BREXIT – a German-British Viewpoint

Overview:

CURRENT SITUATION

The media coverage in the weeks following the Referendum was still allowing hope that the Brexit decision might still be overturned by parliament. Boris Johnson (since 13 July 2016 the new Foreign Secretary) and Nigel Farage - the brains behind the Brexit campaign – couldn’t bolt fast enough once Brexit was a fact. Michael Gove was also taken out of the race by his own party and beginning of the week, Andrea Leadsom - the only candidate running for prime minister next to Theresa May – also bowed out.

This was a on the one hand a positive sign for Brexit-opponents, however it is now impossible to imagine that the British parliament would oppose the (narrow) majority wish of the British people and in this case the fundamental democratic principle. Given such a vital vote, a globally common two-thirds-majority would have been the better solution for change.  

Theresa May (against Brexit before the referendum) is Britain’s new Prime Minister since 13 July 2016 entering No 10 with the words ‘Brexit means Brexit’ – in what form remains to be negotiated over the next couple of years. This week, she has started her introduction visits to see the German Chancellor Angela Merkel as well as the French President François Hollande. Ms Merkel was calling for patience with London, whereas Mr. Hollande took a more straight forward role and declared that free trade depends on free movement.

EU-members can access 22 trade agreements as well as five multi-lateral agreements comprising multiple countries. The UK would have to negotiate trade deals with each of those 52 countries from scratch as a third country in order to keep their ‘preferred’ access to these markets. There are plenty of incentives for the EU and other countries to create a positive basis for negotiations considering the UK as one of its most important trade partners.

Estimations or even definite assurances of future rights for EU-citizens currently residing in the UK cannot yet be made. The same insecurity applies for customs and taxation provisions.

Future tax treatments of foreign subsidiaries, holding companies or other forms of affiliation could be largely different depending on the ultimate negotiated Brexit model.

Post-Brexit Britain will be considered a ‘third country’ according to the current legislation. Negative economic consequences are already noticeable in Germany as well as on a global scale. Constructive and less emotional compared to ‘punishing and self-harming’ negotiations are essential on a political level in order to contain extensive negative impacts.

HOW CAN BUSINESSES SECURE THEIR ABILITY TO ACT / COMPETITIVENESS?

It is right now the time for Businesses to run through possible scenarios and forms of Brexit-models.

TRIGGERING ARTICLE 50

Activation of article 50 is Davis expected still this year, latest beginning of 2017 according to the ideas of new ‘Brexit-Minister’ David Davis. To ‘keep calm and drink English breakfast tea’ is in our view not the motto a competitive business should take on. Brexit will have drastic consequences for foreign subsidiaries, branches and EU-Headquarters in the UK.

GLOBAL NEGOTIATIONS ON THE WAY

Before Theresa May started her tour to Europe to introduce herself this week (contrary to other Prime Ministers who visited the USA first, she went to see heads of state from Germany and France first)
Business Secretary Sajid Javid set off to visit India – Britain’s FDI- investor No. 3 – to discuss the trade relationship between India and the UK after the Brexit. Total trade between India and Great Britain amounted to £ 16.55 bn in 2015.

Mr. Javid will also be visiting the USA, China, Japan and South Korea to discuss future investments and trade relationship, whereas Europe is still not open for negotiations before Article 50 hasn’t been activated.

5 POSSIBLE BREXIT MODELS

Norway Model
Member of the European Economic Area (EEA) with access to the single market.

Financial contribution to the EU (per capita contribution equals the pre-Brexit contribution of the UK), free movement of EU citizens and obliged to apply majority of EU laws and regulations.
The UK wouldn’t save on any contributions with this model and free movement of EU citizens will not be limited.

Switzerland Model
Member of the European Free Trade Association but not the EEA with access to single market  via bilateral agreements excluding some services and goods.
Switzerland pays a certain contribution per capita but much less than e.g. Norway.

Not obliged to apply EU laws but has to adopt certain regulations to enable free trade.
Free movement of people is in place.

Turkey Model
A customs union with the EU is in place. No quotas or tariffs are levied on industrial goods. Agricultural goods and services are excluded in this agreement and Turkey has to impose tariffs dictated by the EU on their imports from all other non-EU countries. This will be difficult for the UK, as 80% of their trade are indeed services.

NO contributions to the EU – NO free movement of people within the member states.

