• Importing goods to the UK
• Pay irrecoverable import duty
• Pay VAT – recoverable if VAT registered
• Distribute across Europe using UK’s strong transport links
avoids paying any further import duty/irrecoverable VAT in
other EU countries if not registered there
VAT – Useful Information
UK Limited Company
Goods – Selling
• Sell to UK
• Charge applicable rate of VAT on your product
• Sell to EU VAT Registered business
• Reverse charge mechanism
• Obtain customer’s VAT number and proof of export
• Sell to EU Non-VAT Registered customer
• Charge applicable rate of VAT on your product
• Sell to Outside EU
• Outside the scope of UK VAT
VAT – Useful Information
UK Limited Company
Services
• Basic rule is that the place of supply depends on whether
or not the customer is a business
• Business – supply is where customer belongs
• Non business – supply is where supplier belongs
• Exceptions to the rule:
• Services relating to land – where the land is situated
• Supplies of cultural/entertainment performances –
where the performance takes place
• Passenger transport – where the journey takes place

8. VAT – Useful Information
Trade Direct
• Goods
Trade directly
in the UK
Importing goods to the
UK with onward sale to
a UK customer
Need to register for VAT
if you exceed the
£73,000 threshold
Trade directly
with the UK
Selling to a UK customer
with the customer
importing the goods
No requirement to
register for VAT
VAT – Useful Information
Trade Direct
• Services
To UK VAT
registered
business
UK Company uses
reverse charge
mechanismto account
for VAT
No requirement for US
company to register for
VAT
To UK non-VAT
registered
business/
individual
US Company would have
to charge VAT if
threshold breached
Requirement to register
for VAT if £73,000
threshold exceeded
VAT – Useful Information
Distance Selling
• Where you sell to the end user/non VAT registered business in
another EU country
• Must monitor the VAT thresholds in each individual EU
country and register for VAT in each country if/when the
threshold is breached.
• Administrative burden which unfortunately is unavoidable
across the EU

9. Rachel Lockwood
Rachel.Lockwood@ouryclark.com
London Thames Valley USA
10 John Street 58 Herschel Street 101 California Street,
London Slough Suite 2450 PMB058,
WC1N 2EB Berkshire, SL1 1PG San Francisco,
CA 94111, USA
+44(0)20 7067 4300 +44(0)1753 55 1111 +1 (415) 946 8984