Rethink the EU landscape | KPMG | BE
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Rethink the EU landscape

Rethink the EU landscape

Rethink the EU landscape

While Brexit continues to cause many uncertainties, the United Kingdom's expected exit from the European Union on 29 March 2019 will have an impact on many Belgian businesses. Jeroen Gobbin, Partner and Head of the Brexit task force at KPMG: "Brexit is increasingly resembling a last-minute trip booked at the airport to an unknown destination. The departure is a fact, but we don't know yet where we are going. We therefore need to make sure that our suitcases are packed for both a sunny holiday on the beach and a skiing holiday in the mountains".

Jeroen Gobbin: "Immediately after the outcome of the 2016 referendum, we brought together experts from our various services – taxation, mergers and acquisitions, risk management, Global Mobility Services and law firm K law – to ensure a quick response".

The divorce agreement describes how the EU and the UK will go their separate ways. The agreement was made between both parties in November this year, but still needs to be approved by Parliament. In practical terms, this means that the British will pay for the financial obligations they entered into previously, certain rules have been agreed regarding how to deal with the rights of Europeans now living in the UK and vice versa, and a transition period is in place until 31 December 2020, which can be extended once. To avoid a physical border between Northern Ireland and the Republic of Ireland, an ultimate emergency solution has been included: the so-called “backstop”.

Jeroen Gobbin: "We need to bear in mind that the divorce agreement itself says nothing about the future relations between Europe and the UK, which is obviously the most crucial aspect for businesses in the long run. It appears as though not much will change for businesses during the transition period which starts on 29 March. However, this period is less than two years and will be critical for negotiating and concluding a comprehensive trade agreement between the UK and the EU. Similar negotiations on agreements between the EU and Japan and the EU and Canada (CETA) have shown that this is a very tight deadline."

Various scenarios

"Our businesses will benefit most from an extended transition period," says Steve De Poorter, Senior Supply Chain Management Manager at KPMG: "Trade would remain more or less frictionless, and trucks would continue their journey upon arriving in the port without any declaration forms, inspections or checks." If a free trade agreement is not in place at the end of the initial or extended transition period, the backstop will enter into force. In this scenario, Northern Ireland would remain part of the European Single Market, and the rest of the UK would be linked to the EU via a customs union. "Trading with the UK would then be similar to trading with other foreign countries. No import duties would be levied, but there would be formalities and checks at the border, as is the case today between the EU and Turkey, for example," De Poorter says. Businesses would therefore need to deal with these customs formalities and should seek specialized advice on this subject.

One tricky point in this scenario is that it only applies to goods, not services. This means that work would have to continue after 29 March 2019 to conclude a more comprehensive trade agreement. Gobbin: "It is difficult to say exactly what that would look like today, because only a political declaration has been made on this subject. The real negotiations still need to begin. An ambitious free trade agreement is always preferable to a no-deal scenario, but import duties may still be imposed if the origin of certain products can't be sufficiently demonstrated based on the rules of origin.

Measuring impact and costs with data analysis

The infamous no-deal scenario, in which trade between the UK and the EU falls back on the rules of the World Trade Organization, is the least favorable scenario. De Poorter: "In addition to import tariffs, this would also cause many organizational and logistical problems, such as congestion at border crossings and ports. This is the scenario that everyone is hoping to avoid, but for which we should prepare ourselves anyway."

KPMG has developed a simplified data scan that can give businesses an initial indication of their level of exposure to Brexit. In a next phase, KPMG can use data analysis of publicly available datasets and your own data to make a detailed calculation of the costs of a goods flow in each of the different scenarios. Gobbin: "For example, our D&A tools allow us to estimate what the additional customs duties are for a particular product in each of the scenarios. In the event that the cost for one product increases enormously, you can concentrate more on exporting another product, or you may even consider opening a local office in the UK as a better option". KPMG offers guidance throughout the entire supply chain, including warehouse location and management, logistics requirements, procurement and supply and contracts with suppliers and customers.

Let’s not forget the impact on employees

The more complex travel conditions will certainly have a major impact on businesses. Nele Godefroid is the Director of Global Mobility Services at KPMG. She gives businesses and employees advice on tax, social security and immigration: "After 29 March, it looks as though the Europeans and British will consider each other as so-called third-country nationals at the border. This will mean extra paperwork and longer turnaround times to deploy people from the UK. If you have employees on both sides of the Channel, you need to establish whether any action is required to guarantee their immigration status and/or social insurance. We have the experience to assist businesses with this: many of our customers are already third-country nationals".

According to Godefroid, there is more at stake than just procedures and formalities. "There are certain profile and skill shortages on the labor market that make economic migration a necessity. We hope that the negotiators working on the future relationship between the UK and the EU will take this into account. We should not only focus on the political situation, but also the labor market reality on both sides of the Channel."

 

As an entrepreneur, how can you prepare for Brexit?

Regardless of the scenario that follows, it makes sense to take the following 'no regrets' steps:

  1. Do you lack experience in dealing with customs formalities? If so, you should quickly find a partner who can take care of that for you;
  2. Are you a supplier? If so, agree on who is responsible for what in relation to imports and exports. Also add conditions precedent to your terms and conditions of delivery;
  3. Are you a customer? If so, the same applies: agree on how you will receive the goods and which activities you will be responsible for in this process;
  4. Think about how financially dependent you are on British customers. If the number of British customers in your portfolio is large and poses an excessive risk, try to further diversify your customer portfolio;
  5. Consider whether you should build up strategic stocks of raw materials from the UK in order to facilitate on-time deliveries;
  6. If you have employees on both sides of the Channel, you need to establish whether any action is required to guarantee their immigration status and/or social insurance;
  7. Find out how well prepared you are for Brexit by taking our quick scan.
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