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KPMG – President Biden, Brexit and what’s next for British-American Business Council

President Biden, Brexit and what’s next for British-American Business Council

[British-American Business Council (BABC) Board Member and KPMG U.S. Principal Paul Harnick recently joined KPMG U.S.-U.K. Corridor Leader Howard Wiener and KPMG U.K.’s Michelle Quest for a discussion on the potential impact of the new U.S. administration’s policies and Brexit on BABC members’ business.]

Paul: What is the Biden administration’s proposed tax plan and what could it mean to a BABC member business?

Howard: During his campaign, Biden emphasized the need for certain policy changes, including infrastructure, clean energy, domestic manufacturing, rebuilding U.S. supply chains, housing, racial inequities, childcare, elder care and health care. To offset the costs of these goals, President Biden proposed changes to the Tax Code. President Biden’s campaign tax proposals were brief and high level. A few of the highlights affecting businesses and individual investors include:

  • Increase the top statutory corporate income tax rate from 21% to 28%
  • Create a new 15% corporate minimum tax on global book income of $100 million or more
  • Increase the tax rate on certain foreign income from 10.5% to 21%. Increase individual tax rates to 39.6% and tax capital gains and dividends for individuals with over $1 million in income at ordinary income rates

Over the coming months, we can expect additional proposals, as well as refinements to proposals, to be made. With Democratic control of the House of Representatives and effective control of the equally split Senate, Democrats are in control of the U.S. legislative agenda. However, whether, and to what extent, tax legislation will be passed is far from certain. As a general matter, Senate filibuster rules require 60 votes for legislation to be considered for a vote, and convincing at least 10 Republicans to vote with the Democrats will be an extremely tall order. It’s important to note, though, that special “budget reconciliation” procedures allow some types of legislation, including tax legislation, to move through the Senate by only a majority vote without being subject to a filibuster. Yet, even in this scenario, the Democrats would need all 50 Democratic senators to agree to any legislation. This effectively leaves every Democratic senator with the power to veto any proposal. Given the broad spectrum of political philosophy among Democratic senators, one could expect negotiations and compromise around any proposals made by President Biden.

Paul: Can we expect a change in U.S. trade policy under a Biden administration?

Howard: Joe Biden has made clear that any trade deal between the U.S. and U.K. must be contingent upon respect for the Good Friday Agreement and prevent the return of a hard border. Given the current economic climate and uncertainty around the pandemic, it is unlikely that a U.K./U.S. trade deal will be done quickly. However, we can expect there will be further efforts to improve the U.K./U.S. economic relationship in the coming months and a deal in 2022 looks possible. More generally, there are not expected to be major trade liberalizations under a Biden presidency. The last few years have seen the U.S. taking a much harder stance on its trade relationship with China. This has been bipartisan.  Although the tone will likely change, many of the concerns of the Trump administration with respect to China are shared by President Biden and the Democratic Party.

Paul: Shifting to our other topic today – Brexit. Michelle, what has been the outcome?

Michelle: Since the U.K. voted in a national referendum to leave the European Union (EU) in 2016, businesses that operate between the U.K. and the EU have faced a significant level of uncertainty. Negotiations between the U.K. and EU ended in agreement on Christmas Eve to conclude the EU/U.K. Trade and Cooperation Agreement. The agreement now governs the economic and trading relationship between the U.K. and the EU.

The fact that an agreement was reached will be welcomed by many BABC members as it provides more certainty. However, businesses need to be aware that the agreement will not result in a static relationship between the U.K. and the EU. The agreement sets up a significant governance structure which will negotiate and determine how the agreement will be implemented. In particular, issues around financial services and data adequacy will be subject to further discussion. Furthermore, there is an automatic review of the agreement every five years.

Paul: What has been agreed?

Michelle: The agreement might be described as “skinny.” It focuses predominantly on goods, with most U.K. and EU goods not subject to tariffs or quotas.

There is little in the agreement for services. The provisions do not go much beyond existing EU practice, and, as a result, there will be challenges for service businesses to trade between the EU and the U.K.

Many citizens’ rights issues had already been covered in an earlier agreement and EU citizens living in the U.K. have until the end of June 2021 to secure their rights. BABC member businesses with mobile workforces need to be aware of the impact as the agreement ends the ‘freedom of movement [of people]’ between the U.K. and the EU.

Certain regulated sectors no longer have “passporting” rights, such as businesses operating in the pharmaceutical and financial services sectors.

Paul: What is the customs impact?

Michelle: The process at the U.K. and EU border has fundamentally changed. Customs declarations are now required on either side of the border and businesses will have to put further preparations in place, including holding registrations and having the data to support these declarations.

While the agreement means duty- and quota-free access to both markets, this applies only for goods that meet specific rules of origin. BABC member businesses should assess the impact of the rules of origin.

There are specific impacts from a customs perspective for Northern Ireland (NI). Customs duty will be due on British goods “at risk” of movement to the Republic of Ireland. A new UK Trader Scheme has been introduced.

Paul: What are the tax implications?

Michelle: The U.K. no longer has access, or needs, to comply with EU tax directives. In some cases, this may lead to additional taxation on certain transactions (for example, some inbound payments may be subject to withheld tax in the paying jurisdiction). The U.K. is no longer implementing DAC6 (the mandatory reporting rules) to the same extent as continuing EU members. U.K. implementation has been limited to one of the five categories (relating to information exchange and beneficial ownership).

The agreement contains provisions for coordination of social security. U.K. nationals travelling, working or living in the EU (and vice versa) will retain entitlements to some benefits. Cross-border workers and employers will only be liable to pay social security contributions in one state at a time.

Paul: What tax implications should BABC members be particularly aware of?

Michelle: There are several provisions in the U.S.-U.K. tax treaty favorable to U.K.-headed companies that require a party to be a resident of an EU member state. Ownership structure where U.K. companies have availed themselves to such provisions must be reviewed. Although there is hope that the U.S. and U.K. will negotiate amendments to account for Brexit, given the myriad of priorities announced by the Biden administration, any changes would not be expected in the short term.

Furthermore, in certain circumstances, consideration of the Limitation of Benefits clause of U.S. treaties may be necessary even where the payer or recipient is not a U.K. resident.

Paul: What is the impact on the U.K.’s economic outlook?

Michelle: KPMG estimates that with a trade deal between the U.K. and EU, U.K. GDP growth in 2021 could total 6.1%. If the U.K. had left the EU without an agreement, KPMG estimates U.K. GDP growth would have been lower, at 3.3%.

Paul: Are there any other impacts?

Michelle: The impacts of the U.K. leaving the EU are wide-ranging and the information we have covered during our discussion only briefly touches on a few of them. Given that the relationship between the U.K. and EU will not be static, businesses should follow developments, particularly in the coming months as the agreement is being implemented.

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