EU might struggle to stop UK’s ambition to be low-tax haven post-Brexit

31 January 2017 9:56am
Pierre Moscovici

22 December 2016. By Matthew Holehouse.

The prospect of the UK becoming a low-tax haven for companies after Brexit ranks high on EU leaders' concerns.

Any move by the UK government to cut taxes to attract businesses and mitigate their concerns about Brexit could sour divorce talks.

But it's unclear whether EU leaders can do much to halt this strategy.

The UK already charges the lowest corporation tax rate in the group of the world's 20 biggest economies, at 20 percent. The country is planning to trim the rate further by 2020, to 17 percent. And if negotiations with the EU go badly, the UK could set a lower rate still — perhaps even one that competes with Ireland's 12.5 percent.

David Davis, the UK's Brexit secretary, reportedly told company representatives in London that Britain could opt to compete with other states through low tax and deregulation.

"Frankly I don't want to have Great Britain tomorrow as a kind of tax haven on our borders. That's not what we wish for," Pierre Moscovici, the EU commissioner responsible for tax policy, said in London last month.

Ann Linde, Sweden's EU affairs minister, has warned that the UK will sour Brexit negotiations if it seeks to undercut its neighbors on tax.

"EU countries will not accept very different levels on labor standards or company tax," she told MLex.

Limited options

While Brexit negotiations are underway, the UK could shy away from moves that anger its neighbors. But in the long run, the EU's ability to rein in UK tax policy is weak.

The UK has made international commitments to other G20 nations to adhere to broad tax transparency and good governance principles. But beyond that, it is free to determine its tax regime.

"[The UK] already does have full sovereignty on tax issues," Moscovici said last month.

The country has consistently defended this sovereign power. The UK is currently resisting EU proposals for a common formula on where a multinational generates profits, on the grounds that it represents a loss of sovereignty. Relinquishing control over tax issues is even less likely after Britain leaves the EU.

Yet EU lawmakers are examining their options.

The EU could include a "code of conduct for business taxation" into any future agreement to avoid measures that "constitute harmful tax competition," according to a draft document drawn up by the European Parliament.

The EU could also demand that the UK apply the principle of "tax neutrality," stopping British authorities from discriminating against non-UK businesses over corporate tax rates, if it wants market access, the report seen by MLex said.

The risk of double taxation would also have to be addressed, either in the agreement or in a separate treaty.

Tax measures play a minor role in the EU's existing trade deals, meaning Brussels will have to push hard to weave the issue into an agreement.

Brexit Special Report