On 23 June 2016 there was a historic vote by the UK public to leave the EU and article 50 was triggered in March 2017. The “Brexit” negotiations with the EC and the other EU member states have commenced and the UK will have two years to negotiate agreements with the EU until it is forced to leave. The effect on taxation is expected to be significant and therefore businesses, not just UK-based but almost all international businesses trading in or with the UK and the EU, need to be prepared.
The immediate effect of Brexit will be felt in the area of indirect taxes such as customs and Value Added Tax (VAT). Currently, the UK is part of the “single market” and VAT tax and customs legislation is “harmonised” throughout the EU with exceptions or “derogations” in specific instances. The single market enables goods to move across intra-EU borders without customs checks. In the areas of services too there are arrangements for administrative convenience in the area of VAT such as the VATMOSS – One Stop Shop for e-services such as downloads of information, music, software, videos and other electronically supplied services, intra-community B2B services, Tour Operators Margin scheme and so on. The UK will have to work out agreements so that businesses based in or using the UK as a “stepping-stone” into Europe are not inconvenienced.
The situation is different in the area of “direct” taxes such as corporate income taxes. The individual member states exercise much more sovereignity over direct taxes levied and there is no EU-wide “harmonisation” for corporate or personal income taxes and social contributions in the same way there is for indirect taxes. However, as demonstrated in the recent “unfair state aid” cases concerning Apple and the Republic of Ireland and other large MNC agreements with individual member states, the European Commission, backed by the CJEU, is taking a more pro-active attitude and is increasingly showing its teeth. This development might actually work in the UK’s favour post-Brexit, as the UK might be seen by international investors as a less-litigious more “user-friendly” jurisdiction.
Without a new “equivalence” agreement with the EU, the post-Brexit loss of the EU Parent-Subsidiary and EU Interest & Royalties directives will impact withholding tax on dividend, interest and royalty payments to UK companies. Although relief will be obtained via the UK’s wide network of bilateral DTAs, “reduced” WHT rates than “zero” WHT rates as currently will apply.
Other areas and agreements likely to be affected by Brexit include the EU Merger Directive, EU Capital Duties Directive, Core Freedoms, dispute resolution, EU Arbitration Convention, BEPS implementation, loss of CJEU and other such benefits.
There are some other “positives” for the UK in a post-Brexit scenario. The UK will continue to remain a member of the G20, the WTO and the OECD. A departure from the EU will mean the UK will have a free-hand to negotiate agreements with these and other such bodies. The OECD “BEPS” project is a case in point where the UK could now negotiate to implement changes at its own pace.
The EU Anti-Tax Avoidance Directive which includes a General Anti-Abuse Rule (GAAR) requires member states to meet certain minimum anti-abuse requirements. These measures could make member states less competitive and the UK’s departure from the EU means more control over such matters.
Regarding CCCTB (Common Consolidated Corporate Tax Base) the EU’s proposed harmonisation of corporate income taxes, the UK has always been a vocal opponent. The UK’s departure means it will no longer be forced to be a party to the new investor-state dispute resolution system which could apply to all future EU agreements including the TTIP with the US (although the Trump Presidency now throws the future of TTIP and other international trade agreements into uncertainty). However, the fact that the UK is freed from what many see as “shackles” and able to negotiate its own way in the wider world might make the UK as a more attractive investor destination in the years to come.
The related links explore the indirect and direct tax implications of Brexit in more detail. The “Brexit effect” is not confined to tax law only. Brexit also affects corporate, financial services, employment, intellectual property, competition law and various other matters affecting businesses. It is important businesses seek advice at an early stage rather than wait until the UK has formally left the EU.