A single mistaken decision to hold a referendum, made in an effort to smooth over internal political disagreements, has unraveled in a spectacular manner in the UK-- and gravely weakened the cohesiveness and stability of the European Union. Here are eight implications of these developments, according to This Way Up's Shan Nair and Dave Darsch.
1. Domino Effect Leading to a Potential Recession?
There is a risk of a domino effect impacting on the 2017 French presidential election and the encouragement Brexit has given to right wing separatist elements within multiple EU countries. This and the other uncertainties in trading conditions may cause potential UK and EU customers to delay decision-making on purchase orders for products and services. There seems general agreement that these conditions are likely to lead to a mild recession in the UK by the fall.
2. Currency Appreciation
At the time of writing, the GBP has crashed against the USD with the Euro also declining to a lesser extent. It is therefore reasonable to suppose that the UK Treasury will be forced to lower interest rates to try and avert (or soft land from) a recession. It is also likely that the USD will ride high on international Foreign Exchange (forex) markets as a safe haven currency. US goods and services will therefore be more expensive in local currency than previously and exporters will have the unenviable choice of pricing in local currency and taking the forex risk or selling less.
Furthermore, the contribution of foreign currency reserves to the overall reserves of well established profitable US corporations will reduce in relative terms, so even if a future US administration were to make it attractive for US companies to pull back foreign reserves to the US, their value in USD will have reduced.
3. Applicability of EU Regulations & The Free Market
Currently CE Marking regulations apply to products sold within the EU. This will no longer be the case once the UK leaves the EU. This may actually make it easier for US companies to sell to UK. However, with the UK outside the free market, export regulations will likely apply, the details of which we will not know for likely another 2 years. This will act as a disincentive for US companies to setup their European profit centers in UK. The Netherlands has historically been an attractive alternative location to UK for European holding companies and its attractiveness is likely to increase as a result of Brexit.
4. Impact of Protectionist Policies on Direct Taxation
Protectionism is on the increase. Prior to Brexit, the UK had already introduced the Diverted Profits Tax and we have all heard of the French tax investigation of Google. Brexit is likely to increase these protectionist pressures with each tax authority wanting more of a share of the "Cake". This may lead to tax authorities more frequently probing the applicability of the "cost plus" model (even if they are based on the OECD model) for remunerating foreign cost centers in Europe. One can also reasonably expect to see more buy/sell inter-company agreements to apply to situations where previously a cost plus agreement would have sufficed and for transfer pricing concerns to have a higher profile.
5. VAT Rules
Once the UK exits the EU, current VAT rules on intra-EU supply will likely not apply. UK's situation may change to one more akin to Switzerland. This will increase G&A costs for UK headquartered companies and therefore be a further reason for US companies to setup their headquarters in Netherlands or Belgium where favorable VAT rules apply.
6. HR Rules no Longer Subject to EU Constraints
This is a possible positive outcome of Brexit for employers and will also impact commercial litigation. The Maastricht treaty and its social charter will no longer apply in the UK nor will European court rulings. HR regulations dealing with commission agents may also change in a manner favorable to US companies.
7. US Directors of a Local Subsidiary?
In certain European countries, a US person cannot be a director of a local company without FBI checks being carried out. These checks can be long drawn out taking up to a year. A good example is France where a Gerant is required for a EURL or an SARL type of company. Many companies deal with this delay by appointing an English speaking EU citizen as a Gerant as the requirement for FBI checks is not then incurred. This option will now exclude British citizens once UK leaves the EU.
8. Banking for a Local Subsidiary
With the increased burden of FATCA implementation and anti-money laundering concerns, many European banks have been rejecting the banking business of US corporations and their European subsidiaries. UK banks have traditionally taken a less bureaucratic approach to this problem. With the UK outside the EU, there may be no easy way out of dealing with the strictures of the remaining EU banks that accept US business.
Overall, as with any business situation, with vagaries comes uncertainty; and with this comes risks, challenges and opportunities. Advance thinking can cause Brexit to be and opportunity and advantage for your company.