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Tax competition post-Brexit

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In the UK/EU TCA, both the UK and EU commit to uphold global standards on tax transparency and fighting tax avoidance. Specifically, with respect to the exchange of information and rules on interest limitation, CFCs and hybrid mismatches, both sides commit not to reduce or weaken levels of protection below the standards provided for by the OECD at the end of the transition period.

In respect of country by country reporting by credit institutions and investment firms, other than small and non-interconnected investment firms, the agreement requires that the parties do not weaken or reduce the level of protection provided for in their legislation at the end of the transition period. Note this test differs from the first commitment outlined above, which is based on OECD standards.

Separately, there are provisions in the agreement preserving the rights and obligations of the EU, its member states and the UK under any tax convention.

The commitments made by the UK and EU in the agreement are supplemented by a standalone political declaration in relation to countering ‘harmful tax regimes’.

The section of the agreement dealing with ‘level playing field for open and fair competition and sustainable development’, requires that where ‘subsidies’ in the form of tax measures are granted by the EU or UK, information should be published on an official website or a public database within a year.

The agreement sets out the factors which should be considered in determining whether a tax measure falls within the definition of ‘subsidy’. A measure will not be considered a subsidy unless certain ‘economic actors’ obtain a reduction in the tax liability that they otherwise would have borne, and those economic actors are treated more advantageously than others in a comparable position within the normal taxation regime.

In any event, a measure shall not be regarded as a specific subsidy if it is justified by principles inherent to the design of the general system. In the case of tax measures, examples of such inherent principles are the need to fight fraud or tax evasion, administrative manageability, the avoidance of double taxation, the principle of tax neutrality, the progressive nature of income tax and its redistributive purpose, or the need to respect taxpayers’ ability to pay.

The agreement also contains non-regression clauses not to weaken or reduce, in a manner affecting trade or investment between the parties, its labour and social levels of protection, its environmental levels of protection or its climate level of protection below the levels that are in place at the end of the transition period, including by failing to effectively enforce its law and standards. There is a further commitment ‘to strive to increase’ the levels of protection. 

The TCA does leave a number of questions on tax competition unanswered and what this means in practice for tax policy going forward remains to be seen. 

Mike Gibson, EY (EY’s Midweek Tax News)