What are the Tax Consequences of BREXIT for U.S. Taxpayers?
By admin of MillarLaw A Professional Corporation On Monday, July 4, 2016
Recently, The Harvard Law School Forum on Croporate Governance and Finance published a note titled “The Legal Consequence of Brexit, authored by Simon Witty. We have restated the transactional tax commentary here. We have added our thoughts on the tax reporting, “information exchange agreements” and federal tax reporting requirements under the heading Compliance.
- The EU has influenced many areas of the UK’s tax system. In some cases, this has been through EU legislation which applies directly in the UK; in other cases, EU rules have been adopted through UK legislation (for example, the UK’s VAT legislation is based on principles which apply across the EU); and, in still other cases, decisions of the European Court of Justice have either influenced the development of UK tax rules, or have prevented the UK’s tax authority from enforcing aspects of the UK’s domestic tax code. This complicated backdrop means that the tax impact of Brexit will be varied and difficult to predict.
- Areas to watch include the following:
- Direct tax: although the UK has an extensive double tax treaty network, not all treaties provide for zero withholding tax on interest and royalty payments. Accordingly, corporate groups should consider the extent to which existing structures rely on EU rules such as the Parent-Subsidiary Directive or the Interest and Royalties Directive to secure tax efficient payment flows. Similarly, corporate groups proposing to undertake cross border reorganisations would need to consider the extent to which existing cross-EU border merger tax reliefs will survive intact. It should also be borne in mind that, even if Brexit occurs, the UK is likely to continue vigorously supporting the OECD’s BEPS initiative such that there may well be considerable constraints and complexities associated with locating businesses outside the UK.
- VAT: although VAT is an EU-wide tax regime, it seems inconceivable that VAT will be abolished. However, it is likely that, over time, there will be a divergence between UK VAT rules and EU VAT rules, including as to input VAT recovery on supplies made to non-UK customers. Additionally, UK companies may lose the administrative benefit of the “one stop shop” for businesses operating in Europe.
- Customs duty: if the UK left the customs union, exports to and imports from EU countries may become subject to tariffs or other import duties (as well as additional compliance requirements).
- Transfer taxes: it seems that the UK would, at least in principle, be able to (re)impose the 1.5% stamp duty/stamp duty reserve tax charge in respect of UK shares issued or transferred into a clearance or depositary receipt system. Accordingly, the position for UK-headed corporate groups seeking to list on the NYSE or Nasdaq may become less certain”.
- Areas to watch include the following:
- Information Exchange . Current Information Exchange Agreements, including those mandated under Foreign Account Tax Compliance Act, “FATCA” should remain unchanged. That means that the agreement to provide financial account information about U.S. taxpayers with financial accounts in the United Kingdom, (England, Scotland, Wales, and Northern Ireland will stay in effect regardless of the ultimate decision on Brexit. That means that the IRS and Department of Justice, where appropriate, will receive annual reports about U.S. taxpayers with accounts in the U.K. which will provide a basis for enforcment actions against those U.S. taxpayers who do not otherwise comply with U.S. reporting laws.
- Reporting: The Intenal Revenue Code and the Bank Secrecy Act have specific reporting laws and Regulations that require U.S. taxpaeyrs to report foreign finanicial accounts, such as bank accounts and foregin financial assets, such as intersts in foreign privately held corporations, partnerships, foundations and trusts. These rules and regulations remain unchanged by Brexit.
- Enforcement: The IRS and Department of Justice will continue to enforce the reporting laws and Regulaiions and in some cases prosecute non-complaint taxpayers. The penalty regime for failure to file informaiton returns, including FBARs is not affected by Brexit.
- Voluntary Disclosure: Brexit should have no affect on the longevity of the Offshore Voluntary Disclosure Program (OVDP) or other voluntary disclosure programs. The decision to seek the protection of the OVDP must be made on individual facts and circumstances, none of which are likely to involve Brexit.
Conclusion: Brexit is not certain. The Parliament must first elect a new Prime Minster who must then ask Parliament to authorize an Article 50 Notice of Withdrawal, in accordance with the provisions of the Treaty of Lisbon. Failure to issue such a notice means no change in the U.K.relatinship with the E.U.
Assuming that an Article 50 Notice is ultimately issued, the U.K. and E.U. have two years, plus agreed extensions, if any to negotiate the withdrawal. The withdrawal only becomes effective then. However, regardless of Brexit or not, U. S. reporting obligations and enforcement actions will continue.