Britons head to polling stations to vote in EU referendum
Corporations could face a difficult problem if the UK chooses to leave the European Union (EU) as voters take to the polls today for the EU referendum.
As UK voters make their decision about whether to remain in the EU or leave, businesses are facing the possibility of new tax legislation and compliance rules in the event of a decision to leave.
The final vote, which will be known on June 24, is likely to be close as several debates and polls held before June 23 showed narrow differences between those wanting to leave the EU (“Brexit”) or remain.
More than half of business owners and city workers at a debate on the referendum in London, held by independent accounting and consulting network Moore Stephens, said they expected UK voters to remain in the EU. What happens if those campaigning for an EU exit win the vote is less clear.
“There is a dirth of law in this particular area, but what is provided for at the moment is that in the event that we choose to leave - and if the government make good on their promise to actually immediately serve notice on the EU that we wish to leave following a vote to go – what happens is that there is initially a two-year period for the exit to be negotiated. And I think we are of the view that it would have to be a negotiated exit because there are a number of complexities that need to be dealt with,” said Sandy Bhogal, head of tax at Mayer Brown’s London office.
“What would also happen is that the UK would have to think about, as part of negotiating that exit, what type of residual relationship it would like to have with the EU. So, from a tax perspective, one of the things for example, we would be thinking about is how we would like to deal with things like customs and excise duties and VAT going forward,” Boghal told International Tax Review.
“Being part of the EU means import duties and import VAT don’t impact cross-border supplies of goods and that is something we would have to look at as part of a negotiated exit.”
Although the decision could go either way, the result will “signal the end of a period of limbo for the business world”, Tim Sarson, partner at KPMG in the UK said in his analysis of the situation.
“We should know whether the coming months (and years) will bring a return to some form of ‘business as usual’ in the event of a remain vote, or some potentially substantial disruption - at least in the short term - in the event of a Brexit vote,” said Sarson.
Dan Neidle, a tax partner at Clifford Chance in London, believes that a leave vote would strip away the parent subsidiary directive and interest and royalty directive. "You’ll have withholdings on many, if not most, dividend payments and some interest payments, paid by European subsidiaries to the UK, and dividends paid by UK subsidiaries to parents on the Continent will be subject to local tax," said Neidle.
“Now, how much of a cost that is, is going to depend on individual group structures and economics. So, I would think very soon after a leave vote, businesses should be pulling out their spreadsheets and working out how much that is likely to cost. If it is a material amount, then groups may well want to think about restructuring their operations, restructuring the way they distribute profits to try to minimise or at least mitigate that cost,” Neidle added.
A vote to leave
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A leave vote would create the most uncertainty for businesses. "Some of the biggest worries will be the loss of the single market freedoms - of establishment and movement of capital - and divergence between UK and EU rules on mergers," said Philip Gershuny, a corporate tax partner at Hogan Lovells law firm.
A decision to leave the EU 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. The talks would tackle key tax issues such as EU tariffs on British goods.
In regard to transfer pricing, there would be changes for multinationals with UK operations.
"Multinationals will be particularly sensitive to any increase in discrimination against the provision of services from the UK to the EU. Brexit will only add to the significant body of changes that are already emerging as a result of the BEPs project and changes to the treatment of IP in supply chains and corporate structures," Gershuny added.
Jose Olvera-Salcedo, tax manager at Hitachi Europe, said that uncertainty is the number one issue leading up to the vote.
"I am not expecting a complete overhaul of the tax system, but maybe some changes that could be not compatible or contrary to current and future EU plans," said Olvera-Salcedo. "For example, if the EU were to implement the public CbCR, and Britain is no longer part of the EU, it would initially mean that companies in Britain would not have to make public their CbCR, but if they have operations in the EU, they would be required to do so, and will likely have also to disclose information related to their operations in Britain," he added.
Concerns for Business
The Big Four accounting firms have all released reports flagging tax areas for businesses to consider.
KPMG's Sarson said the "second big picture issue is whether a leave vote triggers a major business restructuring." Companies may choose to move into or out of the UK as the government issues proposals driven by regulation or linked to immigration rules, he said.
In the event of a Brexit, multinationals may want to consider the following:
PwC focused on trade, tax contributions, regulations, sectors, foreign direct investment, labour markets, and uncertainty;
KPMG partner Tim Sarson said two of the biggest issues for companies are customs and trade impacts on supply chains;
EY found companies concerned with indirect taxes and EU directives as well as the state aid regime; and
Deloitte issued a report explaining how companies should prepare in terms of planning, reporting and positioning.