UK U P D AT E A N D T H E I M PA C T O F B R E X I T H L B N O R T H A M E R I C A N TA X C O N F E R E N C E D E C E M B E R 2016

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1 UK U P D AT E A N D T H E I M PA C T O F B R E X I T H L B N O R T H A M E R I C A N TA X C O N F E R E N C E D E C E M B E R 2016

2 INTRODUCTION UK update and the impact of Brexit The UK in 2016 Impact of Brexit UK tax round up

3 The year in pictures THE UK IN 2016 A slice of British culture.

4 JANUARY Part of the British rock aristocracy David Bowie died 10 January 2016

5 FEBRUARY Briton s drinking twice as much coffee as tea The nation s favourite drink is under threat

6 MARCH Bad weather almost sink boat race we like talking about the weather! Oxford and Cambridge boat race 27 March 2016

7 APRIL Foreign Office gets a new Chief mouser Palmerston joins Foreign Office on 13 April 2016

8 MAY Biggest upset in Premiership sporting history Leicester city won the Premiership title

9 JUNE UK votes to leave the EU EU referendum on 23 June 2016

10 JULY The second of the Queen s two birthday parties The Queen had official 90 th birthday

11 AUGUST Harry Potter grows up New Harry Potter book is released

12 SEPTEMBER New five pound note is impossible to tear and can survive the wash First polymer bank note enters circulation

13 OCTOBER Britain goes mad for cake The Great British Bake Off final

14 NOVEMBER The UK gets Trumped The agenda changes on the 8 November

15 BREXIT Hard or soft it s going to be painful Planning to formally leave the EU in 2019

16 Leaving the EU BREXIT IMPLICATIONS Moving forward Referendum on 23 June 2016 Uncertainty persists Plan to trigger Article 50 in March 2017 Leave the EU by April 2019 Many questions and hurdles Tax implications Some good, some bad and some ugly

17 SIZE OF THE UK MARKET Total market value of all final goods and services produced in a year (GDP) Country GDP Ranking 2016 Size ($ bn) United States China Japan Germany UK France India Italy Brazil Canada

18 1. DIRECT TAXES The good Direct tax rules must comply with EU treaty freedoms No restrictions on UK rates or rules

19 EU Proposals 1. DIRECT TAXES The UK could fall outside new EU direct tax proposals fortunately Common Consolidated Corporate Tax Base Re-launched by European Commission in October 2016 Common set of rules to calculate companies taxable profits in EU Anti-Tax Avoidance Directive Anti-avoidance in five specific areas Implemented by 31 December 2018

20 2. STATE AID The good State aid restrictions UK can provide targeted tax incentives

21 2. STATE AID The good Research and Development Patent Box Investment Share ownership Growth

22 3. EU DIRECTIVES The bad Access to EU Directives Reliant on tax treaties

23 3. HOLDING COMPANY STRUCTURES The bad US UK Germany Dividends Interest Royalties Ireland France

24 3. DIVIDEND WITHHOLDING TAX The bad Country Before After Domestic rate Austria Directive and DTT DTT 5% 25% Bulgaria Directive and DTT DTT 10% 5% Croatia Directive and DTT DTT 5% 12% Czech Republic Directive and DTT DTT 5% 35%/15% Germany Directive and DTT DTT 5% 25% Greece Directive and DTT DTT 10% 10% Ireland Directive and DTT DTT 5% 20% Italy Directive and DTT DTT 5% 26% Latvia Directive and DTT DTT 5% 30/15/0% Portugal Directive and DTT DTT 10% 25% Romania Directive and DTT DTT 10% 16%

25 4. EMPLOYEE MOBILITY The ugly EU social security contributions system Potential for multiple social security contributions

26 5. CUSTOM DUTIES AND VAT The ugly Free trade system Potential for trade tariffs and restrictions

27 5. CUSTOM DUTIES AND VAT The ugly Example Tariff free? Customs union Access to EU FTA s Removal of non-tariff barriers Financial contribution Vote on EU rules EU Yes Full Yes Yes Yes Yes Yes European economic area (EEA) Free movement Norway Mostly No No Some Some No Access to single market Customs compliance Bespoke Switzerland Mostly No No Some Some No Bespoke access to single market Customs compliance FTA Canada Some No No No No No No World Trade Organisation (WTO) USA, China, Japan WTO tariffs Unilateral options No No No No No No Source: EY

