The Polls

Opinion polls in the United Kingdom are trending towards a Brexit from the European Union (EU), an unthinkable outcome barely weeks ago. Though pollsters have been wrongfooted in the UK as recently as the 2015 General Election when they failed to see the Conservative Party majority coming, Brexit has to be seen now as a very possible reality.

What about the Australian/UK/EU axis then!

Regardless of the reasons as to why, it is a fact that most Australian businesses engaging with the EU base their EU operations in the UK through subsidiaries or JVs or via distribution and sales trading relationships with UK businesses. A UK subsidiary of an Australian business makes that part of the business British and so European. These UK-centred operations can then take advantage of the EU four freedoms to access the 500 million EU consumers and businesses.

If Brexit happens, that free access to the EU market will cease once new bilateral trade arrangements are agreed between the UK and EU. The UK will become as foreign to the EU as Australia, and Australia is first in line for a Free Trade Agreement with the EU. Importantly, negotiations on that potential development have already commenced.
While the full legal transition of the UK out of the EU will inevitably take some time, existing relationships in the UK will need to be reviewed and a cost benefit analysis done of the practical and economic effects of Brexit for non-EU businesses to see whether it makes sense to stay in the UK or base alternative or additional operations elsewhere in the EU itself.

Principal benefits of being based within EU

The principal benefits of having an EU-based entity as part of a group structure are simple – access to the EU (previously constituted by the EEC Treaty and now by the Lisbon Treaty) four freedoms:

  • free movement of goods
  • freedom of establishment and services
  • free movement of capital, and
  • free movement of workers and citizens.

Are there “free movement” workarounds in a post-Brexit world for UK-based businesses
In short, technically no; there is no work around such as taking advantage of pre-existing UK trade treaties with other European Member States which the UK prior to its accession to the EU in 1973. For example, some commentators felt the Irish-UK Free Trade Agreement 1965 could be a back door into the EU market but that is not the case as the EU has the competency for trade arrangements affecting all EU Member States, hence the current drive for full Australia-EU FTA negotiations:
http://dfat.gov.au/trade/agreements/aeufta/news/Pages/news.aspx

However, there are structures, analyses and strategies which can be undertaken to preserve full EU market access to both EU and UK markets.

What should Australian business do first in a post-Brexit world?

  1. Determine if your UK presence is for the purposes of UK trade, EU trade or to be the anchor point for wider EMEA (Europe, Middle East and Africa) or Northern Hemisphere business. If predominantly non-EU, then there is little material change.
  2. Check out the Australian double tax treaty network to check which EU Member States have bilateral tax treaties (DTA) with Australia to avoid double taxation. Work with your adviser to determine if the tax implications of the UK post-Brexit compensate for any hindrance to business posed by a Brexit or any new tariffs (see further below)
    http://www.treasury.gov.au/Policy-Topics/Taxation/Tax-Treaties/HTML/Income-Tax-Treaties
  3. Undertake a cost benefit analysis of keeping EU-focused operations in the UK. Identify if the goods and services your business sells would be subject to any additional tariff(s) and regulations coming from a non-EU country as opposed to an EU Member State. The reality is that there is very little in the way of material trade barriers and tariffs on most goods and services (agriculture being a notable exception, for example) for non-EU countries trading with the EU.

    Undertake this analysis in the context of the UK corporate tax rate dropping to 18% from 2020 and the associated tax reliefs that the UK has for businesses engaged with intellectual property such as the UK patent box.

    Therefore, the introduction of any tariffs may in any event be offset by the UK drop in corporation tax and other tax reliefs/incentives noting Australia has a good DTA with the UK.

    As for Australian products meeting EU technical and regulatory standards for selling into the EU, there will be change there. Indeed, any new British standards and regulation will likely be EU-friendly as EU-UK trade is not going to end (see further below).
  4. If your UK business is just one subsidiary out of a number across the EU and the cost benefit analysis drives a need for some EU-orientated group structural change for your business, then redirect your EU-targeted business to one of those other subsidiaries or trading relationships in another EU Member State. For example, if your business has subsidiaries in the UK and in Ireland, as Ireland remains in the EU, full EU access is possible through the Irish business.
  5. If your UK business is your only EU-based business and you need to be in the EU to optimize business, then consider establishing a subsidiary in another EU Member State. In these circumstances, analyse where you derive most of your EU revenues from and also the Australian DTA network. Your business may derive most of its EU revenues from Germany but it may still be more sensible to have a sales and marketing subsidiary in Ireland, Holland or Malta for example for tax structuring purposes.
  6. If your business has a preference for a common law jurisdiction as your home in the European Union, then your options after the UK are Ireland, Malta and, more conceptually rather than practically, Cyprus.
  7. In this context too, different sectors may be attracted to different EU jurisdictions, e.g., technology and social media usually favours Ireland, Luxembourg or Holland, pharma/medtech often favours Ireland and Holland, investment funds favours Luxembourg, Ireland and Malta, and so on.

What are the consequences after a Brexit and pending any new UK bilateral trade agreements with the European Union?

It is likely to be business as usual in practical terms until the UK and EU work out how breakup will happen. The EU Treaty does not deal with the mechanics for how this works.

However, it is also likely that the European Union will not impose punitive tariffs on any UK-sourced goods or services or take any punitive retaliatory measures. We say this for a couple of reasons including:

  • the UK, a wealthy country having a population of nearly 70 million people, is a cornerstone of the wider European market, whether in the EU or not. It is the destination of many of EU Member States’ goods and services, for example, the German car industry exports 820,000 cars annually into the UK, its highest export destination by volume. It will not want to lose that market out of hubris. For the EU to enter into a tariff war with the UK would have some material consequences for certain other European Union Member States, economic and political, such as Ireland which has the only EU land border with the UK. This means that there are not likely to be aggressive reciprocal tariffs between the UK and European Union.
  • trade flows are different in the 21st century as compared to the mid-20th century. Physical goods and services are being supplanted by virtual ones and these are much more difficult for sovereign jurisdictions to police effectively in a traditional manner. This will ultimately also minimise the impact of a Brexit, given the way we buy and procure services in the digital world, and
  • the EU is but one market amongst many in the modern world. Whilst more wealthy in relative terms, there will be increasingly regional wealth equalisation as emerging markets take hold during the course of the coming decades. As the UK gives more emphasis to these markets for its own trade terms, Australians doing business through the UK will likewise gain exposure. For example, the UK was already pursuing aggressive trade strategies with China for foreign direct investment into the UK and as an export market, regardless of the EU. That will not change. The EU will be anxious that it is not “gamed” too much by the UK into the future to the detriment of Germany for example.

Any new opportunities – renewed Commonwealth of Nations (“Commonwealth”) trade?

Boris Johnson and others within the Brexit campaign are on record as calling for a greater emphasis on Commonwealth trade in the event of Brexit.
Therefore, if Brexit occurs, expect an increased focus on Commonwealth trade which has been basically ignored since the UK joined the EU. This may provide new opportunities for Australian businesses across Commonwealth but particularly in the UK market itself.

http://thecommonwealth.org/member-countries

Likewise, there may be a greater allocation of UK investment into Australia, also seeing an influx of British goods and services directed towards the Australian market. By way of analogy, the Portuguese-speaking countries and Francophone countries are very effective in developing trade flows within their countries.