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The Potential Tax Effects of Brexit on Investors and Taxpayers in Ireland
The U.K.’s decision to leave the EU (“Brexit”) will inevitably cause a period of great uncertainty for businesses and individuals.
Although the Irish economy is not dependent on the U.K., the U.K. remains one of Ireland’s closest economic partners. Given that much of the economic activity between EU members is governed by EU rules, any change in the relationship between the U.K. and the EU is also likely to impact on the relationship between the U.K. and Ireland.
This period of economic uncertainty will have an impact for businesses, including potential regulatory and legal implications, together with tax, financing, supply chain and foreign exchange implications. This article focuses on the potential tax implications for investors and taxpayers in Ireland, particularly for those where there is a close business relationship with the UK.
I. Potential Tax Effects
One of the difficulties of determining the implications of leaving the EU is that there are a number of alternatives to full EU membership and much will hinge on the nature of the Brexit negotiations. These negotiations are likely to take at least two years from the date Article 50 of the Lisbon Treaty is invoked, so there will be no immediate change as EU laws and treaty obligations continue to have effect during this secession process.
From a tax perspective, the vote in favor of leaving the EU will have little, if any, immediate impact on either indirect or direct taxes. As the U.K. will remain an EU Member State for two years after Article 50 is invoked (or longer if there is unanimous agreement of the other 27 Member States to extend the period of negotiation), few tax changes are likely to occur in the short term. The scope of any future tax changes will ultimately be determined by the outcome of these negotiations. However, as most indirect taxes (e.g. VAT, Customs Duty, and Excise Duty) are EU-based taxes, it is likely that these will be impacted more by Brexit than direct taxes.
II. Indirect Taxes
A. Customs Duty
At present, Customs Duty is almost entirely governed by EU Directives and Regulations. Following Brexit (and assuming that a model is not chosen which would allow the U.K. to remain in the EU/EEA customs union), control of Customs Duty would revert to the U.K.. Therefore, the U.K. would need to introduce domestic law to replace the EU Directives, Regulations and Council Decisions that currently govern Customs Duty. It is likely that the most significant change to Customs Duty following Brexit will be that all trade between the U.K. and the EU (including Ireland) will be recognized as imports and exports. Unless a free-trade agreement with no or low customs can be negotiated, duty will become payable on imports and exports between Ireland and the U.K..
As a result, compliance formalities will arise on both entry and exit of the goods i.e. both at the Irish side and at the U.K. side. As can be appreciated, this may result in some impediment to trade as well as extra compliance costs. The practical implementation of any such changes would obviously be of importance.
B. Excise Duty
Since Excise Duty is not a fully harmonized tax, we would not expect Brexit to result in any material changes to excise rates in the U.K. market. However, as with Customs Duty, movements of excise goods within the EU will no longer be treated as “intra-EU” but instead will be recognized as imports and exports. This could potentially result in extra compliance costs as a result of new procedures.
With respect to the day-to-day VAT matters for businesses, the practicalities of cross-border transactions will change following Brexit. Invoicing and reporting protocols, including processes and systems, will be revised in respect of cross-border supplies and intra-EU transactions with the U.K. will become “imports” and “exports”. Although, we would not expect there to be any change in the ultimate VAT costs of imported goods, an import VAT charge may become payable up-front at the point of importation. This would result in a cash flow cost and also increased administration/compliance costs for Irish companies trading with the U.K..
III. Direct Taxes
Unlike indirect taxes, direct taxes are not expressly dealt with by the EU treaties. Direct taxes are solely an area of national competency, which only must be exercised in accordance with the EU treaties. Therefore, direct taxes are less likely to be directly affected by Brexit.
A. EU Directives
The EU Treaties authorize the EU Council to issue directives to aid intra-EU trade and investment, as well as administrative co-operation. The directives require unanimity from each Member State before the Member State is required to implement it into national law. In Ireland, the EU directives which have been transcribed into domestic law are as follows:
- Parent/Subsidiary Directive: eliminates withholding taxes on dividends paid to parent companies in EU Member States;
- Mergers Directive; defers capital gains tax which would otherwise accrue on certain mergers, divisions, transfers of assets and exchanges of shares between companies from different EU Member States;
- Interest /Royalties Directive: eliminates certain withholding taxes on certain interest and royalty payments between companies from different EU Member States.
In the majority of cases, the domestic legislation in Ireland into which the directive has been transposed is drafted in terms that simply refer to “Member States” without naming specific jurisdictions. Consequently, as the provisions are formulated by reference to EU membership, presumably U.K. business will automatically cease to benefit from the preferential treatment offered by Ireland under these directives from the moment it exits the EU. Conversely, the U.K. will not be required to introduce into its domestic legislation the various anti-tax avoidance measures proposed by the recently enacted Anti-Tax Avoidance Directive which will take effect from 1 January 2019, assuming that it is no longer a member of the EU at that stage. However it should be noted that the U.K. has already published legislation to limit interest deductions and to address hybrid mismatches
Notwithstanding the non-application of the above directives which provide preferential treatment by Ireland to payments made to EU Member States, much of Ireland’s tax law has been drafted in such a way as to aid international trade and investment between overseas parties located both in the EU and in a tax treaty country. For example, withholding tax should not apply on dividend payments from Ireland where the recipient is located either in the EU or in a tax treaty country (provided certain other conditions are met). Therefore, although it would be necessary to review the particular circumstances, it is likely that domestic exemptions would continue to apply to payments made by an Irish resident company to a U.K. resident company.
B. Tax Treaty
From an international perspective, the ability to benefit from the Ireland/U.S. tax treaty may be somewhat restricted under the Limitation of Benefits provision (unless the U.S. issues a protocol), where an Irish company is ultimately owned by EU residents that are based in the U.K..
