Get updates by email
- Sanford L. Michelman
- Matthew R. Lasky
- Robert P. Barbarowicz
- Robert N. Berg
- Ronald R. Camhi
- Peter F. Cifichiello
- Jesse Contreras
- Robert D. Estrin
- Jeffrey D. Farrow
- Taylor C. Foss
- Samantha Gavin
- Kelly M. Hagemann
- Mona Z. Hanna
- David F. Hauge
- Ryan Hong
- Marc R. Jacobs
- Bryan Johnson
- Warren A. Koshofer
- Dana A. Kravetz
- Vincent S. Loh
- Scott T. Lyon
- Jennifer A. Mauri
- Kathleen M. McCain
- Amanda K. Monroe
- Michael S. Poster
- Eric J. Rans
- Richard Reice
- Mark B. Robinson
- Ian Shane
- Lara A. H. Shortz
- Adam Z. Solomon
- Peter L. Steinman
- Todd H. Stitt
Timur Arbaev © 123RF.com
Brexit: The Knowns and The Known Unknowns
On June, 23, 2016, the UK population voted by 51.9% to 48.1% to leave the European Union (EU). Turnout was 72%, with a record 46.5 million people eligible to vote. The then Prime Minister David Cameron led the “Remain” campaign and immediately after the “Leave” result it was announced he would resign.
In voting to leave the EU, the UK has made probably its most profound economic and political decision in 60 years. In doing so, the UK electorate has registered its dissatisfaction with the EU economic and legal model, rejected European integration and globalization, and, perhaps most significantly of all, has registered its dissatisfaction with the “establishment.” But what happens next?
A Long Goodbye
The UK is in the EU until it is not. It will take some years to achieve a complete exit. While the exit strategy is hammered out by the politicians, and the implications of Brexit slowly reveal themselves, there may be some inertia in terms of how businesses and individuals proceed. We expect a 'look before you leap' basis of decision-making to be adopted by both UK domestic and foreign businesses. Some of the gloomier predictions made are probably overdone - the economic impact will run in both directions, and there will be upsides and opportunities in the current situation.
The impact from Brexit will vary across business sectors; some sectors will be more resilient while others will find strong headwinds holding their businesses back. For example, Brexit won't stop the UK population from increasingly shopping online, but will likely stop US technology businesses from basing their European headquarters in the UK as a gateway to the EU.
Political & Government Context
Political fallout from the Leave vote will be substantial. David Cameron has resigned, and as of July 13 Theresa May is the new British Prime Minister. Ms. May was a Remain supporter but not a very passionate one. A general election is possible but the new Prime Minister has stated that she does not intend to call one at present. The process for leaving the EU looks unlikely to start immediately should take longer than the anticipated two years that politicians are currently projecting.
No Imminent Second Independence Referendum in Scotland
An immediate second Scottish Independence vote also looks unlikely. Although Nicola Sturgeon (leader of the Scottish National Party) has said the Leave vote represents a sufficiently significant change in Scotland's circumstances to call another independence referendum, we think she is unlikely to do so any time soon.
There are three reasons for this. Firstly, the key questions facing Scottish voters in the 2014 referendum (such as currency, monetary policy, and the handling of historic debt) are still not resolved. Secondly, because an important source of tax revenue (North Sea oil) has collapsed in price since 2014. Thirdly, because Scotland 'exports' far more to the rest of the UK than it does to the rest of the EU, so it makes little sense to erect new tariff barriers with the UK rather than the EU. Only if Scotland believed that its trading relationships with England could be radically altered in favor of trade with the EU would it make economic sense to leave the UK trading bloc in favor of the EU.
Process for Leaving
Article 50 of the EU Treaty sets out the process for leaving the EU. There is a two year negotiation period for exit, but this only starts when the UK Government notifies the Council of Europe of its decision to leave. Exactly what constitutes a decision by the UK Government is not clear (the referendum is not itself that decision as it is only advisory) but a formal Government decision is probably enough. Crucially, the two year period can be extended (and it probably will be, given the complexity of the issues at stake). Once the UK Government's notification has been issued there is no provision for it to be withdrawn.
There are two elements to the subsequent negotiation: the "arrangements for withdrawal", and "the framework for the UK's future relationship with the EU," which Article 50 implies need to be considered together. This introduces the prospect that the UK might simultaneously apply for membership in the European Economic Area (“EEA”) or European Free Trade Area (EFTA”), which themselves have relationships with the EU. There is no provision for the Scottish Government to enter into any formal negotiation with the EU; Scottish independence would need to come first.