28 HOW TO PREPARE FOR BREXIT Evaluating your existing structures and operations Key questions that need to be addressed

29 BREXIT RISKS AND OPPORTUNITIES Preparing the groundwork for change Trade Operational UK entity Employment Taxation Finance

30 TRADING RELATIONSHIP Supply of goods or services to and from the EU UK businesses that buy or sell goods within the EU are likely to suffer increased costs and administration if the UK leaves the Single Market (i.e. so called hard Brexit ). This is because goods moving between the UK and EU would become subject to Customs procedures and the simplified VAT rules for intra-community trade would be lost. Those that supply services will also need to consider the new regime and any access restrictions or new regulations that may apply. What trade relationships do you have with customers or suppliers in the EU (or other countries with which the EU has trade agreements)? How dependent is your business and supply chain on the movement of goods between the UK and EU or other countries with which the EU has trade agreements? What impact would a hard Brexit have on your business and how could you minimise the impact? Is your business dependent on a particular regime e.g. passporting, to access the EU services markets (or markets of other countries with which the EU has trade agreements)? What will be the most efficient model for your business post Brexit and should you consider setting up operations somewhere within the EU? What other markets outside of the EU might be fruitful ones with attractive existing trade agreements?

31 EMPLOYMENT The free movement of workers is a founding principle of the EU The free movement of workers has been a significant factor in the UK s decision to leave the EU. As a result it can certainly be anticipated that there will be a people impact arising from Brexit. How reliant is your business on the free movement of EU workers across EU borders? What individuals do you have working in critical roles outside their home country? Will your ability to recruit staff be affected and do you need to reassess your recruitment and/or training policies? Is Hard Brexit likely to lead to a skills shortage in your industry and so drive up costs? What employee communication and engagement is appropriate?

32 FINANCE AND ACCOUNTING Cashflow, business plans and remodelling considerations As with all change, it can be expected that there will be some winners and losers post Brexit. For some there may be cash flow impacts, perhaps arising from reduced consumer spending and higher costs, and therefore it is important to review your existing business plan and consider remodelling it for possible Brexit scenarios. How robust is your cash flow and have you stress tested liquidity by reviewing your working capital needs? What impact does forex movement have on your business and is it possible to mitigate on-going currency volatility? How do you determine your export pricing and commitments while sterling is weak knowing it might get stronger in the future? What is the timing of future capital expenditure and what are the costs and benefits of this investment? What are the terms of your existing bank facility, and could these need to be amended or renegotiated? With tighter lending criteria, what alternative sources of funding may be available to the business? Do you have grants or other funding sources from the EU? How are asset valuations likely to be affected in the year end financial statements?

33 TAXATION Direct taxes have always been the responsibility of individual member states Direct taxes (corporation tax and income tax) have been left a bit in the shadows of indirect taxes, but companies may still be affected by changes in this area. How reliant is your business on the EU Tax Directives and how do these reduce your cost of doing business? What relief will be available in the future under bilateral double tax treaties? Should you repatriate profits from EU subsidiaries pre Brexit? What is your tax operating model and will you need to review your transfer pricing policy? What benefits could arise from a restructuring or remodelling of the group? How do EU rules currently affect workers social security contributions?

34 OPERATIONAL At the heart of all businesses are the relationships with customers and suppliers Although there is still much uncertainty over the impact of Brexit, it is important to take time to assess the economic viability of the commercial relationships as they are the life blood for the business What is your contractual position with critical customers and suppliers? How are your customers and suppliers likely to be affected by Brexit, and what impact could this have on your business? Do you need to consider diversification of the supply chain and customer base and reassess supplier dependency? Would a strategic acquisition address structural changes or opportunities in the market? What are your terms of trade and should you revise aspects such as credit terms, cash collection and invoice settlement policies? Do you transfer customer (or employee) data between the UK and EU? Should you establish a Brexit response committee to monitor the on-going risks and opportunities for the business?

