The UK left the European Union (EU) on 1 February 2020 pursuant to a Withdrawal Agreement which set out a transitional period during which the UK remains a member of the EU Single Market and Customs Union. These transactional arrangements end on the 31 December 2020 after which, absent an agreement to the contrary, the UK will cease to be part of the EU Customs Union or Single Market. However, special arrangements are in place for Northern Ireland so that for the time being it will largely remain within the Single Market and Customs Union in respect of goods. We have set out below some of the expected tax impacts for business arising from these changes.
Post 31 December 2020, the EU’s VAT regime will no longer apply in Great Britain (GB). GB will become a third country in terms of VAT. Goods moving from GB to Ireland (or vice versa) will become subject to import VAT payable at the point of import. Currently, businesses importing from GB do not pay import VAT. Instead they account for VAT in their periodic VAT returns on the difference between EU wide purchases and sales. If businesses are required to account for VAT upfront on purchases, this would create cash flow difficulties.
To address this issue, new rules deferring the obligation to account for import VAT upfront on imports from GB (Ireland’s largest trading partner) are being introduced. The UK has introduced a new “postponed VAT accounting” scheme. Under this scheme, VAT may be accounted for (and simultaneously reclaimed) in the importer’s bi-monthly UK VAT return in certain circumstances. This means importers into GB will not face cash flow difficulties on importing goods from EU member states post 31 December 2020.
The Irish Government’s “General Scheme of the 2020 Brexit Omnibus Bill” (“Bill) includes amendments to tax legislation to ensure continuity of business in light of the UK leaving the EU and includes proposals for introducing a “postponed accounting for VAT” in Ireland. When enacted, importers registered for VAT in Ireland will be able to avail of postponed accounting for VAT. Under this scheme (similar to the UK), importers will not pay import VAT at the point of entry but instead will account for it through their bi-monthly VAT return. This should eliminate any potential cash flow issues for traders.
For the time being, there should be no change post 31 December 2020 to the VAT position in terms of the trade in goods with Northern Ireland which will remain subject to the EU’s VAT regime/ Single Market.
2. Customs Duty
At the time of writing, no free trade agreement (“FTA”) has been agreed between the EU and GB. Therefore customs duties should apply to goods imported from GB to the EU and vice versa. The UK have announced their new system of tariffs, the UK Global Tariffs system (“UKGT”) which will apply to most imports into GB from 1 January 2021 (in the absence of any FTA agreed in the meantime). While many tariffs provided in the UKGT are at more favourable rates than existing EU tariffs, this change could have an impact on the price of products in the UK which were purchased from EU countries, which previously were not subject to tariffs. In contrast to VAT, a trader cannot recover customs duty and it will therefore be a real cost for businesses.
As things currently stand, UKGT should not apply in Northern Ireland post 31 December. Goods traded between Northern Ireland and EU member states will free from import tariffs and duties and our borders should operate seamlessly.
Important registration requirements for Traders
Economic Operators’ Registration and Identification (“EORI”)
All importers and exporters need to be registered for customs purposes. In terms of the UK leaving the Customs Union post 31 December 2020, it is critical for businesses which trade goods between Ireland and GB to have an EORI number. An EORI is an identification number valid throughout the EU, used by traders importing and exporting goods in and out of the EU. This number (which can match a trader’s VAT number) harmonises the importation process and is used to identify the trader at any point of entry into the EU. Registration for an EORI number can be done via the Revenue Online Service. A trader must be registered for customs and excise taxes to be eligible to apply for an EORI.
Authorised Economic Trader (“AEO”)
Certain traders with operations within the EU can apply for AEO status which is an internationally recognised standard whereby an importer / exporter is designated as a trusted trader. Trusted traders get the benefit of simplified customs procedures bringing faster and more efficient clearance of goods at frontiers which could prove invaluable post the transitional period. However, not all businesses will be eligible for AEO status. Businesses should check their eligibility to apply for AEO status given the benefits it offers.
The tax implications of Brexit are most evident in the areas of VAT and customs duties which are subject to common EU rules. Other taxes (i.e. taxes on income, profits and gains and transaction taxes) are, for the most part, governed by the domestic law of Member States and international tax treaties and Ireland has a good regime for relieving such taxes.
However, there are a number of EU directives and regulations and decisions of the Court of Justice of the European Union (CJEU) which provide for beneficial tax treatment for persons who are EU residents which may no longer apply to the UK going forward.
1. EU Directives and Regulations and Ireland’s double tax treaties
The EU Parent / Subsidiary Directive, Mergers Directive and Interest/Royalties Directive provide for specific relief from withholding tax and other taxes in certain situations, where the parties involved are within the EU. The departure of the UK from the EU will mean that UK taxpayers will no longer be able to benefit from these reliefs and similarly, Irish and other EU taxpayers will no longer be able to rely on these reliefs being available in the UK. Fortunately, many of the reliefs provided for in these Directives may also be available under the provisions of our domestic legislation or in the case of the UK, under reciprocal UK legislation or Ireland’s double tax treaty with the UK (“Treaty”).
For instance, payments of interest and dividends from Ireland to persons resident in the UK entitled to the benefit of Treaty will not be subject to Irish withholding tax. So the loss of the relief under some of these EU Directives may have no impact in certain situations. However, the conditions that will apply to availing of relief may be different to those that would have applied under the Directives. So it is important to ensure that the non-application of these EU Directives does not have a negative impact in a given situation.
In addition, it is worth noting that UK residents will no longer be considered EU residents for the purposes of our double tax treaty network. This will have an impact on the availability of the benefits of the Ireland / US double tax treaty where under the “limitation of benefits” clause, the benefit of the treaty is linked in certain situations to ownership by EU residents. Going forward, UK resident owners will not qualify for these purposes.
2. Domestic Legislation
In addition, it is worth noting that much of Ireland’s tax legislation is drafted to provide relief to companies resident in the EU or an EEA state. For example, there is a valuable relief from corporation tax on chargeable gains in Ireland in respect of the transfer of business assets under a scheme of reconstruction or amalgamation of companies. The relief applies where the companies involved are EU resident or resident in an EEA state with which Ireland has a double tax agreement. From 31 December 2020, transfers of assets to or from a UK company will not qualify for this relief.
Similarly for stamp duty, relief in the case of reconstructions and amalgamations may no longer apply to UK entities acquiring Irish based companies after the transitional period ends as the legislation specifically requires the acquiring company be incorporated in the EU or EEA. This would make the acquisition of Irish companies by UK companies more expensive.
Legislative Amendments to Manage these Issues
The Bill (mentioned earlier) contains proposals to amend Irish tax legislation to ensure continuity for individuals and businesses in relation to access to certain reliefs and allowances. It proposes extending the definition of relevant Member State to include the United Kingdom. This will ensure that the corporation tax on chargeable gains relief for reconstructions and amalgamations outlined above will continue to apply for UK companies. Similarly, the Bill proposes amending the reconstruction and amalgamation stamp duty relief, such that UK companies may still benefit from the relief in acquiring an Irish business.
Other proposed amendments applicable to companies include extending the exception from the re-characterisation of interest as a distribution where payment is made to a UK company, and extending the availability of the research and development (R&D) tax credit for qualifying R&D carried out in the UK. These are all welcome measures.
It is hoped that any potential adverse effects of Brexit from a tax perspective will be addressed in the enactment of the Bill discussed above. Fortunately, much of the rest of Ireland’s tax system is likely to remain unaffected by Brexit.
Post Brexit, Ireland will be the only English speaking member of the EU with a low corporation tax regime, highly developed business environment and common law legal system which should ensure that it remains a very attractive country in which to do business.