Canada Model
The CETA free trade agreement – yet to come into effect – rids trade between Canada and the EU largely from tariffs on goods, however some foodstuffs and services are excluded. Furthermore, exporters have to prove the 100% Canadian origin of their goods to avoid goods entering the EU through Canada as a back door. Due to the exclusion of services, this model could be fatal for the UK.

NO contributions to the EU – NO free movement within the member states.

Singapore and Hong Kong Model
The city states impose no import and export tariffs and base their free trade on the framework of the WTO. This barrier free solution would have massive negative implications on the British agricultural and production industries, as many goods could be significantly much cheaper.

A NEW UK MODEL WITHOUT FREE MOVEMENT OF PEOPLE?

One of the ‘winning’ BREXIT camp arguments was imposing limits on the movement of EU citizens. With this in mind, it’s impossible to imagine that free movement will be unaffected.
Theresa May appointed David Davis yesterday to her ‘Brexit-Minister’– a first indication for Britain to leave the single market, to limit free movement and to push the article 50 button before end of the year.

UNRESTRICTED, TARIFF FREE TRADE

The starting base of exit negotiations will be an unrestricted and tariff-free trade between the EU and the UK, without contributing financially to the EU or agreeing on free movement of people. This has never been realised before between ‘third countries’ and the European Union. A realistic solution could be the introduction of new, minimal tariffs according to the WTO regulations which will increase the red tape in the business world again rather than minimising it.

POSSIBLE EFFECTS ON VAT

British VAT law derives from the EU law. Post-Brexit the UK will be in no position to influence such laws and regulation. We assume that the UK will initially have a parallel VAT system in place before the regulations will possibly change (e.g. extended zero tariff and change in VAT rate), thereafter VAT reclaims could become reality.

Reality once changes in tax come into effect: The UK would lose access to the simplified ‘one-stop shop’ mechanism in the processing of VAT, implying a costly and time-consuming process for companies and tax authorities. Risks of double taxation or non-taxation would affect British businesses. Aligning the British VAT with the EU VAT system seems to be the only advantageous solution for British businesses.

CORPORATE TRANSACTIONS

Company law
The central problem of company law is the termination of freedom of establishment. Public companies from the EU with registered offices in the UK will lose their legal foundations. Furthermore it won’t be possible to establish a UK Limited with administrative Headquarters in a EU-member state without an appropriate succession plan and existing companies would have to change their legal entity status.

Tax law
Many EU regulations target the elimination of tax obstacles for companies operation on a pan-EU basis. The Parent-Subsidiary Directive (Directive 90/435/EWG) alleviates withholding tax on dividends. The EU-interest and royalties directive (Directive 2003/49/EG) alleviates the withholding tax on payments of interest or royalties between affiliated companies in the EU. Post-Brexit these directives might no longer be in place and double-taxation could arise (up to 5% instead of 0%).  One alternative for the UK could be abolishing withholding taxes completely aligning with the global trend.

Businesses should get their structures for dividends and other transaction assessed to avoid taxation disadvantages in the post-Brexit business environment.

Direct taxes
Direct taxes fall within the sovereign affair of the British government. However, the corporation tax rate (with currently 20% and in 2020 expected 17% the UK has the lowest G7 corporation tax rate) in the UK has to be aligned to EU regulations, ensuring tax neutrality. In the event of Britain joining the EEA, Britain still has to comply with EU regulations.

In the more likely event of Britain not joining the EEA, changes in direct taxes can be expected (e.g. taxation advantages for domestic companies). This might reduce the UK’s attractiveness to inward investors and at the same time result in new opportunities in the UK market.

Modifications to the Merger and Parent-Subsidiary Directives can also impinge negatively on UK’s economy.

As a NON-EU member Britain will no longer have to adhere to Capital Duties Directive that prevents member states from imposing tax on the raising of capital by companies (e.g. share issues). Depending on the terms of Brexit, the stamp duty reserve tax charge on share issues (currently limited to 1.5%) into depository receipt issuers and clearance services, could be increased and imposed more widely again.

ESSENTIAL POST-BREXIT PREPARATION FOR BUSINESSES

Contact our tax experts NOW to assess the effects of possible Brexit-models on your business and make early arrangements to remain on top of the final game changer.

 CONTACT

InterGest United Kingdom Limited
Céline Laukemann
Head of International Business Development
Palmerston House
814 Brighton Road
Purley
Surrey
CR8 2BR
United Kingdom

Tel. +44 (0)20 8655 8450
Fax: +44 (0)20 8655 8501
Email: celine.laukemann@intergest.com

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