What Brexit May Mean to Multi-Nationals

June 19, 2017

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In this podcast, the first in our Brexit series, David Plaskow speaks with EisnerAmper’s lead transfer pricing agent, Henric Adey, about the United Kingdom referendum on leaving the European Union. They discuss some of the key implications for Brexit, its impact on transfer pricing, how multinationals can be proactive immediately, and how the UK plans to attract and retain companies and talent after Brexit is triggered.

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Transcript

David Plaskow: Welcome to this edition of the EisnerAmper Podcast. Today, we’re talking Brexit with Dr. Henric Adey, economist and practice leader for EisnerAmper’s transfer pricing group. Henric, thanks for joining us today.

Henric Adey: Thanks Dave for having me.

DP: So Henric, tell us, the recent United Kingdom referendum on leaving the European Union – it’s been all over the news lately. You can’t read an article or watch the news without seeing Brexit on the news. Tell us, what is Brexit?

HA: Very simple, it’s Britain wanting to leave European Union. So the people of Britain voted on June 23rd to leave the European Union and therefore made a decision not only on their borders but also on their economy as a whole, the freedoms to make legislation and to really separate themselves from a lot of legislation that they formed together with the other European member states. And so to this end they now formally have to trigger the article 50 that we know of the Lisbon treaty that was put into place in 2007 and that goes back and is an amendment of the original Rome treaty from 1958 and, you know, so this is what we call Brexit now. We always thought Grexit was going to happen first. But it didn’t. So ultimately now Britain is making history and it’s going to have a lot of implications.

DP: Well that leads me to my next question. What are some of the key implications for Brexit? What’s the fallout look like it’s going to be?

HA: I think the fallout is going to be a multitude of things. So it’s not only going to be the border implications that I think a lot of the British people voted for now with all the migration happening in Europe and a lot of the bigger broader considerations. It’s not only political but it also has tax and economic implications and I think when we talk about that here in particular we look at multinationals and individuals that are really operating in the UK and have done so for quite a while who will be majorly impacted from a tax legislation perspective, from an economic perspective, and so there’s a lot of these key decisions that will be made after article 50 has been triggered that will impact those individuals from a post-Brexit/pre-Brexit perspective. So I think that’s going to be the key and we need to kind of watch that.

DP: So, it’s really going to be a marathon not a sprint. Now, with that comes uncertainty, but, what can and what should multinationals be doing now to be proactive about Brexit?

HA: I think they really need to see that there’s going to be two things. There’s going to be what I call a push and a pull. On the one hand the British government will try to make sure that individuals and multinationals are going to remain and do business in the UK. So the corporate tax rate is most likely going to decrease. So that’s going to be a positive thing. We’ve already seen the impact on the pound that’s going to have implication from foreign exchange and we will see that there’s going to be a lot of legislative change. When we look at VAT for example it’s going to be one thing, and, you know there’s probably going to be also a bigger pressure on audit activity because Britain needs to make sure that they will get the tax revenue that now might be minimized. We don’t know what’s going to happen going forward, but definitely a lot of change. So I think analyzing your position as it stands now, where do you want to go, what are your reasons of being in the UK and what do you anticipate it to be going forward. So kind of taking a conservative stance and evaluating what the Brexit will mean to you going forward. I think it’s a must do and I think it’s something that you should be looking at so that there’s not going to be any surprises because as we all know, we don’t know which direction it’s going to go.

DP: Henric, as one of your practice specialties is transfer pricing, we’d be interested to know how Brexit will impact transfer pricing.

HA: I think that’s an interesting question because it’s a little bit like looking into a crystal ball and trying to predict the future. On the one hand I think the UK has been traditionally a country where a lot of multinationals have conducted business and see it as a European headquarter. How that’s going to change going forward is going to be interesting and it will have implications for their transfer pricing overall, how they look at their value change and how they’re potentially going to restructure. So that’s an excellent question. We have concepts like the Patent Box that the UK had introduced a while ago which they might broaden and widen which might attract also researchers and having IP particularly being created in the UK. But then on the other hand, again, push and pull, between being in the EU and not being in the EU, do you really want to have the UK being an IP hub? So I think a lot of interesting questions are going to be put out there. I think there’s going to be heightened scrutiny on transfer pricing. We know that the UK also admitted – has planned to be – on the forefront of executing the BEPS concepts that we’ve seen the OECD put forward and there’s going to be country-by-country reporting. So overall I think there’s going to be a lot of significant change. I think it will depend on a lot of multinational’s long term goals and strategies and we shall see how that pans out. But, you know, planning again is going to be key.

DP: Ok. Definitely an area to keep an eye on.

HA: Absolutely.

DP: Now that the UK is essentially going in it alone, what can it do, if anything to attract and retain companies and talent?

HA:So basically if they’re going to trigger with the Brexit, right, they going to have to find incentives now to keep companies there. And, you know, for example, the UK has been a research and R&D hub and a lot of multinationals have their European headquarters there, right? So one of the issues was that they say oh this is going to affect negatively research in the UK because people won’t travel necessarily, maybe less students come into the UK because we have ultimately separated ourselves and no longer you can hop into the train between London and Paris and have to go through some sort of potentially border control thing. And so how do you attract then companies that say ok now we have all this additional hassle and downside, how do we still attract them to come. And so the two ways you can do that is like you reduce your corporate tax rate, that’s one thing, and the other thing is I give you more incentives to do your R&D here and to keep your IP here. That can come in very different forms. For example that Patent Box thing is to say well if you created it here we’ll give you an additional break on that value that you created here, right? So it’s going to be very, very tricky. And I think you see already a lot of like, you know, American multinationals I know some of them they said, you know what, closing it down, everything goes back to Chicago. Not dealing with this. Then you have some that say, well, let’s wait and see, right? And then you have some – let’s go to the continent, let’s go to Frankfurt, let’s go to Paris. It’s going to be very, very interesting and I think – now, the good thing is, and we shall see that next year, is article 50 going to get triggered, because Teresa May already said we’re not doing it this year. And so actually there’s going to be a court case happening towards the end of this year where actually individuals are dragging the British government in front of the court saying that this whole vote was not necessarily constitutional. So then the question is, well, what the decisions are going to happen, how is this all going to go down, can we trigger… – I mean, it’s likely going to happen, from all that’s being said and what’s out there but I think there’s going to be some fights being put up.

DP: Clearly we’ve just scratched the surface on this ever evolving topic. Tune into the next EisnerAmper Podcast, where we get down to business.

About Henric Adey

Henric Adey is the Transfer Pricing Practice Leader at EisnerAmper. As practice leader, he is responsible for advising clients over a wide span of industries concerning both international and multi-state transfer pricing matters.

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