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Thursday, 25th April 2024 |
| Growing the EU – Are you ready for EU Accession ? |
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| The expansion of the EU to include ten additional Member States on 1 May 2004 has a wide range of implications for Irish businesses. In addition to businesses with branches or investments in those states, businesses trading in goods with those states, or supplying services to them (including financial services) will also be impacted. |
New kids on the block
On 1 May 2004 Cyprus, the Czech Republic, Estonia, Hungary, Latvia, Lithuania, Malta, Poland, Slovakia, and Slovenia will become full member states of the European Union. As most of them are major wine and beer producers the celebrations should be unstinted!
More will happen on Mayday 2004 than sore heads, however. Ten legal systems, ten taxation systems, and ten bureaucracies will become subject to the rules of the European Union.
When we consider the impact that EU rules have had on our own affairs over the last decade, that will give some guide as to the scale of the impact of EU accession for business life in the ten new states.
Irish businesses trading with the accession states, whether it be importing or exporting of goods or the supply of services, need to give immediate and serious consideration to the impact that EU accession is going to have for them. Failure to do so may, at best, cause trading inconveniences post 1 May 2004 or, at worst, give rise to significant additional costs and loss of competitive advantage.
The range of areas to which attention must be given is enormous. It includes, by no means exhaustively, value added tax, customs duty, withholding taxes, corporation tax on branches, application of double tax agreements, record keeping requirements, invoicing requirements, local and Irish tax implications of takeovers and reorganisations, to name but a few.
Local laws in the accession countries vary widely at present, as do their judicial and administrative systems. The process of harmonisation of those laws and systems will therefore be complex and issues encountered will vary between the ten countries.
For this reason KPMG has approached the task of advising clients on the impact of the expansion of the EU by bringing together a multinational team comprising local professionals in each county and a teeam of experts with experience of EU law and practice.
Value added tax
One important impact of accession for businesses in the financial services sector is the potential diminution in the entitlement to input VAT recovery.
For example, banks, insurance companies, fund managers and funds can all currently recover VAT on costs to the extent that their activities are deemed to be supplied outside of the EU. From 1 May 2004 onwards, transactions with the ten accession states will no longer qualify for VAT recovery, thereby giving rise to a real VAT cost. With appropriate planning, however, it may be possible to reduce the impact of this change.
EU accession may also change the current VAT treatment of goods and services supplied to or by businesses or private customers in the accession States. The application of the EU’s VAT rules may result in VAT becoming chargeable on supplies of goods or services which were previously VAT free. For example, where a business in the financial services sector established in one of the accession states receives certain services from abroad, it will be required to account for VAT which it may not be entitled to reclaim.
For entities already registered for VAT in any of the accession states, there may be a range of changes relating to the rate of VAT chargeable, the transactions which are liable to VAT and the date of payment of VAT, to name but a few.
Irish businesses operating within the new states may also face a plethora of new administrative requirements covering VAT registration, invoicing, record keeping and many other similar issues.
Customs duties
On 1 May 2004, both the accession states and the EU will remove their customs duties on trade between them. Simultaneously, the EU’s external customs barrier will come into force around the accession states in respect of imports from non-EU countries.
Many local reliefs and exemptions from existing customs duty regimes in the new states will disappear at the same time.
The documentation requirements for goods crossing the frontiers of some of the accession states will change with the introduction of EU customs documentation. There may also be a need to obtain new customs licences in the accession states. Similarly, customs guarantees may require renegotiation.
Although it is perhaps easier to state the legal implications of the changeover than to forecast the impact on the ground in the early days of accession the key point is that businesses importing or exporting via the accession states will need to assess the impact of the changed customs environment on their business post 1 May 2004.
The requirement to transition from the existing customs duty regimes to the harmonised EU system presents possible planning opportunities, particularly in relation to transactions occurring around the transition date.
Excise duties and similar levies
From 1 May 2004 the accession states will be obliged to levy excise duties on products such as mineral oils, alcohol and related beverages and tobacco. Additionally, the accession states may be entitled to maintain some existing environmental and consumption levies. Anyone who has experienced the impact of budget day changes in excise duties in Ireland will have some inkling of the potential impact of the changes in excise duty regimes expected on 1 May 2004 !
Corporate taxes
The various EU directives that are relevant to corporate tax will be applied in the accession states. These include the parent subsidiary directive, which regulates the taxation of intra group dividends across community borders. Principally this will impact on Malta, as equivalent protection is generally available under Ireland’s double tax agreements with the other countries.
The mergers directive will also have application and will provide compulsory relief for many reorganisations and takeovers.
The interest and royalties directive (not yet in force) will also extend to the accession states, some of whom are seeking transitional relief from its application. The effect of this directive is to largely remove local taxes on interest and royalty payments within an EU wide group.
Many Irish tax reliefs, or exclusions from anti avoidance measures in Irish taxation, are available only in relation to transactions with persons resident in EU member states. The range of transactions covered by this exclusion will be greatly increased from 1 May 2004.
Not currently doing business in the accession states ?
Eastern Europe has lower cost structures than Ireland. It has an educated skilled workforce and, in many instances, a sophisticated infrastructure. Eastern European countries may provide a low cost base from which Irish firms may face competition, both in their export markets and in the Irish market.
Equally, the expansion of the EU to Eastern Europe facilitates investment there by Irish businesses. There will be the safeguard of common rules and law in most important areas. There will be the assurance that the rule of law will apply in business matters. Some businesses in Ireland may consider whether the low cost base of Eastern Europe could have a role to play in strengthening their business against competition worldwide.
If any business leaves it until the middle of 2004 to start thinking about its impact it may encounter significant trading difficulties, incur additional costs and find itself left behind by its competitors. The key is to start planning for the impact of accession at an early stage and obtain advice from those with access to local expertise as well as an expert knowledge of EU rules. |
Niall Campbell is a tax partner in KPMG specialising in VAT. He is part of KPMG’s task force on EU accession services.
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| Article appeared in the September 2003 issue.
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