C. Domestic Legislation—Group Relief
As noted above, most of Ireland’s tax legislation is drafted to provide relief to companies resident in either the EU or a tax treaty country.
Group relief is available for losses where a qualifying group exists. The definition of what constitutes a qualifying group for loss relief purposes was extended in recent years to include companies resident in tax treaty countries. Under existing legislation, a qualifying group should exist for loss relief purposes where all the relevant companies are resident in the EU, EEA or a country with which Ireland has a double tax treaty and therefore there should be no impact by Brexit. However, where there is an Irish branch of a U.K. company, loss relief would not be available to be claimed from or surrendered to an Irish resident group company by that Irish branch
Where there is a transfer of assets inter-group, these assets can broadly only be transferred on a tax-neutral basis where both entities are within a qualifying Capital Gains Tax (“CGT”) group. However, in order to be in a qualifying CGT group, all entities must be EU resident or resident in an EEA state which has a double tax agreement. Therefore, assuming that the U.K. does not get EEA status, if there is a U.K. resident holding company of two Irish resident companies, this could have the effect of breaking the group for Irish CGT relief purposes. Consideration would then need to be given to any potential clawback of any previous CGT intra-group relief claimed on prior transactions as well as the impact on future transactions.
IV. Talent Considerations
Talent has become one of the key assets of most businesses. As a result of the U.K.’s decision to exit the EU, businesses will need to give consideration to a number of issues relating to their talent, including immigration, tax and social security and mobility policy implications
Tax costs associated with assignees working in the U.K. (or vice-versa) will need to be evaluated and policies, systems and processes will need to be reviewed to ensure that they are fit for purpose going forward.
Until such time as the U.K. formally withdraws from the EU, there is no change to the current freedom of movement as between U.K. and EU citizens. However, the full impact of Brexit on immigration matters will not be clarified until a finalized deal on free movement of people is negotiated between the U.K. and the EU as part of the withdrawal process. Based on the comments to date, it seems unlikely that free movement of people can continue in its current form post Brexit.
So far, the U.K. government has indicated that EU nationals currently resident in the U.K. will be permitted to remain post-Brexit (subject to eligibility for permanent residence) but it can be expected that EU nationals will, at some point, be required to obtain employment permits/visas in order to live and work in the U.K.. Similarly, U.K. nationals will be subject to an employment permit regime in EU Member States. Accordingly, it is prudent for employers to carry out audits of their current workforce demographic in order to ascertain their current EU populations in the U.K. (and vice versa) and how the proposed Brexit scenarios will impact these populations.
There will also be immigration implications which are Irish-specific in relation to the Common Travel Area (“CTA”) and the current Visa Waiver Programmes between U.K. and Ireland. At present, there is a CTA made up of the U.K. and Ireland. It is uncertain as to whether the CTA between Ireland and the U.K. in its current form (i.e. border free movement) will continue post-Brexit. However, a future version of this may be discussed during the negotiation period.
V. Foreign Direct Investment (“FDI”)
EU membership has played a key role in attracting FDI to the U.K.. The U.K. outside the EU is likely to be considered less attractive by some companies as a FDI location because of uncertainty and reduced access to the EU Single Market. However, other attractive advantages of the U.K., such as its large population, will remain.
The U.K.’s decision to leave the EU may present potential opportunities for Ireland to attract FDI projects, including some relocation of FDI from the U.K.; however the extent of such opportunities is not yet clear. In addition to Ireland becoming the only English-speaking country in the EU, it remains well placed in offering the unique combination of a sustainable low-tax regime, certainty on EU membership, access to top talent (both from Ireland and the EU) and access to the EU Single Market.
From a financial services perspective, a critical issue for financial services companies is the ability to passport their operations from a regulatory perspective seamlessly from one EU location to another, under EU regimes. Given that these passporting rights may be lost post-Brexit, some companies are now considering the need to relocate some U.K.-based operations to ensure continuity of service. Ireland has proven to have the right infrastructure to support U.K. financial services businesses considering expanding or establishing an EU footprint.
To date, Ireland’s advantage, relative to the U.K., in attracting FDI is its more competitive corporate tax rate. Ireland’s Minister of Finance has reinforced the Government’s commitment to the 12.5% rate of tax and Ireland’s place with regard to global tax reform saying “Ireland continues to play an important role in international tax reform. It is important that we meet the best international standards, while at the same time retaining our sovereign taxing rights and our right to compete on a level playing field. Ireland will retain its 12.5% corporate tax rate which is transparent and there for all to see”. In addition, as noted above, much of Ireland’s direct tax legislation is likely to remain unaffected by Brexit and therefore, this provides a degree of certainty for businesses looking to invest in Ireland and benefit from its EU membership.
Over the coming months, the U.K. authorities are likely to try to provide reassurance and bolster public and business sentiment. Indeed, it has already been indicated that in order to offset any slowdown in the U.K. market, the U.K. will actively pursue tax strategies to attract and retain FDI. In particular, a further potential reduction in the corporate tax rate to 15% has been mentioned. Although this may change, given the new U.K. Government, as it has not been reiterated by the new Chancellor of the Exchequer, Philip Hammond.
In summary, the vote in favor of the U.K. leaving the EU will have little, if any, immediate impact on either indirect or direct taxes in Ireland. The scope of any future tax changes will ultimately be determined by how the U.K. negotiates its exit, however it is expected that any tax impact will mainly relate to indirect taxes. In terms of FDI, a strong focus must be placed on ensuring that Ireland continues to have a pro-business tax regime which is competitive with what is on offer in the UK. This, coupled with Ireland’s political stability and access to the EU Single market will ensure that Ireland remains a key location for FDI.
This article first appeared in the August edition of the European Tax Service.