UK’s tax-haven brinkmanship could prompt EU kill-switch in Brexit deal

27 January 2017. By Matthew Holehouse and Simon Taylor.

The UK's threat to become a tax haven off Europe's shore in the event of a bad Brexit deal is pushing European negotiators to adopt an equally aggressive stance, MLex has learned.

While politicians don't believe the UK will deliver on its threat, one idea under review by EU negotiators is a clause in a future deal with the UK that would void all undertakings if London were to depart significantly from its current economic and social model.
 
This means that the EU could pull the plug on a deal if the UK were to start undercutting the bloc by slashing its taxes.

Politicians in countries including France, Germany and Sweden have already warned the UK against pursuing a low-tax policy, in the interest of ensuring that negotiations on a future UK-EU relationship proceed amicably.

But the UK's chancellor of the exchequer, Philip Hammond, warned earlier this month that the UK could change its "economic model" if its competitiveness was undermined by tough post-Brexit trading terms.

National tax policy doesn't fall within EU negotiators' purview, and Brussels will struggle to rein in a country outside the bloc. Free-trade agreements don't usually contain provisions on taxation, which are a staunchly national prerogative allowing governments to control their own revenues.

But the UK's position is viewed in Brussels — and particularly in France and Germany — as severe and aggressive, prompting some negotiators to consider a stiff response.

This could include fitting the agreement with a clause to void any deal if the UK followed through on its threat of becoming Europe's equivalent of Singapore — a low-tax, business-friendly state.

Detlef Seif, a German lawmaker and deputy EU spokesman inside the country's center-right party, told MLex that the Singapore approach might work for Monaco or Guernsey, but it wouldn't for Britain, given the scale of its economy.

"I can understand that they put something like that on the table, but it wouldn't be a successful model," Seif said.

"In a country with many different economic areas, I fear some economic sectors would really suffer and that's not to be recommended," he said. "We shouldn't cause a trade war, but if one country uses dumping tariffs, others might react to protect themselves."

The underpinning philosophy of most trade deals is bringing two trading partners together, managing their convergence so they can trade on mutually agreeable terms and standards.

The difference with the post-Brexit deal between the EU and the UK is that British laws will be fully convergent and compliant from day one. After 43 years of EU membership, the UK already complies with all EU standards and should therefore qualify for the same or similar trade terms.

But the new agreement will be about managing divergence, rather than convergence.

EU negotiators will have to come up with a way to ensure that as the UK takes its own path outside the union, by slowly developing its laws and trading patterns away from its EU members, there will be a mechanism for managing any excessive divergence.

If the UK decides to uproot its long-held socio-economic model and follow the likes of Hong Kong and Singapore in attracting business through low tax rates, this could qualify as such a divergent step, it is understood.

Such a move could trigger a clause voiding the post-Brexit deal.

	Eliot Gao