What does Brexit mean for US multinationals? Keep calm and carry on.
TAX BLOG |
The immediate impact of Brexit was clear on the financial markets as many world indexes posted double digit losses in the wake of the historic vote. As market jitters have calmed many are now focusing on the long-term consequences. For U.S. multinationals with operations in the U.K., the long-term impact of Brexit may be dramatic but for now it appears that it will be business as usual.
The British exit from the EU will not happen overnight, and until negotiations begin it is unclear what the future relationship will look like between the U.K. and EU. In order to retain access to many of the benefits of the European single market the U.K. would need to either join the European Economic Area or negotiate a bilateral agreement like the one between Switzerland and the EU. Until exit negotiations commence there is not much multinational taxpayers can do to prepare. However, we can look to the likely negotiation topics in order to be ready.
Absent an agreement like the one between Switzerland and the EU, the U.K. may no longer benefit from EU “laws” such as the interest and royalties directive or the parent-subsidiary directive, both of which offer EU member taxpayers reduced withholding tax rates on inter-company payments. However, the U.K. would also no longer be subject to EU state aid investigations into impermissible tax benefits. This may open an opportuntity for the U.K. to offer businesses tax incentives that otherwise would have not been allowed while a member if the EU.
If an agreement between the U.K. and EU cannot be reached to maintain some preferential status for the U.K. then U.S. multinationals will likely need to make adjustments once Brexit is final. Those U.S. multinationals most likely to be affected by Brexit will be those with subsidiaries established in the U.K. to operate as international holding companies; cash flows between the U.S. and U.K. should remain unaffected but flows between the U.K. and the EU may become subject to withholding taxes. While Brexit may not pose imminent tax hurdles the OECD’s base erosion and profit-shifting (BEPS) project is well underway and may have a far greater impact on U.S. multinational taxpayers.
Speak to your tax advisor for further further understanding of how Brexit or BEPS may impact your bottom line.