Brexit’s bearing on United Kingdom (“UK”) tax policy is a common topic of discussion in the wake of the June 23rd, 2016 United Kingdom European Union membership referendum on the United Kingdom’s membership of the European Union (“EU”), which saw UK voters choosing to terminate its membership with the EU. While many interesting insights have been set forth in the days leading up to and following the United Kingdom’s decision to “Leave” the EU, much of the discussion is merely speculation because tax implications of Brexit are highly conditional on the character of the UK’s future formal relationship with the EU. Potential alternatives include the UK: (1) participating in the European Economic Area as a European Free Trade Association member state; (2) negotiating a free trade agreement with the EU or individual agreements with different trade sectors; and, (3) participating in an ongoing customs union with the EU. Certainty regarding the form of the future UK-EU relationship will not be known for years as the parties are now embarking on a two-year administrative process to negotiate the terms under which the UK will leave the EU. As result, a clear understanding of future UK corporate tax policy will remain ambiguous in the short term.
Though more time is needed to develop a clear understanding of Brexit’s many implications on the UK’s future tax regime, clear consequences are apparent for multinationals with UK operations. Specifically, the UK’s departure from the EU will preclude UK taxpayers from benefiting from existing EU Directives that exempt taxpayers from paying withholding tax on dividend, royalty and interest payments among entities in EU member countries (i.e., the Parent-Subsidiary and Interest and Royalties Directives). Consequently, upon exiting the EU, withholding tax rates on such payments involving a UK taxpayer will be determined pursuant to local statutory laws or negotiated tax treaties, which could result in increased corporate tax burdens. This change in withholding tax obligations will undoubtedly play into how multinationals structure European operations. That said, substantial changes are not anticipated for the legal framework under which the UK tax authority will scrutinize transactions among entities of a multinational group (the “UK transfer pricing rules”) because membership in the EU does not have a direct bearing on the UK’s transfer pricing rules. Rather, consistent with the UK’s status as a member of the Organization for Economic Cooperation and Development (“OECD”), the UK transfer pricing rules endorse the practice of evaluating controlled transactions based on the concepts, methods and principles outlined in the OECD’s Transfer Pricing Guidelines for Multinational Enterprises and Tax Administrations. As a result, but for being a potential harbinger of a UK exit from the OECD, multinational enterprises and tax practitioners alike should not expect for Brexit to result in significant modifications to UK transfer pricing rules.
For more information on multinational taxation or transfer pricing concerns, please contact Ben Miller by calling 770.396.2200.