What GBS Leaders Should be Watching Out for as Brexit Approaches

June 5, 2018

The UK is scheduled to leave the European Union at 11 p.m. UK time on Friday, March 29, 2019. However, many issues still need to be resolved – the clock is ticking, and there is much uncertainty. It seems that an agreement has been reached on a 21-month transition period to smooth the way to post-Brexit relations for the UK and the EU. In the face of this uncertainty, what should GBS leaders be looking at now? Are these issues on your agenda?

What should GBS leaders be looking at?

Transfer pricing – for the internal charge-out of UK based costs to European subsidiaries/sister companies. Is this a concern? EU Directives on transfer pricing are broadly designed to implement the Organization of Economic Co-oper­ation and Development’s (OECD’s) guidance in this area, which itself is explicitly embodied in the UK’s transfer pricing legislation. So, there may be little impact of Brexit on UK transfer pricing. However, it’s a good time for GBS leaders to consult with their corporate tax departments on the OECD guidelines. Currency fluctuations are also something to watch. After the Brexit vote the initial decline in sterling made the UK cheaper for EU receivers of cost recharge, however some of this benefit has now been lost. How will currencies trend post-Brexit?

Data protection – the General Data Protection Regulation (GDPR) came into force on 25 May 2018 and most organizations will now have their compliance plans in place. GDPR should be complied with, whether in or outside the EU, if business is done with EU citizens. The European Commission believes this is so important they have released a statement reminding businesses that when the UK leaves the EU, the UK will become a “third country” for the purpose of data transfers under the GDPR.

The commission has the power to determine whether a country offers an ‘adequate’ level of data protection. This means that data controllers in EU countries will have to identify a specific legal basis within the GDPR upon which it can legally transfer personal data to the UK (i.e. ensuring that safeguards are in place).

This will impact any UK business which depends upon receiving personal data from data controllers in the EU, including those who depend upon trade with EU countries, and international firms with offices abroad. So, adherence to GDPR guidelines is imperative.

Tax – the UK is, and most likely will continue to be, competitive in terms of corporate tax rates – so cost transfer to some EU countries will generate a marginal overall gain, but transfer pricing rules need to be complied with per 1.

The UK government will have more flexibility post-Brexit in most areas of taxation, but the EU could look to have provisions in the Brexit agreement which would prevent the UK from undercutting the EU on direct taxation.

Intra-EU transactions – GBS leaders should monitor for changes in rules requiring updates to ERP systems such as customs duties and indirect taxes such as VAT.

Employment laws –  are likely to remain as-is for at least the transition period, but will they diverge over time – possibly favourably for business in the UK? David Davis, UK Government Brexit Secretary, has indicated that existing employment law will not be radically changed. He blogged that: “Empirical studies show that it is not employment regulation that stultifies economic growth… Britain has a relatively flexible workforce, and so long as the employment law environment stays reasonably stable it should not be a problem for business. There is also a political or perhaps sentimental point. The great British industrial working classes voted overwhelmingly for Brexit. I am not at all attracted by the idea of rewarding them by cutting their rights.”

Even if the UK has scope to diverge from EU employment law, changes may not necessarily be immediate on the point of Brexit, or ultimately far-reaching, because much of EU employment law has been brought into effect via UK legislation, which will remain in force post-Brexit unless and until amended. Changes to primary legislation require Parliamentary approval and the Government will need to consider whether reform is politically desirable.

The UK has come to expect a certain level of workplace protection, and wholesale changes seem highly unlikely. Many employment rights, including unfair dismissal and the minimum wage, do not in fact stem from the EU. However, there has been a tendency in the past for the UK parliament and courts to resist EU regulations on employment, so perhaps in the future, depending on the political party in power, the UK may only do the minimum to maintain the rights granted to workers already and therefore develop more relative flexibility over time.

Immigration – will there be an impact on the ability of organizations in the UK to hire immigrants from the EU with e.g. language skills?

Any EU citizen already living and working in the UK will be able to carry on working and living in the UK after Brexit. However, application for “settled status” may be required.

The current plan is that even after Brexit, people from the EU will be able to move to work in the UK during the transition phase. There is some debate over whether they will have the same rights as those who came before, with possible restrictions on access to benefits or to vote in local elections. The EU wants them to have the same rights as now – the UK doesn’t. All this will impact people’s willingness to stay in or move to the UK.

What happens after the transition period has yet to be decided, although it is widely expected that there will be a work permit system along the lines of that for non-EU nationals.

Business travel – The UK government wants to keep visa-free travel to the UK for EU visitors after Brexit and it is hoping this will be reciprocated, meaning UK citizens will continue to be able to visit EU countries for short periods without seeking official permission to travel. If visitors from EU countries wanted to work, study or settle in the UK they would have to apply for permission under the proposals.

No agreement has been reached yet, however. If it is decided that EU citizens will need visas to come to the UK in the future, then UK citizens will need visas to travel to the EU.

Business structure – overall business structures could change as the nature of Brexit becomes clearer. Multinational businesses – with a few exceptions – tend to be in favour of Britain staying in the EU, because it makes it easier for them to move money, people and products around the world. Given the crucial role of London as a financial centre, there’s interest in how many jobs may be lost to other hubs in the EU.

Some UK exporters say they’ve had increased orders or enquiries because of the fall in the value of the pound. Others are less optimistic, fearing products for the European market may have to be made at plants in the EU.

For the UK, being a part of the single market has always been an attractive factor for foreign investors because it meant free trading across EU countries. The UK’s decision to leave the single market could have potential impacts on Foreign Direct Investment (FDI) flows in future.

However, the pro-Brexit supporters see it differently. They see other factors, such as competitive edge and global supply chain connections, that make the UK an attractive destination for foreign investors. They believe strongly that the UK’s ability to pull in investment will continue irrespective of Brexit.

All trade within the European Economic Area is tariff-free. The EU has trade agreements with 52 other countries as well. After Brexit, Britain is going to have to negotiate new deals all on its own. Currently the UK is a member of the World Trade Organization via its membership of the EU. The UK will become a member itself as soon as it leaves the EU. The UK and EU are hoping to strike a broad agreement on trading terms by March 2019, but the finer details could take years to sort out. The UK will also need to reach agreements with other nations around the world.

So, the uncertainty prevails, is likely to do so for several years, and the situation is complex with many potential impacts. GBS leaders should be monitoring the above areas actively. Are you prepared for the potential impact of Brexit?