The Impact of Brexit on Tax and Tariffs
On the tax side, the immediate impact of Brexit is a political one, insofar as Ireland has lost its main ally in arguing the case against a minimum EU tax rate and the introduction of an EU-wide common consolidated tax base.
The certainty of Ireland's ongoing EU membership also provides opportunities for businesses to plan now for the UK's EU exit based on existing Irish and UK tax law. The VAT "one stop shop" arrangements for pan-EU traders are likely to cease in the UK post-Brexit. Businesses may wish to consider methods of relocating to Ireland to avail of this facility. Such arrangements may involve cross-border mergers into Ireland using EU-based provisions for deferring UK exit taxes or otherwise avoiding any such taxes. The use of Irish incorporated holding companies to avail of EU grouping tax exemptions may also increase and become a substitute or an alternative for UK incorporated holding companies.
Tariffs and customs duties could arise on the supply and acquisition of goods and services across the border with the UK and Northern Ireland, although it seems likely to us that there will be an attempt to avoid such barriers to trade during Brexit negotiations.
Much of Ireland’s legislative direct tax system is likely to remain unaffected by Brexit and therefore there is a degree of certainty for businesses looking to invest in Ireland and benefit from its EU membership. Ireland’s tax law has been drafted to avoid fiscal obstacles to trade (eg withholding taxes) where the overseas party is either a member of the EU or like the UK has a double tax treaty with Ireland. For example, dividends paid to an EU resident other than an Irish individual do not attract 20% withhold. When the UK leaves the EU, there will still be no such withhold by reason of Ireland continuing to have a double tax treaty with the UK.
While there will be no immediate impact on VAT charging and its recoverability, Brexit could ultimately result in the loss of VAT zero rating on business to business supplies, within the EU. Also, the UK will lose the benefits of EU directives on absence of withholding taxes on monetary flows, e.g. parent/subsidiary.
In terms of challenges facing the Irish economy in light of Brexit, we would expect the UK to significantly enhance its tax offering to attract inward investment by way of tax competition. This may include offering incentives for inward investment that under EU rules would constitute illegal State aid, but which may no longer apply to the UK.
On the international front, the ability to avail of the Ireland/US double tax treaty will be somewhat curtailed under the limitation of benefits clause where an Irish company is ultimately owned by EU residents that are based in the UK, although the policy makers in Washington may see fit to add a protocol to the Treaty to enable UK residents to benefit post-Brexit.