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Daily Tax Report: International

EU Reassured by U.K. Pledge to Keep Tax Policies Post-Brexit (1)

Nov. 15, 2018, 11:55 AMUpdated: Nov. 15, 2018, 5:49 PM

European Union policy makers are reassured by the tax agreement reached in the draft Brexit deal, under which the U.K. has pledged not to adopt tax policies that would undermine the EU single market.

The commitment puts to rest fears in Brussels that the U.K. could use unjust tax policies to compete with the EU following Brexit.

“The taxation annex in the withdrawal agreement is a very important commitment by the U.K. to ensure that the ongoing efforts to crack down on multinational tax avoidance continue,” said EU chief negotiator Michel Barnier at a Nov. 14 press conference.

“This will serve as an insurance against unfair competition and any erosion of the integrity of the EU single market,’' he said.

In its draft agreement over the terms of its exit from the EU, the U.K has made a general pledge to abide by the OECD’s base erosion and profit shifting measures during the transition period and to implement key EU tax avoidance legislation, including the Anti-Tax Avoidance Directive (ATAD).

Most senior ministers backed the 585-page draft agreement Nov. 15, following a dramatic four-hour emergency cabinet meeting and several resignations.

In the agreement, the U.K. has committed to abide by the EU Code of Conduct for Business Taxation—a commitment by member nations to abolish tax measures that constitute harmful tax competition.

The commitment to honor the Code, launched in the late 1990s, will ensure that the U.K. doesn’t adopt any of more than 100 tax laws that have been phased out in the 28 EU member nations in order to stop harmful tax competition. The Code of Conduct group also is tasked with making the EU tax haven blacklist.

The U.K. also pledged to abide by EU laws ensuring the exchange of information among tax authorities on a wide range of information, including interest and capital gains.

The EU ATAD legislation, which will take effect in 2019, contains a range of measures designed to implement the BEPS reforms, including rules on controlled foreign companies, exit taxation, interest limitation, and hybrid mismatches. It was approved in 2016 and EU countries have been putting the provisions into national law in the past year.

Arbitration Panel

The EU-U.K. withdrawal agreement also calls for an arbitration panel to be set up to referee disputes that arise if the EU believes the U.K. isn’t living up to its commitments during the transition phase. However, the taxation annex specifically states that the arbitration panel will not apply if there are disputes about abiding by EU tax laws.

The withdrawal agreement includes a protocol concerning Gibraltar. The Spanish government insisted during the Brexit negotiations on a commitment by the U.K. to crack down on what it insists is large-scale tax evasion by letterbox companies set up in Gibraltar.

The agreement states that Spain and the U.K. will “establish the forms of cooperation necessary to achieve full transparency in tax matters and in respect of the protection of financial interests of all the parties concerned.”

This includes, according to the protocol, “establishing an enhanced system of administrative cooperation to fight against fraud, smuggling and money laundering to resolve tax residence conflicts.”

State Aid Cases

The draft agreement includes a provision that permits the bloc to bring state aid cases against the country for up to four years after the end of the transition period in Dec. 2020.

The European Commission’s most high-profile state aid case to date saw member country Ireland, in a 13 billion euro ($15 billion) dispute over the tax arrangements it permitted Apple Inc., which based its European headquarters in the country.

The draft agreement, which is still subject to approval from U.K. lawmakers, also answers several abiding questions about tax policy and dispute mechanisms for tax matters, when there are disagreements between the U.K. and the EU after Brexit.

Despite securing the support of her cabinet for the deal, Dominic Raab, the minister for exiting the European Union, resigned from his post saying he couldn’t back May’s deal. Additionally, the secretary of state for work and pensions, Esther McVey, resigned arguing that the deal put before the cabinet yesterday evening did not “honour the referendum result”.

“These documents were the result of thousands of hours of hard negotiation by U.K. officials, and many, many meetings, which I and other ministers held with our EU counterparts,” the Prime Minister Theresa May said in a statement following the meeting.

Key tax questions the draft agreement now answers include:

State Aid

  • The agreement includes a provision that the EU and U.K. will continue to cooperate on ongoing civil cases.
  • State aid cases can be brought up to four years after the transition period for events that occurred before transition concluded.

The U.K.’s Competition and Market Authority will manage enforcement of state aid cases after Brexit. The U.K. government has already said it would give due regard to EU case law.

CJEU

  • Cases pending before the Court of Justice of the European Union (CJEU) at the end of the transition period, brought by or against the U.K., or referred by a U.K. court, will be able to continue to a final resolution providing legal certainty for individuals and businesses involved in or affected by these cases.
  • The Withdrawal Agreement allows for the European Commission to bring infraction cases against the U.K. for up to four years after the end of the transition period for failures to comply with EU law prior to the end of the implementation period.
  • U.K. courts will be able to make preliminary references to the CJEU for eight years after the exit date of March 29, 2019.

Indirect Taxes

  • The U.K. will continue to have access to a number of EU networks including information databases to allow the U.K. to share information on VAT and excise and to fulfill the obligations listed in the Withdrawal Agreement, for four years after the transition period.

Transition Period

  • Transition period where EU rules apply agreed until the end of the year 2020, with an option to extend after June 30, 2020 decided by an EU-U.K. committee.
  • When there are disagreements about the withdrawal agreements this same committee will meet to attempt to negotiate a solution, failing that it will be passed on to an independent arbitration body.

“Divorce Bill”

  • The EU and U.K. have agreed a settlement amount of 35 to 39 billion pounds ($45 billion to $50 billion) to settle the U.K.’s outstanding financial commitments to the EU.

To contact the reporter on this story: Hamza Ali in London at hali@bloombergtax.com

To contact the editor responsible for this story: Penny Sukhraj at psukhraj@bloombergtax.com