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Management charge from Mauritian subsidiary to UK

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Apologies for what might be a simple process, but I have not come across this before so any help would be useful.

We have recently set up a subsidiary company in Mauritius, wholly owned by the UK company.  
There are staff and office costs in Mauritius and these will be recharged back to the UK company.  The Mauritius company has its own bank account, so the UK will send money to enable them to pay wages etc.

For accounting purposes, is the best way to arrange a monthly management charge invoice from Mauritius to the UK, with a markup, and then the UK pays these invoices?  Or is it best to a monthly journal and then do an annual invoice once that year end is finalised?

The VAT is another issue, but I will have to check this with the Mauritius authorities as I don't know whether Mauritius would charge VAT on a management charge to a UK company!

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By paul.benny
23rd Jul 2020 10:51

What exactly is your subsidiary doing? I can give you more a better answer if you can be more specific.

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By kevin01
23rd Jul 2020 10:58

The people are a mixture of Developers, Test Analysts and a Business Manager. They do work for our clients, who are invoiced from the UK - website maintenance, digital analytics, that sort of thing
Hope that helps, and I appreciate your reply

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By paul.benny
23rd Jul 2020 12:31

So you're outsourcing some services to a subsidiary in Mauritius and not trading in-country.

If I was doing this, I'd probably invoice and pay a fixed monthly amount (to provide cash for the subsid) and true up at year end. The bigger question is what mark-up to add.

OECD guidance on transfer pricing (ie cross-border invoicing between related parties) requires the parties to charge an arms-length price. The best way of establishing this is to find a market price - in the jargon, a comparable uncontrolled price (CUP). You can adjust for some lack of complete comparability. For example in a group situation, not having spend on sales and marketing might mean the seller would accept a lower price.

A couple of caveats to that: the UK is an OECD member and HMRC will expect compliance; Mauritius is not and their tax authorities may have an entirely different view of the world. Presumably you have some advisers there who can help.

Mauritius has lower corporate taxes than the UK, so you may well want to earn more of your profit there. I know nothing of double taxation treaties between the countries, no whether there are any restrictions on extracting profits/cash, nor further taxes that might arise.

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Replying to paul.benny:
Psycho
By Wilson Philips
23rd Jul 2020 12:40

paul.benny wrote:
the UK is an OECD member and HMRC will expect compliance;

Which might not be too onerous if the company is small for T/P purposes.
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Replying to Wilson Philips:
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By paul.benny
23rd Jul 2020 16:30

Thank you. I wasn't aware of the exemptions for Small and (some) Medium companies.

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Replying to paul.benny:
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By kevin01
23rd Jul 2020 12:43

thank you so much Paul.
I have briefly spoken to Mauritius advisers and they have mentioned a 5% markup as a guide, but given your comments, it may need some more thinking on this.

Regarding the taxes, we have advisors who can help with that - there will be tax to pay in Mauritius

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Replying to kevin01:
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By paul.benny
23rd Jul 2020 16:33

5% feels low although it does very much depend on the facts.

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Replying to paul.benny:
Red Leader
By Red Leader
23rd Jul 2020 18:36

paul.benny wrote:

5% feels low although it does very much depend on the facts.

Agreed. Difficult to argue with 10-15%.
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