While the process of exit is likely to take some time, a period of up to two years once Article 50 of the Treaty on European Union is invoked and which can be extended by agreement, it is predicted that economic growth will be adversely affected, certainly in the short term while negotiations are ongoing and uncertainty remains for both the UK and the 27 remaining EU Member States.
Although there have been some conciliatory rumblings from the EU, there are also fears that Brexit might create a domino effect with other EU Member States calling for referenda on a possible EU exit. Future negotiations between the EU and UK may be a balancing act between facilitating trade and cooperation on the one hand and discouraging other EU Member States from following the UK’s lead. The UK is a significant economy, being the second largest economy in the EU behind Germany and fifth largest economy in the world, meaning that it has considerable negotiating power.
Potential developments in the UK
Following the UK’s exit from the EU, EU State Aid rules will no longer apply, arguably giving the UK the opportunity to introduce more attractive tax incentives to encourage Foreign Direct Investment by multinationals and to incentivise wealthy expats to relocate to the UK. As an OECD and G20 member country, the BEPS initiatives limit the scope of tax incentives, though.
Uncertainty around how future trade between the UK and the remaining EU Member States will be negotiated in terms of customs duties that might be imposed may encourage multinationals currently based in the UK to relocate to an EU country. A cash flow disadvantage will also arise in relation to VAT at the point of entry for goods coming from EU Member States into the UK and for goods coming from the UK into EU Member States. This will primarily be of concern where the UK business is currently in use as a gateway to Europe. Research suggests that EU membership increases FDI from outside the EU by 27%.
The cessation of the UK’s membership of the EU is likely also to have an impact on workforce mobility and the free movement of people, both for UK citizens living and working elsewhere in the EU and for non-UK who are citizens of the remaining EU countries who are living and working in the UK.
Impact for Ireland and potential to capitalise on the move of multinationals out of the UK
The volume of trade between Ireland and the UK, estimated at over €1 billion in goods and services being exchanged between our countries on a weekly basis, means that Ireland will wish to keep trade with the UK as open as possible. At the same time there is likely to be a wish to capitalise on the move of multinationals out of the UK, should this arise. It was reported over the weekend that the IDA have approached 1,200 multinationals to assure them that Ireland’s future remains aligned with the EU. Government sources have also reiterated Ireland’s commitment to the 12.5% rate of corporation tax.
Key advantages of Ireland that might be highlighted to multinationals headquartered in the UK include its attractive headline 12.5% corporate tax rate; a comprehensive tax treaty network; its status as a common law jurisdiction that is similar to the UK’s legal system; its status as the fastest growing economy in the EU; its highly skilled and educated workforce allied to stable labour costs; R&D incentives comprising the R&D tax credit regime and the 6.25% effective rate of corporation tax introduced from 2016 under the Knowledge Development Box legislation for IP income derived from patents, certain patentable rights, and computer software; its close proximity to the UK, its status as an English speaking EU Member State with close ties to the US and its business friendly government.
Some commentators are highlighting the potential for investment banks to move from London to other centres including Dublin and Frankfurt. A report in Saturday’s Financial Times suggested that some moves are imminent.
Reasons for this, and also for moves by other firms in the financial services sector including insurance companies, is the ability for certain financial firms who have a base and are regulated in one EU country to do business throughout the EU without having to obtain an authorisation or registration on a country-by-country basis. It is likely that the asset management sector in the UK will be significantly impacted and it was reported prior to the referendum that the Irish Central Bank was preparing for an increase in applications for authorisation from asset management companies due to fears from asset managers that they would no longer be able to sell UK regulated funds into the EU following a Brexit.
It is forecast that Brexit will mean lower economic growth in Ireland, which may have implications for the tax giveaways highlighted last week by Ministers for Finance Michael Noonan and Minister for Public Expenditure Pascal Donohue as being possible in Budget 2017 due for release in October.
Some reliefs and exemptions contained in Irish tax legislation will no longer apply to the UK following their exit from the EU. Others apply within both the EU and EEA and so will continue to apply should the UK leave the EU while retaining membership of the EEA.
Such reliefs and exemptions include agricultural relief, which currently applies to agricultural property in an EU member state; stamp duty relief on reconstructions or reorganisations of companies, which is available to companies incorporated within the EU or the EEA; the capital gains tax relief introduced in 2012 that applies to land or buildings situated in any EEA state where the property is held for a seven year period; corporation tax loss relief, whereby the Irish branch of an EU or EEA tax resident company can effectively net taxable trading profits and losses with those of Irish tax resident companies, arising in the same accounting period, where the EU or EEA company that has an Irish branch and the Irish companies are members of the same 75% group, as defined; the Employment and Investment Incentive (EII) introduced in Finance Act 2011 which allows the relief to apply where a company in which the investment is made is incorporated in an EEA state – EII relief will not be available to an investor in a UK incorporated company.
How we can help
We can advise businesses considering relocating to Ireland of the tax advantages and considerations of doing so. We will provide updates on significant developments from a tax perspective involving Brexit as they arise.
Commentary since and prior to the referendum have one common theme: there are considerable uncertainties around the UK’s exit from the EU. The impact for the EU and particularly for Ireland given our close ties economically and geographically will be significant. Managing uncertainties including potential volatility of sterling and implications for their cost base while at the same time continuing with growth plans are likely to be among the key challenges for business. Ireland’s competitive tax regime, the availability of talented workers from within the EU and outside and our access to EU markets should ensure that we will be a more attractive location to locate FDI compared to the UK and this should be a significant in particular for FDI from the USA where the UK historically benefitted.