35 Leaving the EU UK TAX ROUND UP Up date for US tax advisers BEPS People of Significant Control Residential property taxes Corporation tax

36 BEPS The UK has been a strong supporter of BEPS UK is an early adopter of BEPS measures

37 BEPS Action OECD Recommendation UK implementation Corporate response 1: Digital Economy Countries may choose to adopt a range of unilateral measures. 2: Hybrid Mismatches Adopt rules to deny tax advantages arising from hybrid instruments and entities. UK introduced Diverted Profit Tax (DPT) but wider than just digital sector. New hybrid mismatch legislation will apply automatically from 1 January Large multinational groups should review DPT rules. Review mismatch transactions between UK and other jurisdictions. 3: Controlled Foreign Companies Introduce / strengthen CFC rules. Existing CFC rules expected to remain, exemptions may come under scrutiny. Continue to apply existing rules. 4: Interest and other financial payments Restriction on deductibility of interest expense and similar payments. Tax deductibility of corporate interest to be set at 30% of EBITDA from 1 April Consider if net UK interest expense exceeds de minimis threshold of 2m. 5: Harmful tax practices Preferential tax regimes, particularly Intellectual Property (IP) regimes, to be amended. 6: Tax treaty abuse Amend tax treaties to prevent treaty shopping and abuse. Patent Box has been revised from 1 July 2016 to include an R&D nexus approach. Treaty changes may arise. Extended withholding tax regime for royalties from July Review IP assets and R&D expenditure carried out by company. Review cross-border royalty payments and impact of new rules. 7: Permanent Establishments (PE) PE rules to be tightened resulting in lowering of threshold to create tax presence. UK likely to adopt lower threshold and already introduced Diverted Profit Tax. Assess any changes to PE risk for overseas activities. 8 to 10: Transfer pricing Extensive changes focused on value creation and aligning substance with profits. New guidelines will be enacted into UK law when finalised. Review existing transfer pricing arrangements against new guidelines. 11: Economic analysis of BEPS Measuring and monitoring of BEPS to show impact of proposals. HMRC to collect data to assess impact of BEPS. No response necessary. 12: Mandatory disclosure regimes Disclosure of abusive transactions, arrangements and structures. UK already has suitable disclosure rules. No change to existing rules. 13: Transfer pricing (documentation) Master file, local files and Country-bycountry-reporting (CBCR) obligations. UK an early adopter of CBCR for periods commencing from 1 January UK CBCR required where worldwide group turnover exceeds 750m. 14: Tax dispute resolution Minimum standards to improve tax dispute resolution under Mutual Agreement Procedures. UK committed to mandatory binding arbitration. No response necessary. 15: Multilateral instrument Adopt multinational instrument to implement treaty based BEPS outcomes. No 2 action until multinational instrument ready for signing by end of No response necessary.

38 PEOPLE OF SIGNIFICANT CONTROL Movement towards increased transparency Public disclosure of ownership of UK businesses

39 RESIDENTIAL PROPERTY Plenty of changes to get to grips with Taxes are starting to affect the UK property market

40 ENVELOPED DWELLINGS Significant tax costs to putting a wrapper around residential property 28% CGT 15% SDLT on properties > 500,000 Annual Charge Enveloped Dwellings

41 A N N U A L TA X O N E N V E L O P E D D W E L L I N G ATED is not cuddly Property value 2016/17 500,000-1m 3,500 1m - 2m 7,000 2m - 5m 23,350 5m - 10m 54,450 10m - 20m 109,050 20m+ 218,200 Various reliefs apply from annual charge. Must claim on ATED return.

42 STAMP DUTY LAND TAX Slab based dual system Tax Band (portion of purchase price) Standard rate (first residential property or main residence) Higher rate (additional properties) 0-125,000 0% 3% * 125,000 to 250,000 2% 5% 250,000 to 925,000 5% 8% 925,000 to 1.5m 10% 13% 1.5m+ 12% 15% * Transactions under 40,000 are exempt

43 CORPORATION TAX How low can it go 17% in 2020

44 CONCLUSION Uncertain times but must try to

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