Brexit and tax

Irish tax regime

There is a current level of uncertainty hanging over the competitiveness of Ireland’s tax regime in circumstances where the UK is no longer constrained by the EU’s State Aid rules and is free to adjust its tax rates and employ potentially aggressive tax policies that encourage investment and FDI. In addition, other EU Member States are emerging with tax incentive proclamations to compete for FDI.   

The former UK Chancellor George Osborne announced that he was planning to cut corporation tax to less than 15% as part of a plan to give Britain a post-Brexit vote boost. France also climbed on the band wagon and is introducing tax policies to encourage FDI, with Prime Minister Manuel Valls stating, "We want to build the financial capital of the future," at the annual conference of France’s financial services lobbying group Europlace. 

Following Theresa May taking the reins as Prime Minister on 13 July, a cabinet reshuffle in the UK is well underway with announcements coming in every few hours.  Amongst various other changes, Philip Hammond has left the Foreign Office and been named Chancellor of the Exchequer calling into question the reduction of the UK corporation tax rate to 15% as announced by his predecessor George Osborne.

These are definite statements of intention and it seems highly probable that other countries will follow suit. The playing field is officially open and competition for FDI is going to be fierce.   

Ireland will need to consider its own tax incentive schemes and tax regime in the context of the UK levelling the playing field and more competitive regimes being introduced in other EU jurisdictions all of which increases the competition for FDI and diverts attention from Ireland. However, Ireland will be constrained in what it can achieve by EU rules and budgetary constraints, so this will make it challenging to maintain our relative competitiveness when compared to an unconstrained competitor.      

Budget 2017

Just before the referendum, Minister for Finance Michael Noonan and Minister for Public Expenditure Paschal Donohoe delivered their Summer Economic Statement, in which they outlined their optimistic expectation of having probably in excess of a billion euros to give away in the October budget in tax cuts and extra spending subject to the caveat that the impact of the UK referendum may wipe out any anticipated excess. It appears that this caveat may now be the most important part of the Summer Economic Statement. 

The Taoiseach has given assurances that Britain’s decision to leave the EU should not have any impact on Budget 2017. However, a post-Brexit recession is considered inevitable by some commentators and one would wonder whether (this time) we should heed the warning of ill winds and temper the planned Government spending in anticipation of future pressure on the Exchequer rather than continuing with commitments that may no longer make economic sense in the wake of events in the UK. 

At the time of writing, there have been some comments stating that election spending promises may have to be curtailed following Brexit.

Imports/exports

The UK may no longer be part of the single market. This will have a direct impact on imports and exports where VAT zero rating on business to business supplies within the EU is lost. Any exports by the UK into the EU will be subject to tariffs and customs and excise duties at the point of import thereby making UK goods more expensive in the EU market and creating an earlier cash flow point for businesses.

Additionally the UK will be entitled to charge import duties on any EU imports into the UK thereby making EU products more expensive in the UK and reducing Irish export companies competitiveness in that market. 

Import duties will leave businesses faced with additional upfront costs which may lead to cashflow problems. Businesses may need to fund what would previously have been a non-existent import duty before taking a corresponding deduction for the expense.   Cash-flow is cited as the single biggest reason that start-up businesses fail. 

Corporation tax rate

Minister for Finance Michael Noonan has given assurances that there is no threat to Ireland’s 12.5% corporation tax rate as a result of Brexit. However, this does not quite fully assuage the fear that our tax rate will once again be brought into focus for attack by our remaining EU contemporaries. Our ability to protect our corporate tax rate on the basis of a Member State’s autonomy to set tax rates may be at risk now that we have lost one of our closest allies on this matter at the EU negotiation table.  

Group structures

Consideration will need to be given to group structures where a UK company forms part of that group structure. Most tax relief/reduction or preferential treatment is predicated on group companies being resident within the EU.

The presence of a UK company within the group structure may lift tax neutrality on inter-group transactions including, inter alia; withholding taxes on interest and royalties; transfer taxes such as CGT and stamp duty; reorganisation relief; merger relief; transfer of losses; and VAT. In certain circumstances, the provisions of the Double Tax Agreement will mitigate this effect and will need to be consulted for all transactions between Ireland and the UK henceforth. 

EU directives

EU Directives will cease to have effect.   There are many Directives that will have an impact and each will require consideration in its own right. 

At first blush, two important directives for tax purposes that will cease to have effect are the:-

• parent/subsidiary Directive that allows dividends between EU subsidiary and parent free of Dividend Withholding Tax (DWT); and
• interest and royalties Directive that allows interest and royalties to be paid free of withholding taxes between group companies which will impact UK headquartered groups.

Social security

Ireland and the UK have an existing robust Social Security bilateral agreement that will continue in place even when the UK formally leaves the EU. This agreement, although not as favourable as the current regime, should ensure that the ability of short term workers to the UK to continue making their PRSI contributions in Ireland and for persons permanently employed in the UK to continue to aggregate their Irish and UK social insurance contributions in determining pension entitlements.