As the UK prepares to leave the EU customs union the tax consequences and related costs of Brexit for multinational groups will come into sharper focus. In particular, multinationals with significant trade between the UK and EU will need to consider the circumstances in which certain business operations and/or value chains may need to be located within the EU.
When the Burden of Taxes Extends Beyond the Tax
Brexit will mean the UK leaves the EU customs union. It would be very unwise to assume that a free trade area between the UK and EU will be retained. The reality is that there may be significant additional customs duties and tariffs on trade which, in some cases, may necessitate a re-evaluation of production locations and product flows.
Even if the UK secures a good deal on customs duties and tariffs there will, inevitably, be material increases in the costs of trading. Then, there is VAT and VAT is complicated; particularly when dealing with non-EU countries. Even though the UK and EU VAT rules will, initially, be aligned, Brexit will almost certainly result in significant additional costs, whether administrative, cash-flow or simply delays in the movement of goods.
In addition to the increased costs of paying and complying with trade taxes, the EU direct tax directives, such as the Parent Subsidiary Directive and the Interest and Royalty Directive will, in time, no longer apply resulting in the prospect of withholding taxes on payments between the UK and EU. Notwithstanding the UK’s strong double tax treaty network this means that it will be important for companies to consider the potential impact for holding and operational companies.
Whilst all of these issues may be manageable, the question is at what cost? More specifically, the question is at what cost does it make sense to establish an operational hub inside the EU and if so, where?
Better Off Outside? Control of UK Tax Laws
Whilst Brexit means that the UK would, in principle, no longer be subject to European Commission State aid scrutiny, it is unlikely that the UK will be immune from State aid restrictions. In fact, the European Commission expressly stated in its January 2016 Communication on an External Strategy for Effective Taxation that State aid provisions should be included in negotiating proposals for agreements with third countries.
Better Off Inside? Ireland’s Attractiveness is unlikely to be affected by State Aid Investigations
It is public knowledge that Ireland has a particular interest in the European Commission’s recent approach to State aid in cases involving certain tax rulings. Though trumpeted as far-reaching, in truth the Commission’s investigations and decisions on tax rulings is very unlikely to have any significant impact on Ireland as an investment location. The reality is that Ireland’s tax system is generally not “rulings” based. Further, the tax residence laws which were germane to the Commission’s investigation have already been changed and the European Commission has stated that there is no issue with Ireland’s general tax system or its corporate tax rate.
The simplicity and familiarity of the Irish tax regime makes Ireland an obvious option to consider when developing strategies to mitigate the costs and disruptions of Brexit. In addition to a sophisticated corporate tax regime founded on a low tax rate, Ireland also has the economic infrastructure to support the substance required post-BEPS.
Above all, however, Ireland offers certainty in an uncertain world: certainty of commitment to the EU; certainty of access to the EU market; certainty of access to EU talent and skills; and certainty of legal and tax treatment. Ireland also has an unrivalled foreign direct investment track record and business friendly reputation and, following Brexit, will be the only country in the EU which shares Anglo-American business values.