Impact of US trade policies on UK companies

“Simon, how are we seeing businesses respond to sort of changing US environment over the last six months or so?
Yeah, well, it’s an interesting period where it makes us all think about how we trade in different locations. What Trump is trying to do in the States is to make sure that as much of the wealth that is generated in the US is taxed in the US, and in some ways that’s fair enough.

What we need to think about is actually the value chain, and where the value created in our goods or services that are coming from the UK and going into the US, where the value is added and therefore where we should expect it to be taxed.

And about that in the transfer pricing, comment in a moment. But ultimately there is a choice. When you are manufacturing, you could manufacture in the UK or in the US. If you do it in the UK, then you’re going to see a bigger tariff charge, being placed upon the goods being imported into the US.

If you have the manufacturing undertaken in the US with US labour, then you’ll see more of the profit generated in the US. But you’ll still actually have perhaps IP that you have provided from the UK that should be taxed in the UK.

And so it’s a balance there between value and jurisdiction. Perhaps you pick up on the transfer pricing and the tax aspects, for that.
Yeah, absolutely. I mean, so the fundamental principle of transfer pricing is that each country has taxing rights over the proportionate amount of profits based on each individual entity’s contribution to the value chain.

So whenever we’re making changes to the operating model, we need to think about the implications on the transfer pricing policy. And something like a change in manufacturing base would necessitate us to revisit that. Any kind of fundamental exit of assets from the UK might trigger an exit charge.

So we just need to make sure that any kind of long-term gain is worth that exit charge. Potentially, I think as well, we’re talking about transfer pricing, which is a direct tax concept. We mustn’t forget indirect taxes as well. There can be a bit of friction between, for example, transfer pricing and customs duty, and we need to make sure that all stacks up.

Penalties for customs duty can be a lot harsher than for direct tax, so it needs to be done as kind of one holistic exercise.
Sarah, one of the opportunities is to move people between the UK and the US, or elsewhere in the world and the US. What are the implications then, for tax purposes?

This is something that’s quite frequently overlooked. I think sometimes you’ll have senior personnel from the UK maybe going to another country to oversee setting up an operation over there or changing things. Often things get delayed, take longer than you think. This can give us issues around permanent establishment, for example, and also local payroll.

So again, it just needs to be thought about from the start so that can be monitored and any other unpleasant surprises avoided.
I guess so. And in today’s world, where it might be better to create a manufacturing presence in the US, so that we can meet Trump’s requirements of bringing business that needs to be undertaken in the US to the US, moving people — particularly senior people — is going to be likely.

We might then also need to think about what’s the right entity that the US business is going to trade through. Is it a permanent establishment, is it a subsidiary? And if so, how do we repatriate profits that we have made after appropriate taxation in the US back to the UK without paying tax again?

Yeah, absolutely. And frequently when we advise on these types of scenarios, it’s all about minimising that tax leakage when we’re trying to repatriate profits. And frequently we will work with US counterparts to get the right answer for what that structure looks like.”