Dealing with foreign taxation

Question

We are small company that provides services via the internet to many overseas customers. We do not have any overseas offices. We currently have an issue with customers in Kuwait who tell us they are obliged to retain 5% of any sale unless we can provide a certificate from the Kuwait Ministry of Finance.

We have contacted a tax advisor in Kuwait but their fees are high relative to our sales to Kuwait. Where can we find out more and at a reasonable cost?

We have had issues with customers in other countries including Canada and Peru and are currently looking at Morroco so general guidance dealing with local taxation would be useful.

Answer

Hi Fiona,

The first thing to check is whether there is a double tax treaty between the UK and the relevant country, and what that says. These are all available on HMRC’s website. Most UK tax treaties include the provision that business profits are only taxable in the country of residence unless there is a branch or ‘permanent establishment’ carrying out business in the other country. This should protect you from Kuwaiti tax (provided that the particular tax being deducted is covered by the treaty). The UK authorities can supply specific treaty claim forms for certain countries that require this, whereas for others it will be necessary to obtain a ‘certificate of residence’ from HMRC confirming that you are entitled to benefits under the treaty. This will need to be supplied to the payer and/or the local tax authorities.

Therefore, your first port of call should perhaps be closer to home, either to HMRC direct or to a suitable tax adviser to represent you. If that UK adviser is a member of a good international network, such as Russell Bedford International, they will also have access to local advisers in overseas countries in order to quickly establish the most cost-effective solution.

Regards,

Phil Moss
Tax Partner
Lubbock Fine Chartered Accountants, London
Member of Russell Bedford International
PhilMoss@lubbockfine.co.uk
T: +44 20 7490 7766

Answer

Hi Fiona,

Depending on the amounts in question it might be more cost effective to increase future charge rates to your Kuwaiti clients to account for the 5%.Even to get an intermediary company with the appropriate certificate from the Kuwaiti authorities to invoice your Kuwaiti clients on your behalf and remit funds to you would likely cost around 5%.

As for obtaining the certificate yourself, as you’ve found you’d need a local specialist and they are not cheap. Is it justified given the WHT is 5%?

In countries where the withhold rate is higher like Morocco (10%) it may be more prudent to engage a local specialist.

Lastly, and this might be something Phil Moss is better positioned to answer, but you may be able to offset such foreign tax withholds from your UK corporation tax.

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