When the U.K. Chancellor of the Exchequer Phillip Hammond floated the idea of the city of London becoming “Singapore on the Thames” tax haven in the run up to the Brexit negotiations, it triggered alarm bells in Brussels. As a result, even before the U.K. Art. 50 was triggered the European Commission and the EU member states established an unfair tax competition red line.
An over the past year and a half of negotiations the EU remained steadfast. That became clear when the draft EU-U.K. withdrawal agreement – a 585-page document – was released Nov. 14. The accord, which will be put before EU leaders at a Nov. 25 special summit, containsa special annex where the U.K. has committed to abide by key EU tax laws. The agreement also contains a special protocol concerning Gibraltar where the U.K. has, at the insistence of Spain, agreed to ensure against tax evasion and money laundering.
Specifically the U.K. has made a general pledge to abide by the OECD BEPS reforms during the transition period and to implement key EU tax avoidance legislation, including the Anti-Tax Avoidance Directive. Just as important the U.K. has committed to abide by the EU Code of Conduct for Business Taxation as well as EU laws ensuring the exchange of information among tax authorities on a wide range of information including interest and capital gains.
“The taxation annex in the withdrawal agreement is a very important commitment by the U.K. to ensure that the ongoing efforts to crack down on multinational tax avoidance continue,” said EU chief negotiator Michel Barnier at a Nov. 14 press conference. “This will help fight against double non taxation as well as double taxation and serve as an insurance against unfair competition“.
The EU ATAD legislation, which will take effect in 2019, contains a range of measures designed to implement the BEPS reforms including rules on controlled foreign companies, exit taxation, interest limitation and hybrid mismatches. It was approved in 2016 and EU countries have been putting the provisions into national law in the past year.
The commitment to honor the Code of Conduct for Business Taxation for Business Taxation, which was launched in the late 1990s, has been the tool used to force EU member states to phase out more than 100 tax laws deemed to give domestic companies unfair advantage over those in other EU member states. The Code of Conduct group also is tasked with making the EU tax haven blacklist.
The EU-U.K. withdrawal agreement also calls for arbitration panel to be set up to referee disputes that arise if the EU believes the U.K. is not living up to its commitments. However, the EU did concede that taxation annex will not be covered by an arbitration panel, which will be set up to consideration disputes regarding other parts of the agreement.
Another key tax component of the withdrawal agreement, which was the subject of difficult, lengthy negotiations between the U.K. And Spain concerns a Gibraltar Protocol. The Spanish government insisted on a U.K. commitment to crack down on what it insists is large-scale tax evasion by letterbox companies set up in Gibraltar.
The final terms of the protocol state that Spain and the U.K. will “establish the forms of cooperation necessary to achieve full transparency in tax matters and in respect of the protection of financial interests of all the parties concerned.” This includes, according to theprotocol, “establishing an enhanced system of administrative cooperation to fight against fraud, smuggling and money laundering to resolve tax residence conflicts.”
Of course, these commitments will only apply during the transition period U.K., which is currently due to expire at the end of 2020 but could be extended. As for the future EU -U.K. Relationship, which is due to be negotiated during the transition period, the two sides have outlined a key concept in an eight-page document. But again the EU made it clear that fair tax competition was essential.
“Competition must be open and fair,” the EU-U.K. political declaration on the future relationship states. It added that this includes “relevant tax matters, building on the levelplaying field arrangements provided for in the withdrawal agreement and commensuratewith the overall economic relationship.”
As for the complicated issue of VAT, the withdrawal contains a separate article. We will cover the contents of it in next week’s blog. But just as a preview, it calls for the extension of EU VAT 2006/112/EEC to be extended five years after the end of the transition period“with regard to the taxable person’s rights and obligations in relation to transactions with a cross-border element between the U.K. and a member states that took place before the end of the transition period.”
Of course, if there is a no-deal “hard” Brexit all of these commitments are moot points. Let’s hope it never happens. But in the interest of preparing for the worst we will also consider the hard-Brexit taxation implications for both indirect and direct taxation over the next several months.