INTERNATIONAL TAX
The impact of Brexit Mark Taylor considers the impact that Brexit has played on international tax issues and the changes to taxes for multinationals. Mark Taylor International Tax Leader, Kreston International
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ollowing the United Kingdom’s exit from the European Union on 31 January 2020, the EU-UK Trade and Cooperation Agreement (TCA) was finally delivered on 30 December 2020 to govern the future relationship between the UK and EU. This agreement was signed one day before the end of the transition period, after which the UK would have left the EU with no deal. Many uncertainties in the nature of this agreement remained during the transition period, which significantly reduced the time businesses had to plan for the new rules. The most urgent considerations were in terms of import/export procedures, customs duties and VAT to ensure that cross-border trading activities could continue. Now we have passed the first quarter post‑Brexit, it is worth reviewing the changes to other taxes for multinationals.
Withholding taxes
Author bio
Mark Taylor is the International Tax Leader at Kreston International and the firm’s representative with the Kreston International network.
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Many countries withhold tax on the payment of interest and royalties and dividends paid from one country to another. Under the EU Interest and Royalties Directive, EU companies benefited from an automatic exemption from withholding taxes on payments of dividends, interest and royalties. The UK brought these rules into its own domestic law, but is due to repeal them from 1 June 2021. From that date, the requirement to withhold taxes on cross-border payments within the EU reverts to the treatment agreed in double taxation treaties. The individual tax treaty between the UK and the payer/recipient country must now be reviewed to confirm any requirement to withhold taxes. In certain cases, withholding taxes may now arise due to the automatic exemption no longer being available. In these cases, a review of the group structure and flow of funding should be carried out to ensure that the business is not negatively impacted by these changes.
Specific areas to review on withholding taxes include withholding taxes imposed by EU countries on dividends to UK parent companies. There is generally no tax on dividends received by UK companies and therefore this can represent a real cost for groups. For interest and royalties, these will usually be taxable income in the UK. Hence, if tax is withheld by a paying country, double taxation relief may be available (subject to the treaty). Where the treaty does not provide for double taxation relief, the UK company may be able to obtain a deduction for the withholding tax suffered as an expense.
State aid and subsidies
The UK, while a member of the EU, was subject to EU wide state aid rules which prevented state aid being provided to UK companies in certain circumstances. From a corporate income tax point of view, this impacted numerous UK government tax incentives including research and development (R&D) tax credits and tax favourable share option schemes; e.g. enterprise management incentives (EMI). Given that the EU state aid rules no longer apply to the UK, these rules have been replaced by “subsidy control” rules in the TCA. The result is that the UK is now free to set its own policies on subsidy control, albeit there is a declared commitment in the TCA to a “level playing field for open and fair competition”. The UK government has already announced consultations on the possible reform of both the R&D and EMI schemes.
Anti-avoidance
The UK has already affirmed its commitment to continuing with the base erosion and profit shifting ISSUE 117 | AIAWORLDWIDE.COM
