You’ve likely been inundated with coverage of ‘Brexit’ or the British exit from the European Union this past week. The UK announced its decision to end its 43-year membership in the EU June 23rd, which has caused somewhat of a ruckus across the globe—What will this mean for US companies conducting business with Europe?

Some background on Brexit

The UK has been part of the European Union for the last 43 years, so why now is it deciding to split, many are wondering. It is the first member state to exit the EU in its 58-year history. The EU buys nearly half of Britain’s exports, so this move is crushing to the union, to say the least.

Some reasons why (some of) Britain was fed up with the EU:

1. Post 2008 Recession—The EU has struggled to rebuild itself after their 2008 recession, leading to many people of Britain to question their membership in the union. The recession in Europe was centered around the Euro, not the pound, so the UK was not impacted by the recession the same way other nations were, but UK residents felt that membership in such an unsteady, weakened group of nations was overall very dangerous for Britain’s success as a nation.
2. EU’s liberal rules for internal migration—Some UK residents feel strongly that the EU’s immigration policies are reason enough to split with them. Brexit supporters say that the extensive migration of low-wage workers from elsewhere in Europe has lowered wages for natives of the UK.
3. EU’s burdensome economic regulations—Brexit supporters say that their split from the EU will result in improvements to economic competiveness, output and employment. As the EU stands now, the economy is based on compromises made with 27 other nations; therefore binding Britain to the interests of several other nations.
4. Cost Saving— Brexit allows Britain cost saving because the country no longer has to contribute to the EU budget.
5. Freedom—“Brexiters” as they are referred to, are confident that they will gain control over some of their own affairs by being separate from the EU.

What Brexit means for the U.S.

Experts have said that Brexit likely will not drastically affect operations in the U.S., but it could change certain things, namely:

• VAT— Though there will be no changes to the VAT rules on service sales to UK consumers (VAT free), US companies might still have to register for UK VAT if they import and sell to UK consumers.
• Extra compliance for digital goods sales- Any digital service provider must charge and remit the local VAT of the consumer’s country. Brexit means that digital service revenue to UK consumers will have to be reported separately to the UK tax authorities, which will call for a new, separate VAT registration in the UK by US suppliers, and UK VAT returns submitted once per quarter.
• Shipping costs- “Drop-ship,” the process by which a manufacturer buys goods individually from a wholesaler, who then ships it directly to your customer, will change with Brexit. With this shipping method, the store does not purchase a large amount of inventory, thus the retailer never sees or handles the product. With Brexit, drop shipping costs might rise since a leave from the EU also means a leave from the Customs Union. This separation means the UK will need to set new import duty rates for imports.
• Passport rights- U.S. based subsidiaries of financial services firms could lose some of the “passport” rights that enable them to freely sell across the union.
• Immigrant jobs- Because Brexit will likely curb immigration, it will be difficult for Americans overseas to find jobs in Britain.

What if you use the UK as your primary EU import hub?

The biggest changes will be on those who use the UK as their EU import center. Imported goods will no longer be able to be cleared into free circulation since the UK will be outside of the EU VAT regime. U.S. exporters sending goods to Germany, France and other EU consumers will have to clear the goods on entry into these EU countries. U.S. distributors might consider choosing another EU country for their European imports because of this change.

Britain’s exit has certainly stirred up some controversy, and its success or failure is really up in the air at this moment in time. Stay tuned for updates on how things transpire.

Our Global Tax Services Team can advise you further on the effects of Brexit on the U.S. economy.