I’m the head of tax at a financial institution. We have branches and subsidiaries in several jurisdictions both inside and outside the EU. Our headquarters is in the UK, from which we also run our financial data business. Individual customers subscribe to us for the latest investment related information, and we have registered this online business under the union MOSS scheme in the UK. I’m hearing all sorts of conflicting arguments, but should we be taking steps now to relocate to Dublin or elsewhere due to Brexit? Any guidance would be appreciated.
Answer
Certainly from a tax point of view, my advice would be to wait and hold off making any major decisions (such as relocating to Dublin) until there is more clarity around what form of relationship the UK and the EU will have post-Brexit.
Following the referendum, there is no immediate impact for any UK taxes, other than transfer pricing, where the volatility in the markets might impact on valuations and forecasts, and hence the arm’s length price. The UK will remain a member of the EU, and bound by all EU Directives, Regulations and case law until the withdrawal negotiations have taken place.
If you start making changes now, you could miss out on unexpected benefits from remaining in the UK post-Brexit or discover that the changes were unnecessary. As a practical reality, if the UK chooses to have continued access to the single market, substantive change is likely to be minimal, as the UK would have to agree to adhere to key principles of EU law. On the other hand, freed from the restraints of needing to comply with EU law, the UK government may introduce favourable tax reforms to attract international investment following Brexit, such as reducing the corporation tax to 15%, eliminating withholding tax on interest (like Luxembourg), improving R&D tax benefits or postponing or quietly shelving unpopular tax policies.
There should be plenty of time to get a sense of the direction of travel and then make a decision. Nevertheless, there are a number of Brexit related tax issues that you ought to keep an eye on.
Loss of the Parent-Subsidiary and Interest & Royalties Directives
Withholding taxes could arise on interest, royalties and dividends if reliance is currently being placed on these directives. The UK’s extensive tax treaty network should eliminate such tax leakage but not in all cases (e.g. dividends from Germany and Italy to the UK and royalties from UK to Luxembourg). It is important that you go through all the current cashflows (dividends, interest, royalties) where you are currently taking advantage of these directives, both to and from your UK entities, and see whether the double tax treaties give you equivalent treatment.
VAT
This may be the biggest area of change for you. Although EU VAT is unlikely to survive Brexit, it is highly likely that UK VAT will start by mirroring EU VAT very closely, at least in the early years. There are three particular areas of change for you to watch.
First, for your B2C supplies of data. From Brexit, the UK will become a non-union country, so UK MOSS will cease, subject to the terms of the withdrawal agreement. You will need to change your member state of identification to another EU jurisdiction, or else you will need to register for VAT in all the jurisdictions where you have customers.
Second, your input VAT recovery. Currently, to the extent that you incur VAT attributable to loans to non-EU businesses, the VAT is recoverable under the VAT (Specified Supplies) Order, SI 1999/3121. Only input VAT attributable to loans to UK and EU businesses is irrecoverable. The Order will need amendment, as it refers to supplies to persons ‘outside the member states’; and the government will no doubt consider making changes of substance, both favourable and unfavourable, depending on cost to the Treasury.
Third, systems. Don’t invest in systems and software for the moment as there will be inevitable changes. ESL and Intrastat will cease to apply, and movements of goods between the UK and the EU will be treatment as imports and exports with different and increased compliance obligations, but no additional VAT cost.
Customs duties
Movements of goods between the UK and the EU will be subject to customs procedures and customs duties, subject to what is agreed on tariff rates, non-tariff barriers and rules of origin requirements. This will affect you when buying or moving hardware, servers and other equipment to and from the UK. The UK does not have its own customs legislation, but this is expected to mirror the EU’s Union Custom Code effective 1 May 2016. I expect we will end up with no tariffs between UK and EU.
Withdrawal from EU social security contributions system
In your group, you will have internationally mobile employees who could be impacted. There is currently an EU Regulation 883/2004/EC which ensures that EU/EEA workers who move between member states are only liable to pay social security contributions in one jurisdiction. This is generally the country where the work is done. Following Brexit, this EU regulation may cease to cover the UK and so, without change, workers would potentially be liable to double social security contributions.
Harmonisation of EU direct taxes
Brexit could accelerate the introduction of EU tax initiatives that were opposed by the UK, such as the harmonisation of EU corporate taxes through the introduction of a common consolidated corporate tax base (minimum tax rates) and the introduction of a financial transaction tax (a tax on financial trading). If you oppose their introduction, then the UK is a better place to be.
Accordingly, subject to regulatory issues (e.g. passport requirements), it is best now to keep aware of the issues and see how things develop in the UK, rather than rush into any change. There is talk of the UK reinventing itself as a financial centre outside the EU, with an improved regime possibly joining forces with Hong Kong, Singapore and Switzerland to strengthen its position. Business should ride the uncertainty, watch and wait.
