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This article was first published in the June 2016 Ireland edition of Accounting and Business magazine.

The possibility that the UK could elect to exit the European Union (EU) in the referendum on 23 June is causing concern on both sides of the border. The tax impact on Ireland would be potentially ‘very negative’, claims Neil Hughes managing director at Dublin accountancy firm Hughes Blake. Direct taxes are already levied on a national basis, so the impact would be greatest on indirect taxes, such as duties, tariffs and VAT. For example, a so-called ‘Brexit’ could mean the addition of tariffs on the import of goods from the UK into EU member states such as Ireland and vice versa.

This is because it could mean that EU customs duty regulations such as Article 28 of the Treaty on the Functioning of the European Union (TFEU) would no longer apply. In addition, it would free the UK from having to comply with EU VAT Directive 2006/112 EC, for example, allowing it to set its own VAT rates and to decide what might be exempt altogether.

In a November 2015 report the Economic and Social Research Institute in Dublin estimated that a Brexit could reduce bilateral trade flows between Ireland and the UK by 20% or more. This could have a huge impact on employment, as trade between the two countries directly supports over 400,000 jobs, half of them in Ireland, according to the Small Firms Association. It could also affect small businesses looking to expand, as the UK accounts for 43% of exports from indigenous Irish companies. 

The Dublin-based think tank the Institute of International and Economic Affairs calculates a Brexit would wipe €6 billion off the annual value of Irish exports.

Hughes worries in particular about the insecurities for future tax regimes the Brexit debate is creating. ‘Many companies are postponing investment decisions since they are worried about making costly mistakes,’ he says. Also, the uncertainty is already weakening the British pound (with £1 dropping from €1.35 on 4 January to €1.27 on 10 May), making Irish exports more expensive. ‘That is detrimental for our tourism and agricultural businesses,’ says Hughes. In a post-EU scenario, the UK could, for example, allow cheaper meat and dairy imports from South America and New Zealand, a move that would hurt Irish farmers.

There could also be a rise in administrative costs, particularly if border controls are reintroduced. Davy Group, a large Irish provider of asset management, expects that possible ‘trade barriers could reduce GDP by as much as 1% to 3%’. According to an April 2016 Davy analysis, the damage ‘doubles or triples to 6% to 9% if business investment, productivity or competition are hurt’. In addition, renewed border controls would make it more difficult for Irish companies to break into UK markets and would make Ireland less attractive to multinationals.

Given a Brexit, the UK would be free to provide tax incentives exclusively to UK corporations, as EU regulations would no longer prevent it from discrimination against organisations with headquarters outside the UK, Darren Oswick, partner at the UK-based international law firm, Simmons & Simmons and his colleagues noted in a January 2016 analysis of a Brexit’s tax implications. ‘The one possible upside to Brexit would be the possibility that more multinationals might look at Ireland as a base to gain access to the EU,’ says Hughes. Whether those potential benefits would be enough to outweigh the loss of EU-based attractiveness is not known. This is particularly significant for Northern Ireland, given its success in attracting foreign direct investment as an EU location.

‘There will be questions regarding the border between Northern Ireland as part of the UK and the Republic of Ireland as part of the EU,’ says Gerry McInerney from accountancy firm McInerney Saunders in Dublin, who focuses on assisting UK businesses operating in in Ireland. Many construction companies, for example, operate on an all-Ireland basis and UK businesses are currently entitled to tender for significant contracts in Ireland; it is unclear if they would be able to continue to do so. ‘What will happen to VAT relating to such current long-term contracts?,’ McInerney wonders. ‘What will become of the quality and safety standards we each recognise and how do we ensure compliance?’ He is also worried about crossborder national insurance issues for workers that are currently governed by EU directives. In McInerney’s view, the ensuing administrative vacuum will only help ‘crossborder smuggling, tax evasion and organised crime’.

Barbara Bierach, journalist