Tax implications of UK trade deals with India and the US

The general terms of the deal still lack much detail but what is perhaps most notable from a tax perspective is that, contrary to a lot of people’s assumptions, the UK’s Digital Services Tax (DST) was left alone. It lives to fight another day - for now. This is perhaps not that surprising. Different parts of government negotiate tariffs, regulation and tax. International tax policy is the responsibility of UK and US Treasury.

On the day of the announcement the two countries also indicated they would be working towards a more comprehensive agreement on digital business. This will likely be where the DST raises its head again as the US puts pressure on the UK to abandon what it views as a discriminatory tax on US business. The key question for the UK Government may not be whether it gives up the DST, but what it will be asking for in return.

Any digital deal that the UK hopes to strike with the US is also likely to get into the thorny questions of regulation and mobility.

Regulation is one of the most geopolitically sensitive topics. In part this is because of the UK’s relationship with the EU. It wants a reset focussed on improving cooperation in areas of security, trade and mutual recognition of professional qualifications. If the EU turn to further regulation of US digital business, potentially as a lever in any trade war, it is not difficult to see that the UK could be pulled in two different directions.

As for mobility, the free movement of labour and the ease and cost of visas will be crucial variables in digital multinationals’ investment decisions.

A final point that needs to be made on UK-US tax and trade is that, unlike tariff policy which can be done by executive order, other new measures have to go through US congress. Which brings us to the elephant in the room regarding UK-US taxation – retaliatory action.

The US’s dislike of both Digital Services Taxes and the Undertaxed Profits Rule (UTPR) which is designed to give countries taking rights over profits realised in other jurisdictions that are determined to be low-taxed and not subject to tax through another Pillar Two mechanism, is well documented.

Looming on the horizon for US congress are a couple of international tax bills that could be used to respond to the DST and the UTPR and, if passed in their current form, could have consequences for UK-US trade and investment far in excess of those caused by the liberation day tariffs. The landscape in this respect is still uncertain, but businesses will need to stay abreast of developments and should start considering the impact of any of the proposed measures on their business models.

In contrast to the UK-US deal, the India-UK trade agreement is a full-fat free trade agreement, the first one of this parliament. In contrast to the US deal which sets out broad parameters, the India deal has multiple chapters and significant ambition. A good summary of the measures can be found on the Government website.

For decades India has had a reputation of being relatively bureaucratic and protectionist. Since independence it has prioritised import substitution and the protection of its vast agricultural workforce over globalisation. Trade negotiations with India therefore start from a very different place to trade negotiations with the EU, USA or even China.

Despite this the country has built a seriously impressive global presence in digital and service exports, as well as industries such as generic pharmaceuticals. But it remains hard to invest in. There are aspects of the Indian agreement that will be both good and bad for UK businesses.

The only aspect of the Indian FTA that has stuck in the collective mind to date is not Scotch Whisky tariffs, but media headlines about the reciprocal deal on double social security contributions.

Getting a Double Contributions Convention in place with India is sensible, and it shows how important labour mobility was to the Indian negotiating team in particular in an environment where any concession by the UK Government on immigration and visas was always going to be difficult to position politically. Our global mobility team provide more detail on the Convention in this issue of Tax Matters Digest.

But the biggest obstacle to frictionless investment in India by UK multinationals is India’s complex and often unpredictable corporate tax system and a UK-India double tax treaty that is less beneficial than for several of our European peers.

India applies a plethora of withholding taxes and indirect taxes, it has an unusual definition of Permanent Establishments, imposes taxes on profit repatriation, and is renowned for its appetite for litigation in transfer pricing. This makes it one of a select few countries where the usual rules of international tax don’t seem to apply.
 
The Indian FTA doesn’t discuss corporate tax. It’s a different competency within government. The agreement will definitely facilitate trade, and it will make cross border assignments more affordable, but without a major update to the treaty at the very least, it will leave some of the biggest boulders in the stream.

There are three big items which businesses need to monitor in international tax and trade over the next few months:

• The UK’s attempt at resetting the relationship with the EU with the next key date being the EU-UK summit on 19 May. Topping the bill will be defence and security, but they will also discuss emissions trading systems and mobility, including migration and youth mobility;
• US retaliatory action in relation to DSTs and UTPRs, where the expectation is that measures will be included in the reconciliation bill currently being negotiated. Various timings have been suggested with the most ambitious being Memorial Day, with 4 July or the August break being potentially more realistic targets; and
• The continued working towards a digital deal with the US which may well spell the demise of the UK’s Digital Services Tax.

For further information please contact:

• Tim Sarson
• Sharon Baynham