Although further guidelines from the government are expected in the near future with regards to incoming changes and how the free trade agreement will be practically implemented and administered, we have summarised below some key headlines from a tax perspective.
Tax implications of providing cross-border services to EU customers (both external and internal)
No new barriers to trade in services – Any entities who provide cross-border services to customers/entities based in the EU should not be concerned over further tax risks because there is a commitment that there will no new ‘behind the border’ trade barriers applied to service suppliers. After Brexit, the local requirements of the country of payment / performing work (subject to any bilateral tax treaty between that country and the UK) will continue to drive the withholding of taxes applying to the service fees and Permanent Establishment (PE) risks. The local requirements of the country where the customer’s entity is based in (general rule) or where the client’s asset is located in (if a service is directly related to an immovable property) will continue to drive VAT implications. Please note that tax treaties do not apply to VAT.
No customs duty applying to trade in goods – A number of UK entities import goods from the EU and likewise some of entities in the EU member states bring certain goods into the UK (for example, testing equipment). There are no customs duties on all trade in goods originating in the UK or the EU thanks to the free trade agreement. However, all entities will need to comply with new customs compliance obligations in the UK/EU. From January 1st 2021, full border control measure will apply in the EU. However, according to the Border Operating Model, the UK will phase in the introduction of full border control measures (which will start with a 6-month period until import declarations need to be submitted for most goods).
Under the UK Global Tariff/EU Common Customs Tariff, importing or exporting goods from/to the EU will automatically attract a positive rate of customs duty. Entities will need to verify if their business meets the Rules of Origin so that they can benefit from duty free access. In addition, the entities will need to manage a number of customs requirements, for example they will need to classify and value goods as well as determine which goods are subject to licensing restrictions or prohibitions. The relevant teams should monitor the development of the new trade terms and associated guidance during 2021.
No requirement to establish or maintain a local presence – UK entities who supply a service to an EU customer will not need to establish or maintain a local presence under commercial/company laws of the customer’s country. However, the way PE requirements apply for tax purposes will not change. Therefore, if any entity were to breach a local PE threshold, then the relevant UK entity would need to register a PE to comply with the local tax law requirements. Any project or transaction that creates a potential PE risk will require further approvals under DMSG 1-2.
Business travel – Services will now need to adhere to new work permit and immigration rules if they require physical presence to perform them or they entail business travel. Therefore, refer to the requirements that apply to “short-term business visitors” (STBVs). However, PE risks for tax purposes will continue to be driven by the local tax laws (subject to any bilateral tax treaty between that country and the UK). Therefore, Brexit should not create any additional PE risks/requirements.
Exceptions (not tax-related) – Although the general commitments in the main text of the agreement are broad, there are several member state reservations across a range of sectors which must take precedence. For example, any supplies of construction services in Cyprus must be of Cypriot nationality. Therefore, it is a good idea to review the agreement carefully in order to identify any further requirements imposed by certain EU member states for their services and undertake contingency planning for potential new trade barriers (for example, non-recognition of the UK professional qualifications).
The deal document (Trade and Cooperation Agreement) can be found at: EU-UK_Trade_and_Cooperation_Agreement_24.12.2020.pdf (publishing.service.gov.uk).
The EU’s Q&A site can be found at: Questions & Answers: EU-UK Trade and Cooperation Agreement (europa.eu).
Photo Credits to DANIEL DIAZ from Pixabay