Brexit Tax Implications
In an earlier article, I briefly covered VAT and Customs implications of the forthcoming Brexit by the UK. In this article, I briefly discuss direct tax implications and also advice regarding business operations and how they should be reviewed at this stage to ensure that no unforeseen issues arise with physical operations as a result of the new environment in which we find ourselves.
Briefly on the Customs Union, the process of negotiation has begun and the UK have at least put their thoughts out in the public domain. They have stated that as they leave the EU Customs Union, they wish to forge a new customs arrangement that facilitates the freest and most frictionless trade possible between the UK and the EU (the current position!), and which allows them to forge new trade relationships with other countries both in Europe and around the world. What this means is hard to understand bearing in mind trade agreements which the EU already has in place with third countries or where significant progress has already been made with third countries on finalising deals, as clearly the UK will be able to benefit from these existing deals and those that will soon be finalised if they remained with the Customs Union.
Corporate Structure Review
As a member of the EU, EU groups with UK entities can rely upon EU Tax Directives, in particular the Parent Subsidiary Directive and the Interest and Royalties Directive. These allow for the movement of dividends, interest and royalties between EU group members without the incidence of withholding taxes. Group structures need to be reviewed to establish if non-access to these will have withholding tax implications. Double Tax Treaties will be in place but not all have Nil rates of WHT with many of the older treaties having higher rates. This can have significant consequences in terms of raising the global tax burden for multi-national groups, creating cash-flow implications and also raising the compliance burden. A review of structures should be undertaken to establish if the UK’s leaving of the EU will lead to any such consequences. Amending the structure whilst they are still in the union is likely to prove less difficult than doing so after they leave. Examining financing within the group is also important. Debt instruments and arrangements need to be examined to ensure their efficacy post Brexit. This exercise would also be worthwhile in the context of the recent OECD BEPS process which seeks to do away with structures that exploit mis-matches between different jurisdictions domestic rules. Finally, the recent EU anti-tax avoidance directives may have similar consequences for EU groups which warrant a similar review.
Tax Efficient Supply Chain Management
A review of the overall operations of the business should also be undertaken to see if Brexit will have an impact on the business through a higher tax burden or additional withholding taxes or VAT and Customs costs. Already many businesses have suffered a Brexit effect with the performance of sterling creating significant cost increases for many businesses operating in the UK from outside the UK. Certain assumptions can be made based on what we know to date. Looking to reduce these additional costs can be achieved through tax structuring with the following being some of the issues that should be examined:
- Can purchases currently being made in the EU be made in the UK (or vice versa) to avoid customs and VAT and issues as part of the supply chain?
- Can currency exposures be reduced by a change in procurement procedures?
- Will the likely delays in clearing goods through whatever new border arrangements are introduced have an impact on product shelf life or customer fulfilment requirements?
- Is debt in the same currency as the profits e.g. do you have large UK profits but Euro debt?
- Are the finance team aware of the additional compliance burden that will arise once the UK leave the Union and it the software currently in place capable of managing the new reporting requirements?