No doubts that Brexit will have a tremendous impact on tax policies and legislation and although it is still soon to foresee the consequences, we would like to highlight the three broad areas of concern affecting businesses and trading.
1. Corporation Tax
Once the UK is not part of the EU, the British government will be in a position to support tax initiatives to support UK business and trade competition in the EU without being concerned with the applicable State Aid limitations. On the other hand, European groups with a holding company resident and listed as mother company in the UK will not be able to apply the benefits contemplated in EU tax legislation.
Therefore withholding tax may be chargeable to intercompany interest, dividends, and royalties flow between companies in a group, currently exempted from withholding tax by EU legislation. The Merge & Acquisitions, Parent-Subsidiary, and the Interest & Royalty Directives will not be applicable, and UK companies will need to rely on double tax treaty provisions, which in many cases do not provide for a zero withholding tax on those three elements.
The Double Tax Treaty network will be an area of priority for the UK on a bilateral level with immediate effect.
Finally, there are some initiatives in progress such as the EU Anti-Tax Avoidance Directive, public country-by-country reporting and the common consolidated corporate tax base which the UK has been part of; we expect the UK to continue developing legislation in that respect with more flexibility.
2.- Indirect Tax
A domestic Customs Tariff system will need to be established in the UK to substitute the unified ‘Common Customs Tariff’ (CCT) in the EU. The EU agreement allows goods to circulate freely between Member States and bilateral agreements will need to be entered with the main trading partners of the UK in the EU. On the Excise duties most likely the UK will maintain the existing system as this is not a matter regulated at EU level.
Regarding the current regime of value-added tax (VAT), having been enacted by UK Law, is here to stay. However, the legal appeals will end in the UK Courts, and the government will have ample flexibility to determine the rates and VAT scope.
3.- Social Security
The EU provides standard rules to protect social security rights when moving within Europe (EU 28 + Iceland, Liechtenstein, Norway and Switzerland). The rules on social security coordination do not replace national systems with a single European one. All countries are free to decide who is to be insured under their legislation, which benefits are granted and under what conditions. It is most likely that the UK could be considered for these matters under the EEA agreement. Otherwise, bilateral social security and employment treaties will need to be considered.
We can see that Brexit will increase the sovereignty of the UK over its domestic tax matters but how the EU will respond to this is to be seen.
Regulating interstate competition is key in European policies, and if the UK makes a move to improve its tax competitiveness, the EU may respond with more dynamism towards harmonization of corporation tax in the continent -making it more competitive.