Wednesday, July 6, 2016

What is Brexit and How Will it Affect Taxes?

One of the most important events that have happened these days is the so called Brexit (or British Exit), a term used to refer to the United Kingdom leaving the European Union. This Event has had a lot of consequences in both national and international aspects and has affected greatly the finances of the country. These consequences can be seen in the drop in both the price of the Pound and British shares, this has led to different reactions in international finances, for example the rise of the American dollar just days after the decision.

Most think that this was a bad decision and will have bad consequences for the United Kingdom, and these problems have started to appear through the country. One of the biggest consequences people think the United Kingdom will face is the fact that the intervention of the European Union helped keeping the United Kingdom, well, united. Brexit has made the tension between the countries that make part the United Kingdom clearer, especially from the side of Scotland as most of them didn’t want Brexit to happen. Scotland has also been historically against British control and Brexit seems like it will strengthen the Scottish separatist groups even more and this might just push Scotland enough to leave the United Kingdom. Ireland on the other hand, depended a lot of the European Union help reduce tension in the borders, also most of Ireland supported to Remain in the European Union.

Image courtesy Karen Bryan | Flickr
As we said before, most consequences of the decision will be economical and one of the things that will be affected both directly and indirectly is taxes. Taxes will face changes from both Brexit directly and from other economic aspects that are also affected by it. Before we go into taxes directly, we have to take into account that many things may vary depending on how the government of the UK decides to manage their relationship with the European Union and what models they choose to follow. The three models that are the most likely to be chosen, are the Norwegian model, the Swiss model and the Canadian model. The Norwegian model means the UK will make part of the European Free Trade Association and will be a party of the European Economic Area Agreement, meaning its economic relationship would be regulated by the European Union. In the Swiss Model, the UK would make part of the European Free Trade Association but it would not be a party of the European Economic Area Agreement, this would make trade between both to be regulated via an agreement between both sides, though this seems to be the less viable model. The final model is the Canadian model, this model makes use of the World Trade Organization to regulate and supervise the relationship between the countries and the European Union, and would depend on other groups and alliances to help regulate the commerce. Some of these alliances include the OECD, G20 and the one mentioned before, the WTO. After they choose one of these models, the consequences will be easier to predict as more information will be available.

Image courtesy Images Money | Flickr
First we will analyze what taxes will be affected indirectly be Brexit. The first one will be VAT, VAT is chargeable in most products and services provided within the European Union but each member chooses how it works for them, including methods of collection and rates. This will mean the UK will have to analyze and modify it so it can be viable for them when they are not part of the EU. The UK leaving the EU means the UK will have total power over their taxes and might even overhaul the whole system, but this will also mean they would have to pay additional taxes when making commerce with the EU. The UK will not be able to make use of some of the economic advantages of the EU, like the proposed US-EU Transatlantic Trade and Investment Partnership that will remove some custom duties and other trade barriers.

Finally the taxes that will be affected directly are mostly those related with company profits and capital gains, as the UK will have no obligation to follow the EU laws designed to reduce the burden of direct taxation for companies. These laws are designed to avoid double taxation when working within the single market. Even before the Brexit, the UK was not really fond of the models of corporate taxation proposed be the EU, so this will represent a benefit for the UK as they will have control of it.

So we will have to wait a little before we see the full consequences of the British Exit and according to how the issue develops we will have varied results. If you like related topics and are interested in the world of taxes and finances you should check more content in this blog by Adam Greene, the recommended post is What you need to know about corporate taxation as it is about a related topic.

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