The European Council Guidelines for Brexit negotiations published in April 2017 state: ‘Any free-trade agreement should be balanced, ambitious and wide-ranging... It must ensure a level playing field, notably in terms of competition and state aid, and in this regard encompass safeguards against unfair competitive advantages through, inter alia, tax; social, environmental and regulatory measures and practices.’
Further detail was outlined in a presentation by the European Commission Task Force working on Brexit, published last week.
One key tax risk to the level playing field is identified as ‘Targeted UK tax measures to attract investment and business’.
Such measures could include further reductions to corporate tax rates and the UK may well look to do this to stay competitive, particularly in light of the recent US tax reform and the low rates in Ireland.
But what could the EU do to stop this? One possible answer highlighted in the presentation would be to include the UK on the EU ‘blacklist’ of non-cooperative tax jurisdictions.
Would simply having a low headline rate of corporate tax force a country into this category? Or, does the EU see a real risk of the UK introducing significant tax inducements which would currently break the EU rules on state aid?
Either way, this may be just grandstanding from the EU. To categorise the UK in this bracket seems an overreaction.
The UK has some way to go to reduce corporate tax rates to the levels of some other Member States. Take Ireland, given its low corporate tax rate of 12.5 per cent and the recent wrangling with the EU Commission over Apple. If it wasn’t part of the EU, would it also be at risk of blacklisting?
However, this isn’t just about low tax rates. Part of the overall philosophy of the EU is not lowering existing standards to achieve a level playing field. These standards for taxation include the current exchange of information and anti-avoidance measures.
The UK has long been a supporter of the BEPS initiative and has benefited from these information exchange agreements, so it seems unlikely that we’ll see any significant changes post-Brexit.
Perhaps the EU does see all of this as a real risk, or maybe they’re just making these noises as part of their negotiation tactics. Regardless of their motives, we’ll have to wait to see what effect this has on our trade deal with Europe.For more information please comment below or get in touch with Nick Blundell.