The EU-UK Trade and Cooperation Agreement (TCA) covers a broad range of areas and establishes a new institutional framework for the operation and enforcement of the Agreement. However, it does not cover services, including financial services, to any great extent and there will undoubtedly be sectors such as fisheries which will be adversely affected by Brexit and where sectoral support will be required, writes KPMG's Head of Brexit, Brian Daly.
The TCA is underpinned by provisions ensuring a level playing field and mechanisms for avoiding and settling disputes between the EU and the UK concerning the interpretation and application of the TCA and supplementing agreements, with a view to reaching, where possible, a mutually agreed solution. These measures include an ability to impose unilateral rebalancing measures (Tariffs) in some instances.
The TCA also includes Most Favoured Nation Clauses such that if in the future either the UK or the EU agree to more preferential treatments with countries, the UK / the EU, as relevant, can generally claim equivalent treatment.
The EU and the UK have also agreed to create a joint body, called the Partnership Council, to efficiently manage the TCA, which will be co-chaired by a Member of the European Commission and a representative of the UK at ministerial level. The EU or the UK can refer to the Partnership Council any issue relating to the implementation, application and interpretation of the Agreement.
The TCA also provides for the establishment of a range of committees and working groups which appear to provide a framework for the resolution of disputes and for close cooperation between the UK and the EU across a broad range of areas into the future.
The TCA will be reviewed every 5 years, with the first general review taking place by end 2025. Either the UK or the EU can terminate the TCA with 12 months’ notice.
Key elements of the TCA are discussed below.
- Trade in goods
- Trade in services, including financial services & investment
- Dispute Resolution
- State aid and level playing field
- Law and regulation
- Digital trade, intellectual property, public procurement and small and medium enterprises (SMEs)
- Energy and Climate Change
- Road transport
- Social security coordination and short term visas
- Other areas of future cooperation
- Brexit Adjustment Reserve
Trade in goods
- The EU and UK have agreed to create a free trade area for goods with no tariffs or quotas on products as part of the larger economic partnership.
- The provisions in the TCA do not govern trade in goods between the EU and Northern Ireland, where the Protocol on Ireland and Northern Ireland included in the Withdrawal Agreement will apply, see here for more information on the NI Protocol.
- Despite the agreement to create a free trade area, trading under TCA terms with zero tariffs and quotas will still be very different compared to the frictionless trade enabled by the EU's Customs Union and Single Market. In particular:
- Rules of Origin will apply to goods in order to qualify for preferential trade terms under the TCA which can result in unexpected outcomes (see here for more information on Rules of Origin);
- All imports will be subject to customs formalities and documentation requirements and will need to comply with the rules of the importing party; and
- All imports must meet EU / UK standards and will be subject to regulatory checks and controls for safety, health and other public policy purposes, including Sanitary and Phytosanitary standards in relation to the agri-food sector).
As we have seen in recent days, these technical barriers are not insignificant and have the ability to create significant disruption to supply chains.
Trade in services, including financial services & Investment
- The TCA between the UK and the EU contains limited provisions on services – more limited than those envisaged under the Joint Political Declaration made by the parties in October 2019. Trade in services between the UK and the EU will no longer be as liberal as was the case when the UK was a member of the EU Single Market.
- In the absence of further agreements between the UK and the EU on trade in services, the level of access to each other’s markets may diminish over time as the EU Single Market further evolves and the UK charts its own path as a third country.
- Nonetheless, as noted by European Commission, the TCA “provides for a significant level of openness for trade in services and investment, going beyond the baseline provisions of the World Trade Organisation's (WTO) General Agreement on Trade in Services (GATS)”.
- In this regard, the UK and the EU have agreed that neither party can
- impose limitations on the number of services suppliers from the other party’s territory,
- require a service supplier of the other party to establish or maintain an enterprise or be resident in its territory as a condition for the cross-border supply of a service, or
- discriminate between their nationals
- Both parties have also agreed they will afford to services and service suppliers of the other party treatment which is no less favourable than, in like situations, that available to its own services and services suppliers.
