Brexit: What next for UK businesses?
The UK’s vote to leave the EU is expected to trigger changes to tax legislation, potentially driving up the compliance and administrative burden for businesses. So what should multinationals be considering?
"Taxation will inevitably become more complex and burdensome for multinationals that have group companies in both the UK and EU," said Mathew Oliver, partner and corporate tax lawyer at Bird & Bird.
To leave the union, the UK has to notify the EU that it intends to withdraw from the institution. The notice would trigger Article 50 of the Lisbon Treaty, which provides for a two-year negotiating timeframe between the UK and the 27 remaining member states to tackle key tax issues, such as EU tariffs on British goods.
"We can be sure that there will be no major tax changes without legislative process and announcement, and it is highly unlikely that any changes will be backdated to a date before specific announcements," said Kevin Conway, a London-based tax partner at King & Spalding law firm.
However, the UK could be a more attractive destination for investors if it is not part of EU-wide initiatives targeting corporate tax avoidance, plans to harmonise corporation tax rules and the financial transaction tax, according to some analysts.
KPMG told International Tax Review that while being outside the EU "brings challenges", it should also be noted that politically and economically successful jurisdictions like Switzerland have shown "they are not insurmountable".
"Bear in mind that non-EU Switzerland has been home to many of the world's largest and most successful MNCs for years, as well as a regional headquarter for many US and Asian groups," KPMG said in a statement responding to International Tax Review questions.
Meanwhile, some tax advisers across the world said they were adopting a "wait and watch" approach as the UK government and EU chiefs calculate their next moves.
Even so, businesses should give "serious and immediate consideration" to their UK operations and structures in the short-term, especially where they interact with other EU countries, Conway said.
"While we do not know the terms on which the UK will exit or interact with the EU in the future, business should establish various 'what if' analyses on a prioritised basis and scenarios to help consider [the next steps that] would be prudent in the short term," Conway said.
In addition, companies based in EU member states will need to consider the cost implications of trading with the UK post-Brexit.
Vodafone: We’re evaluating our business
Vodafone Group, which is headquartered in the UK, is among those evaluating their business operations.
"It remains unclear at this point how many of those positive attributes will remain in place once the process of the UK's exit from the EU has been completed. It is therefore not yet possible to draw any firm conclusions regarding the long-term location for the headquarters," a spokesperson for the UK-based company told International Tax Review.
"We will continue to evaluate the situation and will take whatever decisions are appropriate in the interests of our customers, shareholders and employees," the company said. "In the meantime – and in order to preserve Vodafone's ability to engage effectively with the EU institutions in future – we will strengthen Vodafone's regulatory and public policy activities in Brussels to ensure the Group's substantial businesses within the EU continue to be represented appropriately," it added.
The tax treatment of big businesses is likely to remain uncertain until there is a trade agreement between the UK and EU. Before that, businesses could benefit from a low corporation tax and additional reliefs in the UK, but at the same time be burdened with withholding taxes on transactions between the UK and EU nations that are imposed without the protection of the EU Parent–Subsidiary Directive and the Interest and Royalty Directive.
UK Chancellor of the Exchequer George Osborne has tried to calm fears among businesses and investors, stressing that the British economy is stable and reliable. "I want to reassure the British people, and the global community, that Britain is ready to confront what the future holds for us from a position of strength," he said days after the referendum vote.
Although Osborne confirmed that there would be no emergency Budget – something he warned would happen if the UK chose to leave the EU – he told BBC radio that tax rises are likely to deal with the economic challenges post-Brexit. These are likely to be announced in the Autumn Statement, likely due in November – if Osborne is still Chancellor.
Meanwhile, Osborne has pledged to lower the corporation tax rate from 20% to below 15%. It had already been due to fall to 17% by 2020.
In an interview with the Financial Times, the Chancellor said the reduction was one of five measures planned to build a "super competitive economy" with low business taxes and a global focus. A Treasury spokesperson, contacted by International Tax Review, would not comment on the details of the plan or when the lower rate would be introduced.
A rate cut to less than 15% would give the UK the lowest corporation tax rate of any major economy. Such a change could accelerate the 'race to the bottom' on corporation tax rates among EU nations and potentially give the UK a tax haven status.
Pascal Saint-Amans, OECD director for the Centre for Tax Policy and Administration, has warned that the "negative impact of the Brexit on UK competitiveness may push the UK to be even more aggressive in its tax offer," according to an internal memo cited byReuters. However, he said that further steps in that direction "would really turn the UK into a tax haven type of economy," adding that there were practical and domestic political barriers to doing this.
