EU to Step Up Tax Pressure on U.K. in Next Phase of Brexit

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By Joe Kirwin

EU member nations and the European Parliament will use the second phase of Brexit negotiations, due to begin in 2018, to ensure the U.K. adheres to tax policies that don’t distort single market competition.

At the same time, member nations and Parliament are expected to exert Brexit pressure to regulate Gibraltar and crack down on U.K. overseas territories and crown dependencies, according to EU officials.

European Parliament member Molly Scott-Cato told Bloomberg Tax that Brexit gives the EU political leverage when it comes to tax issues. She spoke after EU leaders agreed Dec. 15 to move onto the second-phase of Brexit talks that will focus on the transition arrangements and the permanent trading agreement between the two bodies.

“It is a priority for the EU 27 that once the U.K is operating as a third country, that the U.K. does not damage the EU single market,” said Scott-Cato, a U.K. member of the European Green Party, in a Dec. 15 email. She added that if the U.K. stays in the EU single market, the London inner-city finance sector must adhere to EU rules on tax matters.

EU Leverage

Scott-Cato said the future free trade agreement—which will be signed after the a yet-to-be-determined Brexit transition period—“will give the European Commission a chance to exert additional pressure on the U.K” when it comes to overseas territories and crown dependencies.

Ensuring that this happens will be a key goal of the European Green Party as well as other political groups in the European Parliament, which has veto powers over any final Brexit agreement. In November, the European Green Party released a report, “ Tax Justice for the Brexit Negotiations,” detailing the steps it wants the EU to take. These include:

  •  the termination of certain U.K. tax practices such as the non-domicile status, and reforms to the U.K.'s patent box and controlled foreign company rules;
  •  compliance by U.K. crown dependencies and overseas territories with the EU’s Anti-Money Laundering Directive as well as financial regulation and transparency standards;
  •  the end to zero-tax preferential regimes in the U.K. crown dependencies and overseas territories.

EU Clean Up

However, Scott-Cato and other European parliament members also said demands on the U.K. in the Brexit talks will only be successful if the EU forces member nations to reform harmful tax practices.

“For the EU, it would be important for the U.K. to stop playing to be a space for fiscal dumping ,” said Miguel Urban, a Spanish member of the European Parliament with the European United Left political group. “But the EU must also be an example by asking its own tax havens to take steps to stop competing by playing the same game.”

Concerning Gibraltar, Spanish officials, who earlier in the year declared the British independent territory to be a “tax haven,” made it clear that any agreement in the second and subsequent phases will have to include tax policy restrictions.

“There needs to be a serious tax policy clean-up of Gibraltar,” a Spanish diplomat told journalists at the EU Dec. 14-15 summit. “As we have stated from outset of the Brexit process, we will demand this. Nothing less. That has not changed.”

A spokesperson with the U.K., speaking on the condition of anonymity, told Bloomberg Tax the U.K. government was confident tax issues won’t be a problem for concluding a transitional and final EU-U.K. political and trade agreement, whether it be EU crown dependencies, overseas territories or Gibraltar.

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

To contact the editor on this story: Penny Sukhraj in London at psukhraj@bloombergtax.com

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