- It should be noted that the TCA does not cover financial services or audio-visual services.
- In practice, the ability to supply a particular service or invest in a certain sector will also depend on specific reservations set out in the TCA, which may be imposed on UK service suppliers when supplying services in the EU in some sectors and vice-versa.
- The TCA provides that the “professional bodies or authorities, which are relevant for the sector of activity concerned in their respective territories, may develop and provide joint recommendations on the recognition of professional qualifications to the Partnership Council”.
- Hence there is a framework for mutual recognition of professional qualifications. Time will tell how extensive this turns out to be in practice.
- The TCA sets out new arrangements for the joint and sustainable management of shared fish stocks in EU and UK waters, “while fully respecting the rights and obligations of independent coastal States as exercised by the Parties”.
- It sets out new provisions on reciprocal access to waters as well new arrangements for sharing quotas. There will be a gradual phasing in of any changes of quota shares and provisions on access to waters. After a period of stability of five and a half years, during which the current rules will remain in place regarding reciprocal access, the TCA provides for annual consultations to establish the level and conditions of reciprocal access to each party's Exclusive Economic Zones and territorial waters.
- As noted above, the TCA provides for the set up of a Partnership Council and a range of Committees with representatives from the UK and the EU to deal with future disputes. The Partnership Council and these committees can enforce binding decisions on both the UK and the EU.
- In addition, the TCA provides for a Parliamentary Partnership Assembly, comprised of Members of the UK and EU Parliaments. The Assembly can make non-binding recommendations to the Partnership Council. The TCA also provides for civil society input on certain issues.
- The TCA also provides for time limited binding arbitration through an independent panel – both parties can appoint members to the panel.
- In addition, where one of the parties considers that the other has breached the terms of the TCA, parts of the TCAcan be suspended.
- These general dispute resolution provisions do not apply to the level playing field elements of the TCA.
State aid and level playing field
- The TCA contains some level playing field provisions to ensure open and fair competition and to contribute to sustainable development.
- Both sides have agreed not to undercut current levels of protection in areas such as environmental standards and labour laws in a manner that would affect trade or investment between the EU and the UK.
- The TCA also sets out commitments to minimum international standards in the area of taxation, including provisions relating to tax transparency and harmful tax practices.
- The TCA includes a rebalancing mechanism to manage future divergence from the TCA. Both sides can diverge from the TCA but may also apply unilateral rebalancing measures in the case of significant divergences in the areas of labour and social, environment or climate protection, or of subsidy control, where such divergences materially impacts trade or investment and there is “reliable evidence” of same.
- Each side can also seek a review of the trade and other economic parts of the TCA to ensure an appropriate balance between the commitments in the TCA if rebalancing measures have been taken frequently or for more than 12 months.
- Both the EU and the UK have agreed to common principles on State aid – governed by a subsidy control mechanism (discussed below) replacing the application of EU State aid rules to the UK. The UK and the EU are bound by State aid restrictions in their bilateral free trade agreements as well as through the rules of membership of the WTO and commitments to the OECD in relation to harmful tax practices. Nevertheless, there may be increased scope for UK government activity in some areas that were previously restricted under the rules of the EU Single Market, including the expansion of regional or sectoral grants and tax incentives or holidays (possibly focused around the planned “freeports” programme).
- Both sides have agreed to substantive rules on the use of subsidies to ensure neither side can use trade-distorting subsidies. These rules are underpinned by agreed enforcement tools, including a dispute settlement framework. The EU and the UK have agreed that subsidies must respect a defined set of binding principles in order to be granted. Subsidies should only be granted if they are contributing to a well-defined objective of public interest, if there is a need for State intervention to remedy market failure, if there is no other measure available that would lead to the same effect and where the subsidy is proportionate when taking into account its negative effects on trade between the EU and the UK.
