Post-Brexit changes in direct taxation

Much is currently being written about the changes in VAT, duties etc. arising from the Trade Deal between the UK and the EU agreed on Christmas Eve. This article looks at changes indirect taxation, so in this case on income and profits with a particular slant on cross-border tax changes.

To quote from the EU’s own website: “The EU does not have a direct role in collecting taxes or setting tax rates. The amount of tax each citizen pays is decided by their national government, along with how the collected taxes are spent.” Thus, UK taxes on income and profits have never been regulated or influenced by the EU to any great degree, and therefore nothing much will change in that regard post-Brexit. The UK will still need to balance the collection of tax revenue, even more so to fund the government’s Covid initiatives, with the requirement to stimulate domestic business and employment, and to attract foreign investors.

What follows are a few instances where direct taxes will be affected by Brexit.

Withholding taxes

Whilst the UK was in the EU, withholding taxes on payments of dividends, interest and royalties between EU member states were governed by the relevant EU directives. These largely stipulated that no withholding taxes would arise on such transactions between member states. The EU directives will no longer apply in relation to such payments between the UK and the remaining EU members. This could result in withholding taxes being applied where none were previously, as these will now be determined by the relevant Double Tax Treaty (DTT). UK DTTs with a number of EU countries do indeed provide for the reduction rather than the elimination of such taxes. There are currently eight EU countries whose DTT’s impose a withholding tax on dividends paid to a UK parent. As the UK does not usually tax companies on dividends received, such withholding taxes will represent a sunk cost.

DAC6

DAC6 is the EU’s Mandatory Disclosure Regime. This imposes reporting obligations on EU intermediaries (and taxpayers) to disclose cross border arrangements that meet one or more of five sets of hallmarks (A-E). Following the conclusion of the Free Trade Agreement between the UK and the EU, the UK will no longer require intermediaries to file reports under DAC6 with respect to the sets of hallmarks A, B, C and E but only with respect to the sets of hallmarks D.

Hallmarks D relate to the automatic exchange of information and beneficial ownership, as a countermeasure against undermining reporting obligations or obscuring beneficial ownership.

That said, even this will fall away soon to be replaced by the implementation of the OECD’s Mandatory Disclosure Regime (which is broadly equivalent to the D hallmarks).

Tax reliefs and exemptions to be lost

Companies may also stand to lose certain tax reliefs and exemptions. In some EU territories, UK companies may no longer be able to consolidate with other local entities for tax purposes because they are no longer linked by a common EU-resident parent company. Termination of existing consolidations could see tax liabilities arising.

Some EU territories have controlled foreign company (CFC) rules, which grant a specific exemption or relaxation in the case of CFC’s in an EU member state. As the UK has ceased to be an EU member state, it will be necessary to re-assess the ongoing CFC status of UK resident companies controlled by a parent company resident in another EU territory.

US Double Tax Treaty

Another post-Brexit change (implemented on 1 February 2020, the date the UK left the EU) is that a mechanism for accessing US DTT’s no longer applies for EU subsidiaries of UK parent companies because the UK is no longer an EU member state. This means UK-headed groups with US investments may suffer an increase in US withholding tax exposures.

Restructuring

Many businesses have undertaken restructuring in light of Brexit, e.g. to enable regulated businesses to continue accessing the EU market. This can result in a number of tax impacts. Where businesses transfer functions, assets, or risks from a UK entity to an EU one, e.g. to meet regulatory requirements, exit taxes and transfer pricing implications may arise.

Employees

Employee mobility in the form of the free movement of people between the UK and the EU has ended. However, from a tax perspective, another change to consider is social security. For assignments commencing from 1 January 2021, dual social security liabilities could potentially arise.

Property taxes

Some EU countries impose significant taxes and social charges on foreign property owners, with protections for EU nationals. As UK residents will no longer qualify for these, such landlords may now suffer additional foreign tax liabilities.

If you require any cross-border tax advice, get in touch today.

Want to learn more? Visit our International Tax page here.