Global Mobility: Dealing with an Unexpected Permanent Establishment

Elaine Barber (University of Sheffield), Davyd Fisher and Paul Brown (Grant Thornton UK LLP)

Joint Educational Programmes in China and ‘clarification’ of law

Where a UK employee works overseas, the country in which they undertake their duties has the right to charge income tax on any employment income relating to that workday. This means that even one workday in an overseas territory can trigger an employment tax liability (and an employer withholding obligation) in that jurisdiction. The double tax treaty between the UK and the overseas territory may override any foreign tax, however if the overseas work triggers a permanent establishment for corporate tax purposes, this override often does not apply.

Key Takeaways:

-        Understand what your joint educational institution in China has negotiated with the authorities

-        Joint education programmes in China will create a permanent establishment meaning that employees are likely taxable from day 1 in country

• The ‘183 day’ rule is only one part of any potential tax exemption in the host country

-        Keep records of all individuals working overseas, their travel pattern and their role

-        Keep funds in China to a minimum as it is difficult to repatriate money to the UK

-        Work closely with advisers in the UK and China to ensure that both sides of the equation are considered

Actions from start to (almost) finish

-        Clarification of law issued by Chinese authorities in February 2018 regarding Joint Educational Programmes. Confirmed that Joint Education Programmes would be treated as a Permanent Establishment (PE) with resulting tax consequences

-        As it was a ‘clarification’, it was backdated and disclosure was potentially required from the beginning of the programme

-        During Chinese tax disclosure process, the University of Sheffield discovered that the local institution had negotiated a low corporate tax withholding rate BUT this was on the basis that the programme was a PE (i.e. this issue could have been identified at the outset)

-        University of Sheffield employees kept day count in country below 183 days per 12-month period, however:

• Due to presence of a PE, day counts largely irrelevant

-        Impact on:

• Corporate Tax, already being paid correctly through withholding
• VAT, not due on fees
• Employment (income) tax, withholding due from day 1 of the programme

-        Action required with respect to Chinese filings:

• Gather travel data for all employees across all years
• Establish what elements of income were taxable in China (includes employer’s pension contribution)

1. Prepare monthly income tax withholding calculations
2. Consider potential social security charge depending on Province / specific factors

• Negotiate with Chinese authorities for penalties / interest

-        Outcome for University of Sheffield in China

• Authorities agreed to only assess a 5-year period (meaning one year of programme was not caught)
• Penalties waived as a result of negotiations

-        Action required with respect to UK filings:

• Requirement to claim a foreign tax credit from the UK authorities to avoid double taxation.  Three potential options to approach this claim:

1. Ask employees to file a UK tax return, make the foreign tax credit claim and mandate refund back to the University
2. Gross up Chinese tax payments for UK income tax and NIC (costly, with additional tax likely payable in China)
3. Agree a pragmatic approach with HMRC to allow a bulk foreign tax credit claim via a disclosure letter

• Option 3 currently being pursued, with positive verbal response from HMRC. Required signed mandate from each employee for any refund to be paid directly to the University
• Going forward, operate an Appendix 5 (net of foreign tax credit) agreement to allow upfront foreign tax credit through adjustment of PAYE

Challenges

• Require access to all employees’ travel data
• Require copies of all employees’ passports
• Taxes (and penalties) can only be settled from a Chinese bank account, HOWEVER, it may not be possible to convert Chinese income (RMB) back to pounds (GBP) due to currency restrictions

You can access the session slides here.