Prior to COVID-19, tax leaders already faced challenges helping their companies stay abreast of and optimize against a sea of global trade negotiations, deals and disagreements, not least the ongoing trade dispute between the US and China. Then the pandemic struck, wreaking havoc and uncertainty across global supply chains.
And yet, says Gijsbert Bulk, EY Global Director of Indirect Tax, there have been a number of positive developments. While the Trans-Pacific Partnership may have fallen through, Asia-Pacific has since seen its largest free trade agreement (FTA) ever — with the Regional, Comprehensive Economic Partnership. Just before that, the EU entered into an FTA with Japan. ”Tax leaders should recognize the shift, the feeling that the US is no longer the first and foremost trading partner. The EU is looking to the East,” says Bulk.
As 2020 drew to a close, one of the most pressing matters in Europe was whether the EU and the UK would be able to agree on a Brexit deal. After delays during the year and an inability for both parties to agree on the minutiae, a deal was finally struck on 24 December 2020.
As the UK left the single market and customs union on 31 December 2020, new arrangements allowing for tariff-free trade in goods came into force. Yet it has been far from plain sailing since then, with the EU formally launching legal action against the UK in mid-March over alleged infringement of the Northern Ireland protocol relating to checks on goods shipped from Great Britain.3
COVID-19 has shown companies and entire nations the weaknesses in their supply chains and footprints. Adjustments are being made, but will this be transformational or merely incremental?
“Disruptions brought on by national lockdowns and a decreasing demand in export markets has resulted in companies assessing their supply chain vulnerability and resilience,” says Walsh. “Even so, any short-term appetite to onshore and de-risk will be constrained in 2021 because of the costs of diversifying suppliers, logistics and holding larger inventories. Over the longer term, however, government incentives to onshore will likely begin to have an impact.”
Still to be sorted out is the degree to which trade rifts will persist. Bulk says that many executives he speaks with, ask whether a Biden administration will significantly soften the US stance on China trade and tariffs. “If anyone believes there is going to be a major reset now that there’s a new administration in Washington, I believe they will be disappointed,” he says.
“The economic tensions, the constraints in China on Western companies doing business and the allegations of espionage and IP infringement all persist. And though the rhetoric may not be as harsh going forward, the tension is actually greater than before. So, it is likely that tariffs will be in place for at least another four or five years.”
With regard to Brexit, while it is here now, what it actually means in reality remains to be seen.
Bulk explains, the deal has no provisions that constrain the UK’s domestic tax regime or tax rates, rather committing both parties to uphold global standards on tax transparencyand fight tax avoidance. It also contains commitments to specific international tax standards as they stand at the end of the transition period, including on the exchange of information, anti-tax avoidance, and relevant legislation on public country-by-country reporting by credit institutions and investment firms.
The impact on many businesses, most notably those in the UK, are already being felt from an import/export perspective — but the full scale of the Brexit deal is likely to only truly be revealed over time.