With results of the Brexit referendum expected by 5 a.m. Friday, some advisers are setting up so-called “war rooms” staffed with specialist teams ready to field calls from companies uncertain what a “leave” vote might mean for business.
The UK’s bitterly contested Brexit referendum has divided the population and government. The latest polls show the “remain” and “leave” campaigns in a neck-and-neck race to the finish.
In the short term, very little may change after June 23 if Britain decides to part ways with the EU. A leave vote 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 clock starts ticking only after the UK gives formal notice of its intent to leave the EU, however. So in the event of a leave vote – depending on the strategy deployed by the UK government and the patience of the voting public – there could potentially be a delay of eight or nine years to allow the UK more time to negotiate a free trade deal with the EU and other World Trade Organisation members and countries with whom the EU has free trade areas.
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In the event of a leave vote, multinationals may want to immediately consider tax implications, however, including the possible absence of the Parent Subsidiary Directive and in particular the imposition of withholding tax on dividends.
“The UK currently does not have a withholding tax on dividends paid by UK companies but it is potentially subject to withholding tax on dividends received, and the Parent Subsidiary Directive means there is no withholding tax on dividends paid to a UK company by other member states in the EU,” said Sara Luder, head of tax, at Slaughter and May law firm in London.
“If that were to fall away, the companies would have to look back on the underlying double tax treaties and not all of those have the zero rate of withholding tax, so there is potentially an issue for UK holding companies of EU subsidiaries,” Luder said.
In terms of transfer pricing, case law from the Court of Justice of the European Union would have to be considered, said Sandy Bhogal, head of Mayer Brown’s tax group in London.
Transfer pricing rules are required to be enacted so that they impact affiliates both within borders and cross-borders within the EU. That jurisprudence would not bind the UK if it were to leave the European Union, he said.
Country-by-country reporting and State aid
There are also matters related to transfer pricing like country-by-country reporting and the proposal on the sharing of tax rulings which the UK would not necessarily be bound by if it were to leave the EU.
“I think State aid is a slightly separate issue so when you talk about investment and things like commodities, it is worth bearing in mind that there is some discussion at the moment about whether or not it is appropriate to use State aid as a vehicle through which you attack transfer pricing arrangements that have been made by member states,” said Bhogal. “But regardless of the outcome of those discussions if we were to leave the EU we would not necessarily be bound by EU state aid rules as they currently exist.”
Customs and tariffs
If the UK votes to leave the EU, the British government would likely have to soon enter into trade negotiations between the UK and the EU and other World Trade Organisation members and countries with whom the EU has free trade areas.
The fall-back position for imports from the UK into the EU would be the EU’s WTO 'most-favoured nations' duties. That could put UK business at a disadvantage compared with competitors within the EU.
“Something that businesses should be doing soon after a leave vote is looking to see what the impact of a WTO tariffs would be on their entire supply chain as well as their exports, and then we expect government will be looking to industry to help advise on what should be government’s priorities in terms of negotiating new FTAs (Free Trade Agreements),” said Dan Neidle, a tax partner at Clifford Chance. “So, only by looking at the impact of WTO tariffs on the current business will industry be able to do that.”
The EU shares a harmonised VAT system. In the event of a leave vote, the UK could alter how VAT is charged, or replace it with a new tax.
As VAT constituted 22% of the UK government's annual tax revenue in 2014/2015, it is not likely that Britain would repeal VAT without replacing it with a new sales tax. In the long-term, there are other ramifications for businesses.
“What we can say is when you have a system like VAT, which is implemented in the UK but is implemented pursuant to European directives, at the point the UK leaves, not much changes. But over time, legal systems change, they adapt, UK VAT will go one way, VAT in the EU may go a slightly different way. So you could end up over time with two really quite different systems and that will produce anomalies, complexities, and costs for business.”