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Deloitte Brexit Briefing | 9
Brexit – Possible options over the short and medium term
January 2019
2018 Deloitte 2
The current edition
Perspectives on Brexit
Deloitte Brexit Briefings
Deloitte Brexit Briefings series
In our current edition, ‘Brexit – Possible options over the short and medium term’, we analyse the current status of the Brexitnegotiations. Our goal is to provide an overview over the possible outcomes both in the upcoming months as well as years. A special focus lies on the impact of a no-deal Brexit.
The United Kingdom’s decision in June 2016 to leave the EU will have a far-reaching economic and political impact. For German companies, Brexit means a fundamental change in the business environment.
In this context, the Deloitte Brexit Briefings examine the core Brexitthemes and risks from economic, strategic, taxation and legal perspectives, and are intended to provide orientation about the complex effects of Brexit and the Brexit process.
Feb 2017
March 2017
May 2017
June 2017
2018 Deloitte 3
Brexit negotiations
The road ahead: What has happened and what will happen next?
2018 Deloitte 4
What has happened so far: the most important milestones
Brexit | Meilensteine
Source: Deloitte Research
29 MarchArtikel 50 triggered
24 JuneDavid Cameron stepsdown as Prime Minister
6 JulyChequers Plan
23 JuneBrexit Referendum
13 JuliTheresa May wird Premierministerin (PM)
12 NovEU und UK agree on an exit deal
8 JuneUK snap elections
26 JuneEU (Withdrawal) Act becomes law
20
17
20
18
14 NovBritisches Cabinetsigns off on deal
20
16
25 NovEU Heads of State andGovernment agree toBrexit deal
12 DezTheresa May winsvote of no confidencetriggered by Tories
20
19
15 JanBritisches Parliamentrejects exit deal
16 JanTheresa May wins voteof no confidencetriggered by opposition
2018 Deloitte 5
The basic mechanism behind the Brexit negotiations remains unchanged
Brexit | Mechanism
Negotiations between
EU and UK
EU accepts
EU exit
with deal
UK demands
new negotiations
Second
referendum
Agreement
United Kingdom
remains in the EU
EU exit
no deal
No agreementBritish Parliament
accepts
British Parliament
rejects
EU rejects EU rejects
UK demands
new negotiations
Second
referendum
Source: Deloitte Research
Withdrawal of
Article 50
Withdrawal of
Article 50
2018 Deloitte 6
The road ahead: There are many possible outcomes for the upcoming weeks
Brexit | The road ahead
• Successful vote of no
confidence against the
government by the opposition
• or two-third majority of MPs
call for early general elections
...then:
• Election: the current timetable
of concluding an exit
agreement by Mar 2019
cannot be met
• Options include extending
Article 50 (with EU
agreement), No-Deal Brexit or
withdrawing from the exit
New elections
• PM proposes a second
referendum to Parliament
• and UK Parliament agrees
...then:
• Second referendum: the
current timetable of
concluding an exit agreement
by Mar 2019 cannot be met
• Options include extending
Article 50 (with EU
agreement), No-Deal Brexit or
withdrawing from the exit
Second referendum
• PM and asks for extension of
negotiation phase after
consulting with Parliament
• and EU Member States agree
unanimously
...then:
• Negotiation phase is
extended
• Timescale uncertain
Extension of Article 50
If...: If...: If...: If...:
• UK Parliament agrees to the
current or a new deal
• and Europeans Heads of State
and Government and EU
Parliament agree to the deal
...then:
• Exit agreement comes into
force in Mar 2019
• Transition phase with further
negotiations until Dec 2020
Withdrawal agreement
• UK Parliament rejects all exit
agreements
• and negotiation phase is not
extended
...then:
• If nothing else happens, the
default option would be a no-
deal Brexit on March 29
No Deal
If...:
Final outcomePossible delay on a final decision
Source: Deloitte Research
2018 Deloitte 7
Down the road: No end to uncertainty expected in the coming years
Brexit | The road ahead
Jan – Mar 2019
29 March 2019
Mar 2019 –Dec 2020
From Dec 2020
If there is agreement from the British Parliament and the EU countries, the ratification process continues on both sides:
• UK: EU (Withdrawal) Bill anchored in legislation
• EU: EU Parliament votes on exit agreement
Brexit Day
The United Kingdom officially leaves the EU, unless both sides agree to an extension of the negotiating phase as per Article 50 or an exit from Brexit.