"The Chancellor has clearly turned his attentions to maintaining the competitiveness of the UK in attracting investment and ensuring that it holds on to big businesses, who may now be looking at transferring operations overseas to ensure access to the single European market," said Tim Wach, managing director at Taxand. "The decision marks an escalation of corporate tax rate reductions across the globe and will undoubtedly spark the next round of inter-country competition, as rates hurtle towards those seen in countries such as Ireland – at 12.5% – which have previously been seen as outliers," he said.
The UK's move "will no doubt re-open the debate over what constitutes a 'tax haven'. At 15% or less, the UK looks set to be confirming its position in this bracket, which will no doubt anger those across the G20 who have long been working to garner support for a more harmonised global tax system", Wach said.
"This move, on the back of the Brexit decision, is a step backwards for harmonisation, though multinationals will no doubt welcome the fact that their interests are high on the agenda in an increasingly uncertain economic environment," Wach added.
Aside from the corporate tax cut, the five-point plan includes pushing for investment from China, ensuring support for bank lending, increasing efforts to invest in northern England and maintaining the UK's fiscal credibility.
UK freed from ATAD, CCCTB?
The UK's exit has another silver lining for businesses. The UK would not be obliged to implement the EU's proposed Anti-Tax Avoidance Directive (ATAD), which includes measures that go beyond the OECD's BEPS proposals to tackle corporate tax avoidance, and the Common Consolidated Corporate Tax Base (CCCTB) proposed by the European Commission to harmonise corporate taxation.
"The UK should be able to avoid having to adopt some of the EU measures it doesn't like such as the current proposals to harmonise corporation tax rules," law firm Akin Gump Strauss Hauer & Feld said in a tax alert. "Unless the UK decides to continue as a member of the EEA, it would also be free to implement tax laws that constitute state aid or contradict EU freedoms or are discriminatory. This could lead to an even more competitive tax regime," the firm added.
"EU-wide measures can make member states less competitive and create dual levels of accountability," Bird & Bird's Oliver said. "If investors balk at measures of this kind, the UK might be viewed as an attractive host state by virtue of no longer being subject to them," he said.
Dominic Stuttaford, head of tax for Europe, Middle East, Asia and Brazil at Norton Rose Fulbright, told International Tax Review that although the UK would not have to implement the ATAD, it will still introduce a number of measures proposed in the draft law as far as they align with the OECD BEPS package. "The UK government was a strong proponent to some of the anti-avoidance and transparency measures proposed in the ATAD, as well provisions based on the OECD BEPS package," Stuttaford said. "These measure will potentially be introduced in the UK in a different form."
The next problem
How the tax landscape for businesses evolves over the coming months and years will depend on how efficiently the UK and EU negotiate Britain's exit and a replacement trade deal. However, the political circumstances in the UK could stall progress.
Leaving the UK is unlikely to be a smooth process, with the EU pushing for a quick and efficient breakup and the UK government already delaying the procedure. MP Teresa May will replace Cameron as Prime Minister on July 13, but she has not confirmed when the exit process will begin.
Further delays could also be possible if London-based law firm Mishcon de Reya takes legal action against the government for not consulting with Parliament before serving an Article 50 notice.
"Legal steps have been taken to ensure the UK government will not trigger the procedure for withdrawal from the EU without an Act of Parliament," the firm said in a statement.
"The government, however, has suggested that it has sufficient legal authority. Mishcon de Reya has been in correspondence with the government lawyers since June 27 2016 on behalf of its clients to seek assurances that the government will uphold the UK constitution and protect the sovereignty of Parliament in invoking Article 50. If the correct constitutional process of parliamentary scrutiny and approval is not followed then the notice to withdraw from the EU would be unlawful, negatively impacting the withdrawal negotiations and our future political and economic relationships with the EU and its 27 member states, and open to legal challenge. This legal action seeks to ensure that the Article 50 notification process is lawful," it said.
Kasra Nouroozi, the Mishcon de Reya partner behind the threatened court action, did not respond to e-mailed questions from International Tax Review by press time.
The EU's position
While the UK is biding its time before invoking Article 50 and thereby beginning the two-year process of leaving the EU, the remaining member nations are getting impatient.
"Europe is ready to start the divorce process," European Council President Donald Tusk has said.
"The UK must respect the wish of a majority of its citizens, entirely, fully and as soon as possible, by officially withdrawing from the EU before any new relationship arrangements can be made," the European Parliament added.
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