International Tax News

Brexit – the tax perspective

In yesterday’s referendum, Britons voted to leave the European Union. Brexit has become reality. While a lot has been said and written about Brexit’s consequences for the economy, immigration policy and trade, Brexit’s effects on the UK tax system received less attention.

The EU is not only a single market guaranteeing the free movement of goods, capital, services and people but also a customs union. There are no customs duties on transfers of goods among the Member States and common external tariffs apply to goods coming from third countries. Upon leaving the EU, the UK would most likely cease to be a part of the customs union. This means that customs procedures for import and export in relation to EU countries would have to be introduced. However, the UK would be able to negotiate its own free trade agreements with other countries and trade blocks.

UK VAT law has its roots in EU law. In the European Union, VAT law is harmonized by means of various directives that were implemented into domestic laws of the Member States. Decisions of the Court of Justice of the European Union (CJEU) play an important role in interpreting EU VAT rules. Upon leaving the EU, EU directives and CJEU decisions would cease to be binding. However, a significant change to the structure of the UK VAT system is unlikely. Such a change would be simply to expensive to implement. Despite no longer being determinative, CJEU decisions may continue to serve as a useful help in interpreting UK VAT law.

Although corporate taxes are not harmonized in the European Union in the way that VAT and customs duties are, EU membership has a profound impact on UK corporate taxation. Many changes to the domestic legislation were triggered by CJEU decisions (for example, Marks & Spencer, Cadbury Schweppes) and EU directives. It is difficult to say whether after Brexit these changes will be reversed.

Recently, the European Commission has started a number of State aid investigations into transfer pricing rulings granted by some Member States to multinational companies (Apple, Starbucks, McDonald’s and Fiat). If the UK leaves the EU, it will no longer be bound by the State aid rules. However, if it joins the European Economic Area, State aid legislation will continue to apply.

Although for the UK Brexit would mean more sovereignty over fiscal matters, there is still a lot of uncertainty over its impact on the UK tax system. In the event of Brexit, future relationships between the EU and the UK will be shaped by the withdrawal agreement. Given the fact that negotiations concerning the exit are certain to be lengthy and complex, the UK tax law should remain unchanged at least for some time.

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