UK To Save $1.5 Bln in EU Tax Payments in Case of 'No-Deal' Brexit

Several major British companies might avoid paying more than $1.5 bln in EU tax payments in the event of a 'hard Brexit', as tax decisions made by European courts would be void on British soil after Albion exits the bloc in March.

Kristian Rouz — Britain is bracing itself for exiting the EU on 29 March, and some economists have pointed out that UK companies could avoid paying some $1.5 bln in EU taxes this year.

These taxes are expected as part of a possible Brexit deal; however, the UK Parliament, the cabinet of Prime Minister Theresa May, and EU negotiators are still struggling to strike an agreement, and a 'no-deal' Brexit could mean the UK might exit the bloc without paying the hefty divorce fee.

The EU has been preparing a $1.5-billion tax bill for dozens of British enterprises operating on both sides of the English Channel. Brussels suspects these companies of getting illegal tax breaks over the course of several years, and European courts are expected to rule in favour of the European Commission's claims that British companies should pay these taxes.

However, in the event of a 'hard Brexit', a European court would have no jurisdiction over companies domiciled in the UK, meaning any decision made with regards to UK companies would be void on the British soil.

"The issue is not the chance of an appeal, but how to actually enforce a decision taken just before the Brexit date," Prof. Raymond Luja of the Maastricht University in the Netherlands said. "What if the UK simply would ignore it?"

The issue of allegedly underpaid taxes comes amid rife deliberations across the UK over the $69-bln divorce payment to the EU. Hardline Tories in Parliament and PM May's cabinet have insisted the UK does not owe the EU anything, suggesting that in case of a 'no-deal' Brexit, a divorce payment would not be applicable whatsoever.

However, European officials insist the UK would still have to pay the compensatory fee, even in the event of a 'hard Brexit'. According to the EU's chief Brexit negotiator Michel Barnier, London could face 'major problems' if it decides to avoid paying the settlement fee.

"It will be more difficult to make them respect them in the case of a 'no deal', but we will continue to insist: These commitments are legally binding under international law and I cannot imagine that Britain would not respect its commitments," Barnier said.

Meanwhile, according to European officials, at least 53 British companies, including Compass Group Plc, Pearson Plc, and Diageo Plc, could be facing tax penalties after an upcoming decision by a European court. An EU investigation, officials say, said British companies used fiscal loopholes to reduce their fiscal contributions to the bloc.

READ MORE: Ender's Game: Airbus CEO Threatens to Leave UK, Calls Brexit Plans a 'Disgrace'

However, some argue that loophole-related decisions can't apply retroactively, which could make a solid legal argument for the British companies in question.

"The UK might indeed just ignore the whole thing," Howard Liebman of Brussels-based law firm Jones Day said. "It may decide… not to lodge an appeal and simply say, we're out, and this decision doesn't impact us. Then what would happen?"

The May cabinet has so far not denied that Britain might owe the EU some budget contributions to make up for the bloc's spending on certain programmes that have benefited the UK over the years.

However, PM May has hardly spoken on the matter after her proposed Brexit deal's failure in Parliament, and a subsequent rise of influence of hardline Tories and Northern Irish unionists in both the House of Commons and her cabinet.

Some Tory MPs have suggested the UK should withhold its divorce payment form the EU after Brexit, and use it as leverage to convince Brussels to enter a free-trade deal with Britain. Once a mutually-beneficial trading relationship is established across the English Channel, some Conservative MPs say, then London would consider paying tax fees to the bloc.

Barnier, however, doesn't appear to be convinced the UK will eventually meet what he claims are its budget commitments to the EU.

"This depends on the future relationship, like I already said. We are ready to be more ambitious if the British decide to shift their red lines, for example by remaining in a customs union, or participating in the single market," Barnier said.

But legal experts say in case of a 'hard Brexit', the UK could simply sever ties with the EU, moving on to the World Trade Organisation (WTO) rules in its relations with the bloc. In this case, experts say, the EU would hardly be able to apply legal pressure on Britain, and any potential punishment for the UK could be deemed as political, and unacceptable form the standpoint of WTO rules.

"After the UK leaves… what can the EU or European courts actually do to force the UK to comply with those judgments?" Jones Day's Liebman said. "I do not believe there is any enforcement mechanism available, regardless of the outcome."

However, some argue the EU could file a legal case against Britain with an international court, such as the International Court of Justice in the Hague, or it could try its luck in British courts as well.

READ MORE: Brussels Files Lawsuit Against UK for 'Unfair' Tax Cuts for Commodity Traders

Experts say the issue of corporate tax payments and the broader divorce payment adds uncertainty to the already highly-tumultuous Brexit process — also suggesting that a huge sense of relief would spread across the globe once the UK exits the bloc on 29 March.