Brexit Seen Boosting EU Drive to Harmonize Corporate Tax

For over 50 years, Bloomberg BNA’s renowned flagship daily news service, Daily Tax Report® has helped leading practitioners and policymakers stay on the cutting edge of taxation and...

By Joe Kirwin

June 24 — The U.K.'s exit from the European Union is expected to strengthen the drive led by Germany and France to harmonize corporate tax policy—especially when it comes to an upcoming attempt to revitalize a plan to develop a single set of rules that would allow cross-border companies to file a single tax return for their EU activities, according to European Parliament members, tax practitioners and some academics.

The U.K. departure also will eliminate a potential legal hurdle for a financial transactions tax (FTT) that is in the final stages of negotiations by 10 EU countries, practitioners said.

Other pending or upcoming tax legislation likely to be affected by the U.K. vote to leave the EU includes revisions to the EU Anti-Money Laundering Directive that would require making companies' real ownership public, a blacklist of tax havens along with sanctions against them, and reporting of companies' taxes paid and profit earned in each country of operation.

What effect, if any, the U.K.'s departure will have on the EU's highly publicized state aid investigations is unclear. As EU officials ponder their role in the new, dramatically different organization, they could conceivably decide to scale the investigations back—or go forward with renewed energy.

“The whole vote suggests that there's maybe more of a populist concern about the EU,” said Lilian Faulhaber, an associate professor at the Georgetown University Law Center, adding that the state aid investigations, by looking into the tax practices of large corporations, could play into that populism.

The state aid investigations looked into whether companies have received impermissible state aid—banned under an EU treaty—through lax enforcement of transfer pricing rules in advance pricing agreements or rulings.

CCCTB Test

The first big EU corporate tax policy test following the June 23 referendum will come when the European Commission in October proposes a revised common consolidated corporate tax base (CCCTB). Originally put forward in 2011, it has been stalled because of opposition led by the U.K..

“The U.K. played a powerful role in the Council of Ministers when it came to countering the French-German axis in favor of enhanced corporate tax harmonization and possibly rates,” Stefaan de Baets, a Brussels-based corporate tax lawyer with PricewaterhouseCoopers LLP, told Bloomberg BNA June 24. “That was especially true with the CCCTB. No doubt France and Germany will now renew their push for corporate tax harmonization. It might not happen immediately as it depends on what role that the U.K. will have in decision-making process as it negotiates its exit.”

Exit Strategy

EU leaders and the European Parliament will convene starting on June 28 to map out a strategy for the exit of the U.K.

European Commission President Jean-Claude Juncker said at a June 24 press conference that until the U.K. departure is finalized, the country will retain voting rights in the Council of Economic and Financial Affairs.

“We have rules to deal with this in an orderly way,” Juncker said. He added that “until this process of negotiation is over, the United Kingdom remains a member of the European Union with all rights and obligations that derive from this.”

The U.K. isn't expected to rush into beginning the separation process. British Prime Minister David Cameron announced June 23, in conceding defeat of the Remain in the EU camp, that the U.K. would wait to invoke Article 50 of the Treaty of Lisbon to leave the EU until a new prime minister is appointed by October 2016. Leaders of the official “Vote Leave Take Control” campaign also cautioned any future government not to rush into invoking Article 50.

Besides the CCCTB, another test for an exiting U.K. will come after July 5, when the European Commission proposes EU Anti-Money Laundering Directive revisions, which have been called for in the wake of the Panama Paper revelations. A primary issue is whether the revisions for beneficial ownership will extend to trusts, which the U.K. has opposed in the past.

Possible Silver Lining

While most EU officials expressed regret at the U.K. vote to leave the EU, especially over the geopolitical concerns it raises, some said there could be a silver lining when it comes to corporate tax policy.

“Looking forward, post-Brexit, I do feel that we might be able to move more quickly and more decisively not only on internal policy such as the FTT and the CCCTB but also with regards to external steps such as the common EU list of tax havens and sanctions against non-cooperative tax jurisdictions, where a number of them are part of the British Commonwealth,” Jeppe Kofod, a Danish member of the European Parliament and a spokesman on tax issues for the Socialists and Democrats, told Bloomberg BNA June 24.

The European Commission in coming months is expected to present a “scoreboard” rating foreign countries, including independent territories, linked with the U.K. The list will serve as the basis of an EU tax haven blacklist that EU member states are due to finalize in 2017.

Three days before the U.K. in-or-out referendum, the 28 EU countries agreed on the Anti-Tax Avoidance Directive, the terms of which EU countries must implement into national law by the beginning of 2019.

Because the ATAD goes beyond some provisions of the Organization for Economic Cooperation and Development's recommendations on combating tax base erosion and profit shifting—including on the issues of controlled foreign companies, exit taxation and interest limitation—questions linger about how the U.K. parliament will handle the issue (120 DTR I-1, 6/22/16).

“I would not be surprised if the British Parliament decides to detach itself from the Anti-Tax Avoidance Directive,” said Tommaso Faccio, a taxation professor with the University of Nottingham, told Bloomberg BNA June 24. “As it is European legislation, it will be seen as a negative.”

Faccio also said a U.K. exit from the EU poses potential clashes with EU competition authorities over tax incentives that the U.K. will likely offer to persuade the banking and financial services industry to remain or invest in London.

“One of the arguments that civil society groups made to remain in the EU during the campaign was that if the country is out, the city of London will become a tax haven,” said Faccio. “Now that it is leaving, the U.K. government will be keen to put in place tax incentives to keep businesses from leaving and to attract new investment. That will likely cause conflicts with the EU in the future.”

With assistance from Alex M. Parker in Washington.

To contact the reporter on this story: Joe Kirwin in Brussels at correspondents@bna.com

To contact the editor on this story: Rita McWilliams at rmcwilliams@bna.com

Copyright © 2016 The Bureau of National Affairs, Inc. All Rights Reserved.