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Brexit – Foreseen effects: Tax

Now that the UK has chosen to leave the EU, considerable time and especially efforts to rebuild the legal framework for indirect taxation of trade shall be taken.

Concerning  indirect taxation, as long as the United Kingdom remains within the European  Union, the British VAT system will continue to follow the general principles laid down by Community Directives providing the common system of the Value Added Tax. In short, according  to these  principles, the sale of goods  for consideration between traders  established in different Member States constitutes intra-Community supply and as a rule VAT is applied “at destination”. The services rendered follow the “Business to Business” rule in which VAT is applied in the country of the principal in case  of a taxable person.  The legal framework inspired by the EU Directives on intra-Community trade may no longer be applicable. For Italian operators this will lead to a modification in the valuation of the English market in light of the new provisions they could enact  there.

This change will undoubtedly be significant: the sale of goods  between the English and Italian entities would qualify as imports / exports, so that, for example, Italian companies which purchase goods  from an English operator  will pay VAT at customs; services will not suffer substantial changes in the enchmark, but most service operations  will be excluded from VAT payment for lacking the territorial requirement. For these  types of operations,  the invoice integration system be abandoned in order to adopt  a self-invoice and reverse charge  system. The UK exit (not only of Great Britain, but also its relevant territories from a tax perspective such as, for example, the Isle of Man) from the EU will also have an affect on procedures that previously were simplified within the Community through uniformity of documentation. Similarly, the documentation accompanying the movement of goods  will change as there will be again a need  for accompanying documents to escort  moving goods  destined for Great Britain’s territories.

Last but not least, we must also re-evaluate the amount of customs charges and duties applicable to goods  from British territories. All this will have more than a social impact of course,  which, to the extent herein relevant, will mean an incremental increase in the costs of goods and services for businesses.

One last mention of VAT rates. In the interests of Community harmonization, the 1985 White Paper  envisioned a rationalisation of tax rates (for all Member States one rate not lower than 15%  and not more than 25% , and one reduced for some operations,  provided that is was not less than 5%): the purpose was to avoid the distorting effects of competition in intra-Community trade that could be generated as a result of differences in tax rates that, notwithstanding the equality of the taxable amounts, would irreparably affect the final price to the consumer  of a good.

The freedom of the United Kingdom from the obligation to adjust its VAT rates according  to this EU system could affect the market, with noticeable effects for Italian businesses and consumers.

All transitional arrangements and the development of any bilateral agreements which, with an eye to the “common good”, will be negotiated to avoid post-Brexit damage  on the fiscal and economic front and in trade relations between the countries, should be closely followed.

We should also consider the consequences for the direct taxation of British companies, or those  which are based in the UK. Brexit will not create  a legal vacuum since the law of the European  Union and Community tax rules will continue to be applicable up to the signing of an agreement on the exit of a Member State  as provided under the EU Treaty (Article 50).

The first special rule concerning  EU companies is the parent – subsidiary Directive (Directive 90/435 / EC, 2011/96, 2015/121), whose  purpose is to ensure  fiscal neutrality of corporate groups  through exemption from taxation and or by withholding of dividends paid to subsidiaries or affiliates.

The aim of this directive was and is to eliminate double taxation by eliminating tax constraints which limit the creation and development of corporate groups  in the EU member countries.

The requirements for exemption are: minimum holding of 10%  of the other’s company capital; minimum of two years possession, reducible

by the Member States; residence of the parent and child company in the EU and being the same subject in their Member States to the imposition of tax on national resident  enterprises.

European  law provisions widely used  by companies based in the United Kingdom are those  of Directive 49/03 on the regulation of interest and intercompany royalties. If companies meet the requirements set out in the parent – subsidiary Directive, except for the minimum holding percentage which rises to 25% , Directive 49/03 provides for the total exemption from taxation of interest payments  on loans and of fees from royalties made by a resident company of a subsidiary or associate in another member State.

You can consult and/or download the full version of the Brexit dossier here.


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