UK and USA DTT

It is essential to establish the role of the agent. This will be the person who conducts work for the UK entity dealing with the end user. These rules do not cover work done directly with a customer; there is no agent in the chain if the UK is dealing directly with the customer.

The answer lies in the Double Taxation Treaty that the UK has with the USA. UK/USA Double Taxation Agreement – 2002.

Firstly, Article 7, Business Profits applies. Paragraph 1 confirms that the USA will only be entitled to tax if there is a permanent establishment in the USA. That is to say, if the UK company has a permanent establishment in the USA. Any profits so earned must be calculated in accordance with the balance of the paragraphs in Article 7.

What constitutes a permanent establishment (PE)?

Article 5 of the UK/USA Treaty covers this topic. In particular, where agents are concerned and there is no physical establishment, paragraphs 5 and 6 apply.

Paragraph 5 looks at where the agent is not independent (quite likely an employee); a PE will exist only if that agent is able to conclude contracts that are binding on the UK company. If this is not possible, having an employee in the USA will not constitute a PE.

Paragraph 6 looks at the position where the agent is independent. Provided the agent is acting in the ordinary course as an independent agent, no PE will exist.

What are the implications of this?

No PE. The USA is not entitled to tax at all. Any withholding tax, which may have been deducted, should be fully refundable in the USA. No credit may be claimed against the UK tax. Section 33 of the Taxation (International and Other Provisions) Act 2010 only allows a credit where reasonable steps have been taken to minimise the overseas tax by:

(a) under the law of the non-UK territory, and

(b) under double taxation arrangements made in relation to that territory.

Where there is a PE and we have computed the profit in accordance with Article 7, then that tax is available as a credit against the tax due on the assessment of that profit in the UK. Tax will be due in the UK on a worldwide arising basis. In other words, the UK/USA Treaty does not provide an exemption from UK tax on the profit but does allow a credit for the tax against UK tax on the profit.