- These general principles are complemented by specific binding principles applying to key sectors, such as energy and financial services, or types of aid, such as subsidies relating to research and development (R&D).
- With the aim of transparency, the EU and the UK will publish information on an official website or a public database within 6 months of the granting of a subsidy and within 1 year for subsidies in the form of tax measures.
Law and regulation
Digital trade, intellectual property, public procurement and SMEs
- The TCA contains provisions aimed at facilitating digital trade and ensuring the EU and the UK will cooperate on digital trade issues in the future, including on emerging technologies.
- The TCA sets out specific and detailed standards in respect of intellectual property rights, which are in addition to and which complement the existing Agreement on Trade-Related Aspects of Intellectual Property Rights (the TRIPS Agreement) which has been agreed between all the member nations of the WTO.
- On public procurement, EU firms will be able to bid on UK public sector contracts on equal footing with UK firms and vice-versa.
- The TCA seeks to maintain favourable cross-border trade conditions for SMEs in the EU and the UK through specific provisions in the TCA in relation to SMEs. This includes provisions in relation to information sharing.
Energy and Climate Change
- Both sides have agreed to establish a new framework for future cooperation in energy.
- From 1 January 2021, the UK will no longer participate in the EU internal energy market and the UK will trade on third country terms with the EU.
- The TCA contains specific level playing field provisions in relation to the energy sector, as well as those applying more generally on social and environmental issues.
- The UK will no longer participate in the EU Emissions Trading System (ETS) but both sides will consider linking their respective carbon pricing systems to ensure the integrity of their systems are preserved.
- A new framework for cooperation in the fight against climate change will be established, including an agreement that the current level of climate protection in the EU and in the UK will continue to be upheld. This also includes cooperation in the development of offshore energy with a particular focus on the North Sea and reaffirmation by both sides on their ambition to achieve economy-wide climate neutrality by 2050. The UK will, however, define its own climate change policies and targets.
- There is a separate agreement between the UK and Euratom on the safe and peaceful uses of nuclear energy.
- The TCA sets out new terms and conditions for market access, as well as arrangements for cooperation in the areas of aviation safety, security and air traffic management to ensure connectivity between EU and UK airports for passengers, goods and mail.
- UK air carriers wishing to fly under this Agreement will have to comply with certain conditions, such as holding a valid licence from the UK's competent authorities, having their principal place of business in the UK and being majority UK-owned and controlled.
- UK airlines will no longer be able to fly between two EU destinations.
- EU carriers will have to respect similar conditions on licences and principal place of business and continue to comply with EU requirements on EU/EEA/Switzerland majority ownership and control.
- As of 1 January 2021, the UK will no longer apply the EU's regulatory framework for aviation safety, and no longer participate in the European Union Aviation Safety Agency (EASA).
- The TCA provides for quota-free point-to-point access for operators transporting goods by road between the EU and the UK. Without such an agreement, only operators holding European Conference of Ministers of Transport (ECMT) licences would be able to undertake such journeys.
- UK and EU hauliers will also be able to perform up to two additional operations in the other party's territory once they have crossed the border – this is less than the “free” movement that applied up to 31 December 2020.
- Full transit rights across the other party’s territories are provided for in the TCA, meaning Ireland can continue to deliver goods to the EU via the UK.
- EU and UK hauliers will be bound by common road haulage sector standards under the TCA, such as those in relation to working conditions for drivers, qualification requirements and vehicle safety requirements.
- The TCA will also allow regular international bus services to continue to link the EU and the UK.
Social security coordination and short term visas
- The TCA contains a number of social security coordination measures aimed at protecting the entitlements of EU citizens temporarily staying in, moving to or working in the UK and vice-versa after 1 January 2021.
