As we rapidly approach 1 January 2021, we remind readers of the most pressing issues for the tax department to deal with.
Remember Brexit? That thing we were all talking about from early 2016 until the end of last year. Then we had an election, followed by a pandemic, and it just went away. Well it’s back. The second wave has started. And there’s an odd sense of déjà-vu as we find ourselves discussing exactly the same issues we were obsessed about two years ago. And just as before, the burden of Brexit planning and uncertainty falls on the tax department. Tim Sarson, Tax Partner, KPMG in the UK, sets out his views on the current state of play and what tax departments should be focussing on now.
The current state of play
The Withdrawal Agreement was signed on 24 January 2020 and came into effect on 31 January 2020. Among other things, three major subjects were settled: (i) The status of Northern Ireland as part of the customs and regulatory territory of the EU; (ii) The immigration status of EU27 and UK citizens; and (iii) The UK’s financial obligations.
The UK is no longer a member of the EU. Since February we have no MEPs, no commissioners, and no formal means of influencing regulation or tax policy. However we remain until 1 January next year, subject to most remaining rights and responsibilities of EU membership including regulatory passporting and oversight, free movement of people / visa free travel, no customs borders, and access to various tax relieving directives.
There are a few scenarios for what happens on 1 January 2021:
My money is on the light touch scenario. Regardless, the important point is that whatever happens, short of some historic U-turn, the UK will enter 2021 as a third country with customs and regulatory borders in the Channel and the Irish Sea (and Kent?), and all the disruption and additional bureaucracy that this involves. It may or may not also enter the year with greater freedom for the state to intervene in the economy through tax incentives and subsidies, previously restricted by EU state aid rules.
We have roughly three months until Brexit. What do you need to do? It would take several articles to cover the full extent of Brexit changes to all types of tax, indeed at KPMG we maintain a reference bible of all conceivable tax impacts which runs to many pages and is regularly updated. To keep things simple, we have focused on three of the most pressing topics in corporate, indirect and payroll tax that are common across many sectors and taxpayers:
Many multinationals with UK regional headquarters have restructured their European trading activities, typically by inserting a ‘Brexit company’ in a member state or in some cases, shifting entire functions. This is driven variously by: the loss of regulatory passporting for financial services, pharmaceuticals and some other industries; the risk to physical supply chains of border friction; and customs compliance issues for non-EU entities importing and, in particular, exporting products out of the bloc. Even some companies with no clear technical reason to do so have gone, or are going, via the Brexit company route to be on the safe side.
The tax impacts of this are primarily in the supply chain: new VAT registrations and customs authorisations, and the right transfer pricing model for a supply chain that may involve very significant volumes of sales but a limited amount of new substance. For some bigger shifts, taxpayers have to consider potential exit costs, and the related risks such as Diverted Profits Tax (DPT), Offshore Receipts in respect of Intangible Property (ORIP) and permanent establishment (PE).
Early in Brexit, there was optimism about a community-wide replacement for the parent-subsidiary directive or bilateral agreements to eliminate dividend withholding tax. There has been some progress in the latter, for example the UK and Austria have recently agreed conditions under which withholding tax will be relieved on dividends, but by and large there should be non-zero withholding tax on dividends from a number of EU locations from 2021.
Most companies with a UK holding structure have responded by paying out distributable reserves before the end of the year, buying a little time. If you have not yet done this, it is worth considering.
In 2020 the headache was people being in the wrong place at the wrong time. Next year, as we (hopefully) start to move around again, it will be social security. There’s no immediate prospect for reciprocal social security arrangements across the community, so we fall back on a patchwork of domestic legislation and very old bilateral social security agreements. For regular business travellers it will mean the same need for tracking and compliance as we already need for travel to and from Switzerland.
Now is the time to dust down last year’s no-deal plans if you haven’t already. In the meantime, please speak to your usual KPMG contact and we’ll be happy to discuss.
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