by Andreia Barbosa, PhD student at the Law School of UMinho

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On 23 June 2016, the British people decided to leave the European Union, re-launching the idea that belonging to the European Union, in the light of Article 50 of the Treaty on European Union, does not seem to be an obligation, but a choice. States have the (unilateral) right to leave.

The actual effects of Brexit are not yet fully known. In fact, its exact consequences will only be effectively known when the negotiations are over – which will only happen, predictably, in early 2019.

There are, however, more likely scenarios than others and, consequently, more likely effects than others. Among the most immediate scenarios and effects, are those relating to the commercial transactions between the United Kingdom and the European Union. Because, of course, one of the most important ideals of the European Union is the free movement of goods, based on the existence of a single market without technical and physical frontiers in the free movement of persons, services, goods and capital­. So, the question arises as to the terms under which trade in goods between the United Kingdom and the Member States of the European Union will take place.

In view of the umbilical relationship between the European Union and the free movement of goods, it would not theoretically be possible for the United Kingdom to leave the former and to benefit from the latter.

The UK Government has already set out its negotiating objectives and a desire to enter into a free-trade bilateral agreement that is “tailor-made” according to the British economy. Coming out of the single market, the UK’s intention is to enter into a bespoke free-trade agreement (BFTA). In view of the highly impacting effect that the introduction of the new agreement is expected to bring, a transitional trade model with the European Union is being negotiated, in accordance with the Customs Future Partnership Paper (UK Government Papers), to enable operators adjust to new customs relations.

In the light of a comprehensive analysis based on the negotiations that have been established, it is clear that trade between the United Kingdom and the Member States of the European Union will change significantly from the point of view of their qualification. The movements of goods into and out of the United Kingdom will be considered as imports and exports and consequently their taxation will no longer be shaped in the light of the United Kingdom’s stated intention to leave the single market. However, if the commercial agreement is concluded, it is possible that commercial transactions in some cases and for certain goods do not involve the payment of customs duties.

On the other hand, and in a more evident consequence in general terms, bureaucracy and ancillary obligations tend to increase. For example, completing customs declarations and the figure of the customs representative (dispatcher) will most likely be a reality in the commercial activity between the UK and the European Union. At the outset, however, it will no longer be necessary for economic operators to include commercial transactions with the United Kingdom in Intrastat.

There are, moreover, a number of customs issues arising from the effects of Brexit, such as (i) what treatment should be accorded to goods which are sold and dispatched before Brexit, but which actually reach the purchaser only after Brexit ?, (ii) how will cooperation and exchanges of information be maintained between the customs authorities of the European Union and those of the United Kingdom? In fact, all legislation concerning the taxation of commercial transactions will have to be changed, in a dimension difficult to typify here in a complete way.

As regards VAT specifically, there are also a number of changes which, with a greater degree of certainty, can be pointed out. Let us see, for example, some of them.

At the moment, intra-Community transfers of goods are exempt (at the origin), and there is a self-assessment and automatic deduction of VAT at the destination. That is, the VAT, in the current molds, does not have any financial impact for the companies. However, after leaving the United Kingdom of the European Union, sales made there are still exempt because they are exports, but the United Kingdom will have to bear the same VAT from the outset, and there will no longer be a possibility of self-liquidation and deduction. Tax will have to be paid at customs and, only at a later time, can the VAT be deducted.

On the other hand, entities in the United Kingdom which currently have a VAT register in a Member State of the European Union and have a warehouse there for stock which are consigned, because they are entities resident in the European Union, do not have to have in that State A tax representative. As soon as the United Kingdom leaves the Union, such tax representation becomes compulsory.

Finally, in terms of VAT there is, from the outset, a positive aspect to be pointed out, which is related to financial transactions. At present, any financial transactions are exempt from VAT. They do not give rise to the right to deduct VAT from banking institutions established in the European Union (this is when billing these services to entities within the Union). When services provided by Portuguese banks are billed to entities outside the Union, these operations remain exempt but confer the right to deduct, an advantage which the United Kingdom may enjoy when leaving the European Union.

Well, since international trade is one of the most powerful engines of the Globalization Era, the terms under which the expansion of cross-border trade must be realized have been studied for several decades now. Given today that no country is an island and that all countries participate in the world economy and are interconnected through international trade and finance, new legal solutions have had to be created in the face of scenarios that have not yet been experienced. One of these scenarios is the triggering of Article 50 of Treaty on European Union, whereby the terms under which trade between the United Kingdom and the Member States of the European Union will undergo significant changes, including taxation.

Of course, the adaptation of the legal solutions dictated by the United Kingdom’s withdrawal from the European Union, which will take place on 30 March 2019, is a task which is admittedly challenging, but the implementation of which is already taking place, revealing the Union’s ability to adapt to the new requirements, while, in accordance with Article 3 (3) of the Treaty on European Union, adopt solutions compatible with the pursuit of a highly competitive social market economy aiming at full employment and social progress. Proof of this are the documents issued by the European Institutions which reveal the clear objective of protecting the Union’s interests by striking a desirable balance between the effect of Article 50 and the pursuit of the European interest enshrined in Article 3.

This new adaptation, it seems to us, should continue to be carried out in accordance with the “four principles of European confidence which form the indispensable foundation of a European society” – developed by ULRICH BECK, in The German Europe – duly adapted to the specific commercial reality. They are: (i) the principle of equity (building the Union always implies not only the consecration of rights but also the creation of obligations); the principle of balance (there must be a balance in the relationship between large and powerful states and small and less powerful states, and protection of the latter should be a priority);  principle of reconciliation (due to the inequalities between the various countries, the weaker partners must be treated in accordance with a policy of reconciliation, without blame and negligence) and the principle of barring exploitation (mechanisms must be strong countries to take advantage of others’ weaknesses for their own benefit).

The principle-oriented approach will allow to stop the feeling of disbelief before the European Union and, specifically, before the Customs Union, shielding the forces of cohesion against the forces of defragmentation. For this reason, although the answer to the question “What Customs Union today?” Is under construction, should not be given to fear.

Moreover, the fact that international trade is currently facilitated and regulated harmoniously does not mean that barriers to trade have ceased to exist. Purely free trade returns to a utopia. And still good. As long as barriers to trade are required, inter alia, to change the terms of trade in favor of a country for the temporary protection of a “nascent industry” with growth potential, to facilitate and improve the control of the flows of goods in the chain the protection of national economies, the environment and public health, and, importantly, to ensure that such cohesion forces are not weakened, uniting European citizens in the maintenance of the Union project – although rebuilt – the continue to be relevant.

Thus, in the light of Brexit’s experience of international trade taxation, it seems to me that it is possible to attribute a new purpose (of a non-fiscal nature) which has not yet been invoked: ensuring the cohesion of the single market itself.

Pictures credits: UK Border by David McKelvey.