If an exit agreement has been concluded, the transition phase begins in March 2019, during which the future economic partnership is negotiated.
End of transition phase – future economic partnership comes into force unless the UK and EU agree an extension of the negotiation phase.
If the transition phase ends without any future economic partnership agreed, the backstop comes into force.
If the British Parliament does not accept the exit agreement, the British government has 21 days to submit a new plan to Parliament.
If nothing happens to stop Brexit, the default option is that the UK will leave on 29 March.
If Article 50 is extended, negotiations continue between the UK and EU - the United Kingdom remains part of the EU during this time.
No-deal Brexit if EU and UK do not reach an agreement and the negotiation phase is not extended. WTO rules apply to trade.
Source: Deloitte Research
2018 Deloitte 8
Brexit negotiations
Exit agreement vs. No Deal
2018 Deloitte 9
What are the six key points in the current withdrawal agreement?
Brexit | Exit agreement
Transition phase• 29 Mar 2019 to 31 Dec 2020• UK continues to comply with EU regulations,
but loses membership of EU institutions• Transition phase can be extended once for a
definite period• Decision about extension must be made
before 1 Jul 2020
02
01
Citizen rights• EU citizens living in the UK and UK citizens
living in the EU retain all of their rights, including during the transition phase
• Free movement of people - one of the four basic freedoms of the EU - ends
• Travelling without visa should however remain possible in future
04
03
05
06
Backstop• If the transition phase ends without
agreement, the UK and EU remain in a customs union - for an indefinite period
• This backstop can only be lifted with agreement from both parties
Financial settlement• EU and UK agree on a financial settlement of
approx. EUR 44 billion• This consists of contributions to the EU budget and
British commitments made in the past • In case of an extension of the transition phase,
further payments become due
Goods trade• During the transition phase, UK and EU remain in a
customs union under EU regulations, therefore no customs duties or goods controls are necessary
• During a Backstop the whole of UK would form a single customs territory with the EU. Northern Ireland would further align with the EU single market on goods standards, agriculture production and veterinary controls.
Governance• A committee with representatives of both parties
was founded to deal with all legal questions to do with the exit agreement
• The ECJ remains the jurisdiction for all questions relating to EU law
Source: European Commission
2018 Deloitte 10
320 votes are required in Parliament to approve a deal – however, the parties are fragmented and a majority Parliament assent remains unlikely
Brexit | British Parliament
Distribution of seats by party in the British Parliament (N=650)*
Source: UK Parliament, Deloitte Research*11 Members of Parliament will not vote: The Speaker and his three deputies are not allowed to participate, 7 members of the Northern Irish Sinn Fein party refuse to take their seats in parliament.
315
10
257
3512 21
Conservative
Democratic Unionist Party
Labour
Scottish National Party
Liberal Democrat
Other
2018 Deloitte 11
The situation after a disordered Brexit would be chaotic - an overview in numbers
Brexit | No Deal
10 percent customs dutiescould arise for cars alone according to the World Trade Organisation (WTO). Lowering the level of duties bilaterally without a full free trade agreement is prohibited by WTO regulations. However, the UK could choose to levy applied rather than bound tariff rates provided this rate is granted to all WTO members.
75 percent of derivatives tradingin euros is conducted in London, according to the Bank for International Settlement. Without a specific agreement, European customers would no longer have access to clearing services after a no-deal Brexit. However, the European Commission has already announced that it would temporarily classify British clearing houses as equivalent to those in the EU.
11,000 HGVstravel to Calais every day. Passport and customs controls would be necessary at the border with Great Britain. This could lead to long delays, especially for the economy; Imperial College London estimates that a delay of two minutes per HGV in Dover and at the Eurotunnel would lead to a traffic jam of 47 kilometres.
