Brexit Risks Losing Corporate Tax Break Worth Billions in U.K.

  • British firms would face new levies in former sister states
  • Tax-cut competition among countries seen as potential threat

British multinational companies face new withholding taxes that may cost hundreds of billions of euros a year if U.K. voters decide to leave the European Union, international tax specialists say.

A so-called Brexit “would have a major impact” on British corporations that have subsidiaries in the EU, said Daniel Gutmann, a partner at French law firm CMS Bureau Francis Lefebvre and a tax professor at the Sorbonne Law School. “It’s clear we’re talking about hundreds of billions of euros, or dollars.”

In February, almost 200 British companies, including BP Plc and AstraZeneca Plc, signed a joint letter in the Times of London urging Britons to vote to “remain,” and arguing that a departure “would deter investment and threaten jobs.” Spokesmen for BP and AstraZeneca declined to comment for this story. AstraZeneca, the maker of cholesterol medication Crestor and other drugs, has previously released a statement outlining benefits of remaining in the union -- though the statement doesn’t mention taxation issues.

“Exiting the EU holds the risk of increasing the complexities and costs of getting medicines to those who need them most,” the company’s statement says.

Tax Implications

If U.K. voters decide to leave the union -- a departure process that will take two years -- British companies’ subsidiaries in EU nations would lose an exemption from withholding taxes on any dividends they pay to their British parents. While the U.K. has separate tax treaties with some countries that could serve the same purpose as the exemption, it doesn’t have treaties with all EU member states, said Patrick Cox, an international tax lawyer at Withers LLP in New York.

“There are numerous countries where the rate is 5 percent or higher” for such withholding taxes, Cox said. “So there is clearly an impact to multinational corporations headquartered in the U.K. It’s a big deal.”

Polls are split on the outcome of Thursday’s Brexit referendum, amid concern that a vote to leave the EU could trigger a recession, curtail trade advantages and fuel global instability. While much of the debate among Britons has centered on immigration policy -- open borders is a basic tenet of EU law -- the tax implications for British corporations could be significant.

‘Absolute Cost’

Losing the withholding exemption may well create a new cost for British corporations that receive dividends from subsidiaries in EU member states. That’s because the U.K. itself generally doesn’t tax corporations on such dividends -- meaning a British corporation would have no recourse for seeking domestic tax relief on any new foreign withholding taxes.

“Because such dividends are usually exempt from tax in the U.K., there would be no way of getting relief for the additional foreign tax suffered, and it would be an absolute cost,” wrote Roopa Aitken, a corporate and international tax specialist with Grant Thornton LLP in London, in a February article.

Dividend payments are a way for large companies with operations in multiple countries to transfer profits from subsidiaries back to the parent. Withholding taxes on such payments -- which are typically designed to counter tax avoidance through profit-shifting -- top 25 percent in Germany, 30 percent in France and can reach 15 percent in the Netherlands, according to the accounting firm Deloitte LLP. EU member states decided to exempt one another’s companies from the withholding regimes under the so-called “parent-subsidiary directive,” which is designed to prevent double taxation by different countries on the same earnings.

‘Big Risk’

Should the U.K. opt to leave, however, Cox said the tax-related effects may reach far beyond dividend payments. “The big risk,” he said, is that a Brexit would prompt U.K. leaders to accelerate the nation’s trend toward cutting tax rates -- now at 20 percent for corporations and set to decrease to 17 percent by 2020. In Ireland, an EU member, the corporate rate is 12.5 percent.

Additional rate cuts in Britain could stir other EU nations to retaliate -- stirring competition to set the lowest rates as a means of attracting investment, he said. Or other nations might impose higher tax rates on British companies doing business in the EU.

It’s also conceivable that a Brexit could boost a stalled EU project aimed at simplifying tax rules and preventing profit shifting, he said. That project, which the U.K. has opposed, would allow companies operating in the union to calculate their taxable income or assets based on a unified set of rules. The change aims to prevent companies from avoiding taxes by exploiting differences among tax jurisdictions. If the U.K. leaves the EU, the chance of adopting the simplification proposal increase, Cox said.

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