EU Directives and Regulations
First and foremost, a full Brexit may mean that the UK can no longer directly benefit from the key EU Tax Directives aimed at the single EU market (Parent/Subsidiary, Interest/Royalties, Merger, Savings, Social Security, and VAT Directive).
The flipside is that the UK is no longer bound to the (draft) EU Directive(s) aimed at harmful tax competition such as the Anti-Tax Avoidance Directive, Common Consolidated Corporate Tax base (CCCTB) and the Directive on Administrative Cooperation (automatic exchange of information) or obliged to grant the benefits of these single market Directives to Dutch companies doing business or investing in the UK. Also the concept of State Aid (think Starbucks) would no longer apply to the UK.
All of course very much depends on the relationship between the UK and the EU going forward, e.g. a full break-up, a Norwegian (EEA), Swiss (EFTA), or other model with a decreasing order of integration and access to the single EU market. It is likely that only in case the UK and the EU agree to a model which provides for full access to the single market, the UK will be entitled to the benefits of EU Tax Directives aimed at supporting the single market from a taxation perspective.
It also depends on what view the UK take of the merits of the directives – on anti-avoidance, the UK has been a vocal proponent of measures to combat anti-avoidance and is an advocate of transparency. Equally, it is not clear what happens to historic tax matters or claims – which relate to periods when the UK was a member of the EU.
Example: Parent / Subsidiary Directive vs. Tax Treaty
In case of a full break-up and as long as no specific arrangement is agreed upon, Dutch companies with business interests in the UK and vice-versa need to rely on the UK/the Netherlands tax treaty to prevent potential double taxation. The outcome could very well be less favorable. For example, the statutory dividend withholding tax rate on profit distribution by a company resident in the Netherlands is 15 per cent. Dutch domestic laws implementing the Parent/Subsidiary Directive allow dividends to be paid from the Netherlands to a shareholder in another EU member state owning at least 5 per cent of the shares in the Dutch company without attracting any Dutch withholding tax, hence a reduction from 15 per cent to nil. If the UK is no longer part of the EU, a UK shareholder must rely on the UK/the Netherlands tax treaty to avoid possible double taxation. On the basis of the treaty the Dutch dividend withholding tax rate of 15 per cent is in principle only reduced to 10 per cent, or to nil but only in case a UK corporate shareholder holds 10 per cent of the voting rights in the Dutch company. Consequently, UK corporate shareholders owning less than 10 per cent of the voting rights of the Dutch company paying the dividends would be confronted with a 10 per cent withholding tax.
VAT and Customs
VAT is a completely different issue. There are no bi-lateral agreements that govern indirect taxes such as VAT. The UK will have to modify or replace its VAT rules which currently are directly based on the EU VAT Directive. It is not clear how far the UK will adopt the EU VAT rules; while it is unlikely that there would be immediate radical change, over time the two systems would diverge – particularly if there is continued VAT case law developments at the ECJ or there is a review of the extent of VAT exemptions (such as for the financial services or insurance sectors). Brexit means that, among other things, UK businesses will lose access to the “one-stop-shop” mechanisms that applies to different areas of VAT to reduce the administrative burden of having to register for VAT in all EU members states.
Last and not the least, customs charges on trade between the UK and third countries including the EU member states. Unlike excise duties which are not fully harmonized in the EU, for customs purposes the UK applies the EU Common Customs Tariff. This system is designed and controlled by the EU itself. If the UK would want to charge tariffs on imports, it would mean that the UK must implement a domestic tariff system, possibly based the WTO General Agreement on Tariffs and Trade.
It is clear that, especially in case of a full break-up, there is a significant burden on the UK to come up with new laws and regulations to replace or amend the current EU rules that have been implemented in UK law. This also applies to the field of taxation. This does however not mean that the UK has total freedom and can start with a blank sheet when it comes to taxation.
The UK is a member of the OECD which restricts its ability to fully set its own tax agenda. Moreover, it is still bound to bi-lateral taxation agreements with most, if not all, of the current EU member states. It is unlikely that from a taxation perspective the UK will be able to, nor would want to, operate in splendid isolation. The UK will be conscious that business will potentially have to cope with other pressures – making immediate and radical changes to the tax system unlikely in the short term. The long term is different.