BREXIT – Direct and Indirect Tax Impacts

Indirect Tax

Giles Salmond

Partner

Eversheds Sutherland

Direct Tax

James Ross

Partner

McDermott Will & Emery UK LLP

Trade and Customs

Selin Yavuz

Senior Proposition Manager

Thompson Reuters

Moderator

Alfredo Espada

Associate Director – Indirect Tax and Tax Technology

Astrazeneca UK Ltd

Why the UK voted for Brexit?• Referendum on 23 June 2016 : “Should the United Kingdom remain a member of the European

Union?”

• Referendum result: • Remain: 48.1%• Leave: 51.9%

• Very little discussion before referendum on what leave would actually mean

• When voting against the EU, vast majority believed:• EU is bureaucratic• It is too expensive to be part of the EU• Better to have control on EU immigration

• Votes were not against:• A free trade agreement• Globalisation

The Process after 23rd of June, 2016

2017

March 29UK triggersArticle 50,starting its withdrawalFrom the EU

2018 2019 2020

Nov 13UK and EU agreeDraft WithdrawalAgreement

Mar 29Britain leaves EU

Transition Period

2021

Jan 1(?) New EU – UK Trade Deal (?) Transition extension (?) No Deal

June 19Launch of EU-UKBrexit talks

Dec 14-15Interim Deal on- Irish land border- UK Divorce Bill- Expat Rights

Mar 29European Parliament votes on deal

May 23-26European Parliament elections without theUK

UK accepts free movement of people to/from EU UK retains access to EU markets UK pays into EU Budget UK has no part in EU decision-making

Dec 12Boris Johnsonelected as PM

• Direct taxes generally a Member State competence• EU tax legislation requires unanimous approval of MSs

• Parent-Subsidiary Directive• Withholding tax exemption on dividends paid to 10% EU corporate shareholders

• Interest and Royalties Directive• Withholding tax exemption on interest and royalties paid to 25% direct EU

corporate shareholder/EU company with common direct 25% EU corporate shareholder

• Mergers Directive• Deferral/exemption on certain cross-border reorganisations

• Administrative co-operation Directive• Exchange of financial information, CBC reports, rulings and APAs• Reportable cross-border arrangements (DAC6)

• ATAD I and II

Brexit – Direct Tax Consequences

• Parent-Subsidiary Directive• UK dividends to EU – no change (no UK dividend withholding tax)• EU dividends to UK – Directive no longer applies

• Treaty may provide zero rate• Even if treaty allows withholding, domestic law may grant zero rate• Some countries will start withholding (e.g. Germany, Italy, Portugal)

• Interest & Royalties Directive• UK payments to EU – no change (primary legislation)• EU payments to UK – may attract withholding (e.g. Italy, Portugal)

• Mergers no longer within scope of Mergers Directive • ATAD I and II• Exchange of information (including DAC6)

The Directives post-Brexit

• EU case law and direct taxes• Freedom of establishment (Marks & Spencer, Cadbury Schweppes)• Freedom of movement of capital (Franked Investment Income GLO)• State aid (CFC finance company partial exemption)• Capital duties directive (HSBC/Vidacos)

• US tax treaties – limitation on benefits clauses• “equivalent beneficiary” often defined by reference to EU/EEA membership in other

EU tax treaties with the US• Consequence – UK company may no longer be an equivalent beneficiary enabling

another EU company to claim US treaty benefits

Other consequences

• Possible delays at ports/borders

• Customs Systems not up to handle increased volumes of Declarations –expecting 400M additional customs declarations with Brexit

• Ports not able to cope with administrative burden of Customs Clearances

• New UK tariff schedule ; A total of 11830 tariff lines have been published in the UK Global Tariff..

• New FTAs ; After 31 December 2020, EU trade agreements will not apply to the UK.

Deal or No Deal – Trade related Facts

• No Trade Agreement between the UK & EU• Trade will need to be performed under World Trade Organization (WTO) rules

• A new trade agreement between the UK & EU• Canada style• A new deal similar to existing deals of the EU

• An extension• EU has already indicated its willingness to extend • UK has clearly mentioned that there must be no extension

Deal or No Deal – Trade related Uncertainties

• VAT subject to EU law (harmonized throughout EU)

• VAT subject to some limited variations in the Member States

• At the moment UK seeking to maintain VAT system close to EU law – changes made to recognize UK no longer an EU Member State

• Changes to UK VAT law comply with recent CJEU VAT cases e.g.VAT exemption for fund management

• UK will be able to vary some VAT liabilities/rates post Brexit (subject to any UK/EU trade agreement)

Brexit – Indirect Tax (VAT)

• VAT on goods imported no longer paid at border but on VAT return – cash flow benefits

• UK will allow VAT recovery for supplies of financial services now to Non-UK (previously only non-EU)

• New VAT rules of Businesses selling to consumers/marketplace rules

• EU VAT registration e.g. EU Mini One Stop Shop, VIES, EORI

• Northern Ireland/Irish border – supply chains into/from EU

• EU VAT refunds?

Brexit – Key VAT changes

• VAT Directive will continue to be relevant to interpretation of UK VAT law

• But when EU VAT law departs from UK law, UK VAT law will be interpreted differently

• New CJEU cases may be persuasive but not binding

• Abuse of law principle will be retained

• How far will VAT general principles continue to apply e.g. fiscal neutrality?

• Regulations can be introduced to change effect of old CJEU cases

How will VAT law be interpreted? Change inevitable

Q & A

Thank you for you attention

Slide Number 1Slide Number 2Why the UK voted for Brexit?Slide Number 4Brexit – Direct Tax ConsequencesThe Directives post-BrexitOther consequencesDeal or No Deal – Trade related FactsDeal or No Deal – Trade related UncertaintiesBrexit – Indirect Tax (VAT)Brexit – Key VAT changesHow will VAT law be interpreted? Change inevitableThank you for you attention