Post-Brexit, taxation uncertainties

Thu | 21.07.2016

Accounting/audit/tax

Brexit or the United Kingdom leaving the European Union has alertly and firmly shaped the national and international headlines the moment the results of the referendum held on the 23rd of June were announced. Political, social, economic issues were put under scrutiny; but what happens to the taxes and levies – and, more importantly, what happens to them from Romania’s perspective? What will Romania’s economic losses and perhaps gains be following Brexit?

Just how long this process needs to materialise and the decisions to be made by the British Parliament and the European Council (mainly referring to the famous Article 50 of the Treaty on the European Union), respectively, are only matters of time. What we do know for sure is that sooner or later the Brexit’s consequences will influence the economic and, inherently fiscal, relationship between Romania and Great Britain.

As shown by the statistics (made available on the website of the Embassy of Romania to the United Kingdom of Great Britain and Northern Ireland), Romania’s imports to the UK amounted to EUR 1.57 billion in 2015, 17.50% higher than 2014, which means that the Romanians were more and more attracted by British products. This placed the UK on the 14th position of a general classification of all states from which Romania imports goods and the 11th position among the European Union states. Also, the UK imports account for 2.49% of the total Romanian imports.

Which taxes and levies will impact the economic relationships?
Brexit will affect both the direct and the indirect taxes. Below is a short analysis of the Brexit’s implications on the main taxes and levies categories.

What happens with the indirect taxes?
VAT will probably be the most affected. Although an indirect tax, it will affect Romania’s imports from the UK directly. Why? Great Britain will no longer be an EU member state, therefore the provisions of the European Directive on VAT (Directive 2006/112/CE), also implemented in the domestic legislation, will no longer be applicable (in other words, the reverse charge mechanism will no longer be applied).  This is why a 20% (19% as predicted for 2017) VAT will be applied for the goods imported by Romania from the UK, among which are the right-hand-drive cars. It is also important to keep in mind that such VAT will be applied and paid at the customs.

This could also happen to Romania’s exports to the UK, depending though on the British legislation.
Brexit will also result in custom duties on imported and respectively exported goods, in the light of a new EU Custom Tax Code. The fact that the value of the custom duties includes VAT is of note.

According to the source quoted herein, the Romanian exports to the UK in 2015 amounted to EUR 2.38 billion, 10.55% higher than in 2014. Great Britain ranks 5th in the general classification as well as in the EU states classification while the total Romanian exports account for 4.36%. Exported products are mostly cars, instruments and equipment, but also textiles.

The UK rank first in the classification of states with a balance of trade that is favourable to Romania.  

Thus, in its economic relationship with the UK, Romania could be affected most by the custom duties, but also by VAT. Just how the Romanian manufacturers will handle the competition in such a sense remains to be seen.

What happens with the direct taxes?According to the data made available by the National Office of the Trade Register, at the end of May 2016, Great Britain occupied the tenth position in top 10 foreign investors in Romania, with approximately EUR 998 million in subscribed share capital (2.5% of the total foreign companies); over a half of these companies operate in the extraction and processing industries.

A series of tax directives are in place at the EU level to facilitate the free circulation of merchandise, capital, services and people. The provisions of such directives will no longer be applicable in the relations with the UK.  Thus, the dividends, interests, royalties, services, cross border reorganisations will no longer be exempted from the withholding tax (as they are now).

What will the impact be?
The answer lies with the provisions of the Double Tax Treaty between the government of the Socialist Republic of Romania and the government of the United Kingdom of Great Britain and Northern Ireland signed in 1975.

For instance, the Treaty provides for withholding taxes of 10% or 15% on dividends, interests and royalties.

However the said Treaty has never been amended since 1975, when it was signed by the Government of the Socialist Republic of Romania represented by Manea Manescu (prime minister at that time).

What about the individuals?

According to the general rules laid down in the European Regulations on social contributions, the individuals are governed by the laws of the EU member state where they work. As a result of Brexit, the Romanian nationals working in Great Britain and the British expats in Romania, respectively, could be faced with the obligation to pay social contributions in two different states.  

What solutions are there for Romania?
Statistics show that Great Britain is an important market for Romania, given the favourable balance of trade.

There is no guarantee that, after Brexit, Great Britain will have a special position in relation to the EU. As regards the direct taxation, a first step to streamline the economic relations between Romania and the UK would be to update the Double Tax Treaty to the current economic reality and the new principles and rules of the international taxation as a matter of urgency.

Looking at the Brexit’s tax consequences, it is safe to say that the process will disadvantage Romania from an economic perspective; this should prompt the authorities to take simple and urgent measures on the matter.  

Article written by Bogdan Gheorghiu, Senior Manager Tax Advisory, in collaboration with Andrei Husman

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