Tax & Accounting Blog

Brexit and Potential BEPS Implications

BEPS, Blog, Checkpoint, ONESOURCE, Transfer Pricing July 12, 2016

On June 23, 2016, the UK held a referendum on whether to leave the European Union (EU). Supporters of the “leave campaign” won by a vote of 52% to 48% to leave the EU.

According to a press release issued by the European Commission, the decision to leave the EU will require Article 50 of the EU Treaty to be invoked. If no agreement is reached within two years of the UK activating Article 50, the UK would leave the EU without any new agreement in place. Even if the UK leaves the EU, it would still be influenced by the OECD’s BEPS project, as well as by other international standards of anti-avoidance and transparency.

There are potential changes that may occur over the next few years as the UK transitions to leave the EU, including in the areas of value added tax (VAT), state aid, and withholding tax. This list is not exhaustive, and the decision to leave may trigger a number of other tax and regulatory considerations. As a result of Brexit, the UK may become more aggressive in its attempts to prevent corporations from leaving the UK, and to stay competitive. Chancellor George Osborne plans to cut the UK corporate tax rate from 20% to 15% by 2020, which would be one of the lowest rates of all advanced economies. EU officials are concerned about a ‘race to the bottom’ in corporation tax rates.

VAT

VAT (or its equivalent) in the EU is a broadly-based consumption tax on the value added to goods and services. It applies to goods and services that are bought and sold for use or consumption in the EU. The UK may lose access to the “one-stop shop” VAT mechanism, which was implemented by the EU for supplies of telecoms and electronic services to consumers. See BEPS Action 1 recommendations.

State Aid

The prohibition on State Aid has been used to examine several EU tax systems and tax rulings given to multinational companies. See BEPS Action 5 recommendations. In certain high-profile cases, the EU Commission has already decided that specific tax rulings constituted state aid to the multinational taxpayer and ordered recovery of the estimated ‘underpaid’ tax from the companies involved (though cases are on-going and subject to appeal).

Following a Brexit, the UK may grant state aid as it chooses or can follow the EU rules over the next two years.

Withholding Tax

Some EU directives remove tax obstacles from businesses operating across the EU. For example, the Parent-Subsidiary Directive eliminates withholding tax on dividends paid between associated companies within the EU. If these directives no longer apply, double taxation of dividends could arise for groups with a UK parent and EU subsidiaries or EU parent and UK subsidiaries and there could be withholding tax costs on payments of interest and royalties into the EU from the UK and vice versa (subject to applicable double tax treaties).

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