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November 07, 2018

Why it is so hard to prepare for a hard Brexit

A poll in Germany has just found that the vast number of German companies that trade with the UK are not prepared for Brexit. Most of the 1100 companies polled by the IW institute believes that there will be a deal in the end, so why bother? Six out of ten companies have done exactly nothing, and a quarter only what they consider a bare minimum. 

But what does it mean not to be prepared for Brexit? Is is realistic to expect companies to prepare? We noted a point yesterday by Allie Renison of the Institute of Directors in the UK. It is quite impossible for small or medium-sized companies to prepare for a political event on the scale of Brexit. SMEs don’t have large compliance departments, but spend their days struggling to survive in business. How can they conceivably prepare for an uncertain event, given the large number of possible scenarios? A manufacturer cannot simply buy an operating licence in the EU just in case. A shift in supply chains is a big commercial decision for a company, with big implications for profit margins.

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November 07, 2018

Kicking the digital tax down the road

At its meeting yesterday, the Ecofin failed to agree an EU digital tax, but the Austrian presidency still hopes a decision may be taken by the end of the year. However, the positions of proponents and opponents of a digital tax remain far apart. A compromise proposed by Germany is to delay the entry into force of any EU digital tax until at least 2021 to give time for the OECD to release its own report on digital taxation, due in 2020. As a German source put it to Handelsblatt, this would be a face-saving measure for everyone. Opponents of the tax can find comfort in the fact that the tax is now delayed for at least two years. Proponents can say that they are putting pressure on the OECD to come up with a solution. And the European Commission can say that the EU reached an agreement this year as it had planned. But in the end, the German-proposed compromise may just result in no EU digital tax at all.

The drive to introduce a digital tax is led by France and the Commission with the support of other large member states such as the UK, Italy or Spain, all of which have plans to introduce a digital tax at the national level if the EU or the OECD don't act first. Large countries are the ones fiscally most damaged by the ability of internet firms to shift profits to low-tax jurisdictions such as Ireland, which is one of the leading opponents of the digital tax. Ireland is joined in its opposition by Denmark and Sweden. Both countries are concerned that the disproportionate effect of the digital tax on US firms would invite US retaliation. An agreement at the OECD would avoid this, but precisely because the biggest internet firms are from the US, it seems unlikely that the US will agree on an international tax standard. The Trump administration has already achieved its own narrow goal of encouraging US corporations to repatriate profits.

In the middle of the two groups is Germany. Despite being a large country with an interest in avoiding profit shifting, German industry hopes to get a piece of the internet pie, and is concerned that a European digital tax would discourage investment and disadvantage Europe relatively to its global competitors. This is a concern shared by the Scandinavian countries.

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