- From 1 January 2021, UK nationals are allowed short-term visa-free visits of up to 90 days within any 180-day period in the EU, following an EU decision on this point. The UK has also decided to reciprocate for EU citizens. The EU decision is conditional on the UK continuing to provide for equal visa-free travel for short-term visits for EU citizens of all EU Member States, without discrimination between EU nationals.
- The free movement of Irish and UK citizens between the UK and Ireland continues to be governed by the Common Travel Area, which is expressly acknowledged in the TCA.
- The majority of social security benefits will be coordinated and protected between the EU and the UK, however, there are some exceptions, including family benefits, long-term care, special non-contributory benefits or assisted conception services.
- Further information on new immigration rules and social security cooperation
Other areas of future cooperation
- There are further areas in which the EU and the UK agreed it was in their mutual interest to continue a close cooperation into the future, notably: health security, cybersecurity and information security.
- The UK will continue to participate in a number of EU Programmes, including Horizon Europe (Research), Euratom Research and Training, ITER fusion and Copernicus (satellite system). The UK remains a member of the European Space Agency.
- The TCA provides for cooperation between the EU and the UK on anti-money laundering and combating terrorist financing - confirming the EU and UK's continued commitment to Financial Action Task Force (FATF) standards.
- The TCA also contains a number of commitments in relation to peace, security and law enforcement, including continued UK participation in Prüm and UK cooperation with Europol and Eurojust.
Brexit Adjustment Reserve
In tandem with the TCA, on 25 December 2020 the European Commission put forward a proposed Regulation for a Brexit Adjustment Reserve to provide financial support to EU Member States worst affected by the UK leaving the EU. The proposed Regulation will now have to be adopted by the EU Parliament and the EU Council. The Reserve is intended to mitigate the adverse economic and social impacts of Brexit and will fund specific measures set up by the Member States to help businesses and economic sectors, workers, regions and local communities suffering from the impact of the end of Transition Period. The Brexit Adjustment Reserve will cover expenditure in any Member State over a period of 30 months, from 1 July 2020 to 31 December 2022.
The Brexit Adjustment Reserve will be implemented under shared management with the Member States and will most likely be implemented in Ireland through state agencies such as Enterprise Ireland and Bord Uisce Mhara. Member States will likely roll over existing systems already used for the management and control of cohesion policy funding or the European Union Solidarity Fund. Ireland’s initial proposed allocation for 2021 is €1.051 billion or 25% of the fund.
The Reserve can be used to support measures such as:
- support to economic sectors, business and local communities, including those dependent on fishing activities in the UK waters;
- support to employment and reintegration in the labour market of citizens returning from the UK, including through short-time work schemes, re-skilling and training;
- ensuring the functioning of border, customs, sanitary and phytosanitary and security controls, fisheries control, certification and authorisation regimes, communication, information and awareness raising for citizens and businesses.
How can businesses avail of the Reserve?
Businesses should analyse what parts for their business will be significantly impacted by Brexit. Based on that analysis, identify projects that require substantial funding (>€1M) that may be eligible for funding from the Reserve. Thereafter, consider approaching Government agencies with the projects and lobby for funding.
Get in touch
If you have any queries on how Brexit will affect your business, please get in touch with our dedicated Brexit Response Team.
Brexit deal agreed: Sections
- Business Impact and Planning: In Ireland
- Business Impact and Planning: In Northern Ireland
- Suggested Business Planning Framework
- Key Dates to be aware of
- The Trade and Cooperation Agreement (TCA)
- The Withdrawal Agreement
- The Northern Ireland Protocol
- The Brexit Omnibus Act enacted in Ireland
- VAT and Customs: The Rules of Origin
- Key VAT and Customs actions for Irish businesses to take
- Key VAT and Customs actions for Northern Ireland businesses to take
- An explanation of the key VAT and Customs measures
- Impact on employees' mobility – immigration and social security
- Impact on Financial Services
- Impact on Services
- Impact on Data movements
- Impact on Direct Tax matters
- Impact on some Company Law provisions