I’m the head of tax at a financial institution. We have branches and subsidiaries in several jurisdictions both inside and outside the EU. Our headquarters is in the UK, from which we also run our financial data business. Individual customers subscribe to us for the latest investment related information, and we have registered this online business under the union MOSS scheme in the UK. I’m hearing all sorts of conflicting arguments, but should we be taking steps now to relocate to Dublin or elsewhere due to Brexit? Any guidance would be appreciated.
Answer
Certainly from a tax point of view, my advice would be to wait and hold off making any major decisions (such as relocating to Dublin) until there is more clarity around what form of relationship the UK and the EU will have post-Brexit.
Following the referendum, there is no immediate impact for any UK taxes, other than transfer pricing, where the volatility in the markets might impact on valuations and forecasts, and hence the arm’s length price. The UK will remain a member of the EU, and bound by all EU Directives, Regulations and case law until the withdrawal negotiations have taken place.
If you start making changes now, you could miss out on unexpected benefits from remaining in the UK post-Brexit or discover that the changes were unnecessary. As a practical reality, if the UK chooses to have continued access to the single market, substantive change is likely to be minimal, as the UK would have to agree to adhere to key principles of EU law. On the other hand, freed from the restraints of needing to comply with EU law, the UK government may introduce favourable tax reforms to attract international investment following Brexit, such as reducing the corporation tax to 15%, eliminating withholding tax on interest (like Luxembourg), improving R&D tax benefits or postponing or quietly shelving unpopular tax policies.
There should be plenty of time to get a sense of the direction of travel and then make a decision. Nevertheless, there are a number of Brexit related tax issues that you ought to keep an eye on.
Loss of the Parent-Subsidiary and Interest & Royalties Directives
Withholding taxes could arise on interest, royalties and dividends if reliance is currently being placed on these directives. The UK’s extensive tax treaty network should eliminate such tax leakage but not in all cases (e.g. dividends from Germany and Italy to the UK and royalties from UK to Luxembourg). It is important that you go through all the current cashflows (dividends, interest, royalties) where you are currently taking advantage of these directives, both to and from your UK entities, and see whether the double tax treaties give you equivalent treatment.
VAT
This may be the biggest area of change for you. Although EU VAT is unlikely to survive Brexit, it is highly likely that UK VAT will start by mirroring EU VAT very closely, at least in the early years. There are three particular areas of change for you to watch.
First, for your B2C supplies of data. From Brexit, the UK will become a non-union country, so UK MOSS will cease, subject to the terms of the withdrawal agreement. You will need to change your member state of identification to another EU jurisdiction, or else you will need to register for VAT in all the jurisdictions where you have customers.
Second, your input VAT recovery. Currently, to the extent that you incur VAT attributable to loans to non-EU businesses, the VAT is recoverable under the VAT (Specified Supplies) Order, SI 1999/3121. Only input VAT attributable to loans to UK and EU businesses is irrecoverable. The Order will need amendment, as it refers to supplies to persons ‘outside the member states’; and the government will no doubt consider making changes of substance, both favourable and unfavourable, depending on cost to the Treasury.
Third, systems. Don’t invest in systems and software for the moment as there will be inevitable changes. ESL and Intrastat will cease to apply, and movements of goods between the UK and the EU will be treatment as imports and exports with different and increased compliance obligations, but no additional VAT cost.
Customs duties
Movements of goods between the UK and the EU will be subject to customs procedures and customs duties, subject to what is agreed on tariff rates, non-tariff barriers and rules of origin requirements. This will affect you when buying or moving hardware, servers and other equipment to and from the UK. The UK does not have its own customs legislation, but this is expected to mirror the EU’s Union Custom Code effective 1 May 2016. I expect we will end up with no tariffs between UK and EU.
Withdrawal from EU social security contributions system
In your group, you will have internationally mobile employees who could be impacted. There is currently an EU Regulation 883/2004/EC which ensures that EU/EEA workers who move between member states are only liable to pay social security contributions in one jurisdiction. This is generally the country where the work is done. Following Brexit, this EU regulation may cease to cover the UK and so, without change, workers would potentially be liable to double social security contributions.
Harmonisation of EU direct taxes
Brexit could accelerate the introduction of EU tax initiatives that were opposed by the UK, such as the harmonisation of EU corporate taxes through the introduction of a common consolidated corporate tax base (minimum tax rates) and the introduction of a financial transaction tax (a tax on financial trading). If you oppose their introduction, then the UK is a better place to be.
Accordingly, subject to regulatory issues (e.g. passport requirements), it is best now to keep aware of the issues and see how things develop in the UK, rather than rush into any change. There is talk of the UK reinventing itself as a financial centre outside the EU, with an improved regime possibly joining forces with Hong Kong, Singapore and Switzerland to strengthen its position. Business should ride the uncertainty, watch and wait.
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