On June 23 2016, voters of the United Kingdom (UK) decided to leave the EU. To initiate the formal procedure to end EU membership, Article 50 of the Treaty of Lisbon will have to be invoked. The UK and the EU will then have two years to negotiate the terms of a separation. A full exit can be expected in late 2018. Until the official departure, existing EU regulations, directive treaties, and jurisprudence of the European Court of Justice remain applicable.
The actual tax consequences of a Brexit are directly linked to the type of the future relationship between the UK and the EU. The latter is still unknown, but the main alternatives, among else, include:
- Close relationship - access to the common market as well as contribution to the EU budgets on the same basis as Norway, Iceland, and Liechtenstein;
- Free trade relationship: a standalone trade agreement or a series of topic-related agreements will govern the relationship between the UK and the EU, in a way similar to Switzerland; and
- Loose relationship: the EU and the UK form a customs union (in the manner that the EU-Turkey has).
Potential tax implications for multinational companies are discussed below.
EU Directives, Jurisprudence, and Withholding Taxes
The main objective of some EU directives is the removal of tax barriers from businesses operating across the EU. For example the Parent-Subsidiary Directive and the Interest and Royalties Directive eliminate withholding tax on dividends and interest and royalty payments respectively, between associated enterprises within the EU. Additionally, the Capital Duties Directive prevents member states from imposing tax on the raising of capital by companies (stamp duty reserve tax), and the Merger Directive facilitates the cross-border reorganizations from a fiscal perspective.
In the after Brexit era, the EU directives may no longer apply, and the payments of dividends, royalties, and interests may be governed by the existing double tax treaties between the UK and the other European countries. In every case, the extent to which the EU directives will be applied in the cross-border transaction between the UK and the EU states heavily depends on the type of the future relationship between Great Britain and the EU; a closer relationship such as the European Economic Area membership, means lesser deviation from the existing regime. The same applies to the endorsement and application of the four fundamental freedoms, the EU law, and the decisions of the European Court of Justice.
The UK’s value added tax (VAT) law is currently harmonized with the European VAT directive, and the Brexit might theoretically result in significant deviations from the current regime. Effectively, in the short term, little is expected to change, considering the confusion and the cost changes. Nevertheless, the UK government will gain additional flexibility on setting the rates and the scope of the VAT, and the right of appeal to the European Court of Justice will no longer be available for taxpayers.
The Brexit may result in the UK’s leave from the European Customs Union, and trade between the UK and EU member states might undergo customs procedures, and the levy of excise taxes should not be precluded. However, even the full withdrawal from the EU customs union is not expected to result in the UK’s liberty to impose tariffs as it sees fit. The membership in international organizations or treaties (WTO, GATT) reduces the possibility of a purely independent tariff policy.
The future deviations from the existing status quo in both the VAT and the customs areas are dependent on the type of the future relationship between the EU and Great Britain.