This process appears to be sufficiently complex for it to absorb most of the relevant capacity of the UK Government over the negotiation period, particularly its trade negotiators and lawyers. For example, one report suggests that over 40,000 pieces of secondary legislation have been passed by the EU institutions and which apply to the UK. In each case, the UK Government would need to decide which of these it wanted to keep, amend, or repeal. It is unlikely that a start could be made on agreements with non-EU countries until the question of the UK’s relationships with the EU was concluded.
The UK is not the only country facing political constraints during the exit process. Both the French and German Governments face general elections during 2017, which means that political leaders in the rest of the EU will be under considerable domestic pressure to explain how these countries will deal with the impact of the UK leaving on issues like: migrant management, EU financial contributions, trade issues from fisheries to financial services, and on the position of the hundreds of thousands of French and German nationals working in the UK.
Models for Future Relations Between the UK & EU
The negotiations on the "framework for the future relations" between the UK and the EU under Article 50 EU Treaty may lead to various outcomes, based on the following existing models:
Norwegian-style EEA agreement: The UK joins the EEA and maintains full access to the single market, but must adopt EU standards and regulations with little influence over these. The UK need not be involved in EU programs involving financial redistribution, such as the Structural Funds, the Common Agricultural Policy and the Framework Programs for R&D.
Swiss-style bilateral agreements: The UK and the EU agree on a set of bilateral agreements which govern UK access to the single market in specific sectors only.
Free Trade Agreement-based approach: The UK is free to agree to FTAs independently and the UK’s relationship with the EU itself is governed by an FTA.
Most Favored Nation-based approach: No need to agree on common standards and regulation, but at the expense of facing the EU’s common external tariff, which damages UK trade in goods and services with the EU.
Tax Implications of Brexit
The likely tax outcomes of Brexit are difficult to predict, not least because the terms of any future exit remain unclear. In general terms, not being in the EU would remove the UK's powers to impact EU level tax matters, while on the other hand the UK will no longer be bound to the restrictions of the EU treaty including EU efforts to limit harmful tax competition.
The tax implications of Brexit would depend on what other agreements the UK is able to hammer out post exit. The expectation is that the UK's membership in other international organizations, like the OECD, and other bilateral tax treaties would continue to limit its ability to introduce a completely new tax policy.
After an exit, dividends to UK companies are no longer governed by the EU Parent-Subsidiary Directive. In general, this provides that where a parent company in one EU member state receives dividends from a subsidiary company in another EU member state, the member state of the parent company must not tax the receipt. As a result, no withholding tax is due on dividend distributions to parent companies that are resident in the EU and fulfill certain other conditions.
If the Parent-Subsidiary Directive no longer applies, a group company with a parent company in the UK and subsidiaries in other member states (or vice versa), may become subject to double taxation with respect to profit distributions unless a double tax treaty or similar agreements prevent this.
The Merger Directive applies to mergers, divisions, and transfers of assets and exchanges of shares that take place between companies in different member states and provides a deferral of the taxes that could be charged on the difference between the real value of such assets and liabilities and their value for tax purposes, subject to certain conditions. After Brexit, the UK will no longer be a party to the EU Merger Directive, which is designed to remove fiscal obstacles to cross-border reorganizations. This will make reorganizations involving UK entities more difficult and potentially trigger taxes
UK VAT law derives from European Law. After an exit the UK will no longer be required to give effect to the VAT Directives and regulations. It would be open to the UK to change how VAT is charged or even to replace it with an alternative sales tax.
After an exit, new rules would have to be developed to replace or modify the existing VAT rules which distinguish between supplies made to or from the EU member states. The UK would lose access to the EU "one-stop shop" mechanisms that removes the burden for a business having to register for VAT in up to twenty-eight jurisdictions.
There are far more unknowns than knowns at this point in the United Kingdom’s exit from the EU. The inevitable changes to the UK’s laws and regulations will almost certainly have unexpected consequences and business both within the EU, the U.S. and further afield, which have UK interests, will have to keep alert and nimble to adapt their business in the wake of Brexit.
This article is not offered as, and should not be relied on as, legal advice. You should consult an attorney for advice in specific situations.