When the UK voted to leave the EU on the 23rd June 2016, no one could have imagined that the details of the exit would still be unknown and undecided almost three years later.
What was also not envisaged at the time was that the main stumbling block for the UK to leave the EU in an agreed manner would be the implications that Brexit would have on the Island of Ireland. The term “Backstop” is now a common word in the vocabulary of every EU politician and this term refers to a potential solution to the difficult political situation that Brexit creates for Northern Ireland and its relationship with Great Britain and the Republic of Ireland.
While many may wonder why this political issue with a small island in Europe could be one of the reasons for the delay in implementing an orderly Brexit, one must consider the significant historical links between the UK and Ireland and the current political situation concerning Northern Ireland.
In respect to the impact from a trading perspective, it is widely accepted that a no deal Brexit would have major detrimental implications for the Republic of Ireland due to the fact that the UK is its largest trading partner and export market. However, it must also be considered that the Republic of Ireland is the 8th largest trading partner for the UK and its 7th largest export market. UK exports to the Republic of Ireland are more than double what they are to larger countries such as Italy & Spain.
Tax & Economic Implications for Ireland:
Brexit presents many tax and economic challenges and opportunities for Ireland. Purely from a tax perspective, Brexit could have widespread implications such as:
• Tariffs and customs may be applied to the sale and acquisition of goods and services to the UK and Northern Ireland. The issue of Customs and Excise Duties is particularly complicated for Ireland given the political issues surrounding Northern Ireland.
• Due to Ireland’s geographical location, the majority of imports into Ireland must travel through UK ports. Any complications arising from Customs Duties could provide major obstacles in the smooth transportation of goods to Ireland.
• Brexit could result in the loss of VAT zero rating on business to business supplies within the EU.
• Irish businesses which incur UK VAT may no longer reclaim that VAT through the Electronic VAT Refund (EVR) mechanism. Instead, they may have to revert to the paper claim through the 13th EU Directive claims. This could create significant cash flow problems for Irish businesses.
• Distance Sales rules may no longer apply to the UK. Irish suppliers to UK consumers have to register for VAT in the UK in order to avoid UK customers becoming liable for VAT and duty.
• The UK may fall out of the scope of the Mini One Stop Shop (MOSS) for Telecommunications, Broadcasting & Electronic (TBE) supplies. UK suppliers of TBE to EU consumers may have to register for MOSS in another EU country. Ireland would be an obvious choice for many UK suppliers in which to register for MOSS.
• UK Travel Agents may have to register for VAT in Ireland if they are making supplies of accommodation in Ireland as the Tour Operator Margin Scheme may no longer apply to UK Travel Agents.
• Traders who import or export goods into or out of the EU will need a unique EORI number (Economic Operator Identification & Registration system). This number is valid throughout the EU. It is used as a common reference number for interactions with the customs authorities in any Member State. If the UK leaves the EU then an EORI number may be required for Irish businesses trading with the UK.
• If the UK leaves the EU, then it is expected that the UK may reduce its Corporate Tax rate even further. This will lead to increased competition with Ireland with respect to attracting foreign investment. Ireland may come under increased pressure from the EU in respect to its low 12.5% Corporate Tax rate as the UK was traditionally an ally of Ireland in objecting to a minimum EU Corporate Tax rate and common consolidated tax base.
• There may be implications where a UK company forms part of a Group Structure. It is possible that tax reliefs may be lost due to the fact that a UK company in the Group will not be resident in the EU. With Ireland’s close economic ties to the UK, many Irish companies will have UK branches or subsidiaries and vice versa. Irish Groups with UK entities will have to review how Brexit affects the structure from a tax perspective.
• It may no longer be possible to make dividend payments between EU parent and subsidiaries free of DWT if one of the entities is resident in the UK. This could have implications for many Irish or UK companies that have subsidiaries in the other country.
• Some UK headquartered groups may consider relocating to another EU country if it is no longer possible to pay interest and royalties free of withholding tax between group companies. There is an opportunity for Ireland to attract many of these companies due to the close ties between Ireland and the UK.
• Various other reliefs may be affected such as Capital Gains Tax and Stamp Duty on asset transfers, reorganisation reliefs and transfer of losses. UK companies may have to give serious consideration to their residency if Brexit adversely affects their tax exposure. Again, this is an area where Ireland may benefit if it can attract such companies to relocate to Ireland.
• From a personal tax perspective, Brexit is not expected to have as large an impact as it has on customs, VAT and Corporate Tax. There have been signs that some High Net Worth UK individuals are looking at moving some of their income bases to Ireland and avail of Irish non-Domicile rules with respect to the remittance basis of taxation. However, there does not yet appear to be a large exodus of UK HNW individuals leaving the UK as a result of Brexit but they are exploring other options in preparation for a no deal Brexit.
• Brexit may affect the agreements in place with respect to Temporary Assignees such as PAYE Exclusion Orders and A1/E101 Social Insurance arrangements. Due to the close economic and geographical links between Ireland and the UK the issue of Temporary Assignees and Cross Border Workers is a significant one and Brexit could have a negative impact on such arrangements.
• In respect to personal tax, one of the main issues may be the freedom of movement of people into and out of the UK. Air & Sea Travel routes between Ireland and the UK are amongst the busiest in the world and any disruption to the flow of people between both countries would have negative economic consequences for both countries. There is also the issue of travel between the Republic of Ireland which will remain in the EU and Northern Ireland which will be outside the EU.
• It is expected that the Double Tax Agreement between Ireland and the UK will continue to provide guidance with respect to the issue of personal taxes between both jurisdictions.
• It is widely agreed that after the UK, Ireland is the country that will be most affected by Brexit. While Ireland remains a fully committed member of the EU it also has intrinsic historical, cultural, economic and social links to the UK. It also shares a land border with the UK in Northern Ireland.
• It is in Ireland’s best interests that the UK’s exit from the EU is part of an agreed exit that maintains close economic and financial links between the EU and the UK.
• The Irish Government is issuing guidance to Irish businesses on the implications of a no deal Brexit and how businesses should prepare for such an event. Brexit also presents some opportunities for Ireland to attract UK businesses that wish to establish a presence in an EU country and for non-EU businesses looking to locate to an EU country in order to avail of the EU Single Market.
• It is hoped in Ireland that the new deadline date for the conclusion of Brexit negotiations on the 31st October 2019 will result in an agreed deal that paves the way for the UK to leave the EU in an orderly manner that creates the least amount of disruption possible for both Ireland, the EU and the UK. Otherwise, we may have a “Nightmare on Downing Street” on Halloween Night 2019.