154 million passengersa year fly from Great Britain to the EU, plus 457 thousand tonnes in freight. Without a specific agreement, European airlines would no longer have access to British airports, and vice versa, British airlines could not longer fly to European airports.
219,000 EU citizenscame to the UK in the year ending June 2018. Although the rights of EU citizens living in the UK long-term are supposedly secure even in case of a no-deal Brexit, this does not clarify the right of residence for many other European citizens.
45 million medicinesare transported every month from the UK to the EU. Due to delays and traffic jams in Calais, these might not reach the EU in time.
Source: WTO, UK Parliament, Imperial College London, ONS, Eurostat, Bank for International Settlement
2018 Deloitte 12
-2,1
-1,4
-0,8
-0,7
-0,6
-0,6
-0,6
-0,4
-0,3
-0,3
-0,3
-0,3
-0,2
-0,2
-0,2
-0,2
-0,2
-0,1
-0,1
-0,1
0,0
-2,5 -2 -1,5 -1 -0,5 0
United Kingdom
Ireland
Poland
Czech Republic
Slovakia
Denmark
Greece
Sweden
Finland
Portugal
Hungary
Belgium
Netherlands
Italy
Spain
France
Germany
Austria
Croatia
Romania
Bulgaria
The immediate effects of a no-deal Brexit on growth would be manageable for many European countries on a macro level, but...
Brexit | No Deal
Effect of No Deal on gross domestic product compared to UK remaining in the EU (% difference in GDP level in Q4 2020)
Source: Oxford Economics, NIESR, UK in a Changing Europe, Bank of England
Whereas the effect on the other EU Member States appears comparatively low across various studies, the forecasts for the British economy fluctuate considerably due to the large number of uncertain factors.
The NIESR think tank, for example, estimates that in case of No Deal, British GDP would fall by 5.5% compared to its level if the UK remained in the EU until 2030.
The ‘UK in a Changing Europe’ group predicts that British GDP per capita would fall between 3.5% and 8.7% over the next ten years as a result of No Deal.
The Bank of England also estimates that UK GDP could fall by up to 8% in the worst case if the United Kingdom and the European Union cannot agree on a deal. During the 2007/08 global financial crisis, the British economy shrank by 6.25%.
In absolute terms, a 0,2% lower GDP for Germany would result in a 7 billion EUR lower prosperity level.
2018 Deloitte 13
Brexit Briefing III: Connectedness of German industries with UK Brexit Briefing V: Effects of a hard Brexit on automotive manufacturers
The sectors with the highest employment are transport and logistics (95,700 employees), finance and insurance (59,100 employees) and retail (44,600 employees).
1,000 German companies have subsidiaries in the UK, this includes 160 of the largest German corporations
These 160 large German companies employ around 400,000 people in the UK and achieve revenues of approx. EUR 150 billion
The automotive sector is the most valuable, achieving revenues of EUR 40.1 billion, followed by the energy sector and the transport and logistics sector with revenues amounting to EUR 24.3 billion and EUR 20.6 billion respectively.
Taking British consumer behaviour into account, sales in the United Kingdom are expected to fall by approx. 550,000 vehicles (-19%) in the year of EU exit.
Total turnover from vehicles in the UK will decline by approx. € 12.4 billion (-18%)
Based on the declines in sales and turnover, approx. 18,000 jobs in the German automotive industry would be endangered directly.
If vehicle manufacturers pass on this cost increase 1:1 to their customers, the price of a car in the United Kingdom would increase by € 3,700 on average.
...individual industries would be strongly affected
Brexit | No Deal
Source: Deloitte Research
Retail
no-deal
2018 Deloitte 14
There are four key areas for European companies to consider
Market
Product
Regulation
Market
RegulationTariffs
Exports
Growth
Strategy
Finance
Capital
Flows
Local
Content
Funding
subsidiary
Valuation
Tariffs
Tax
Transferpricing
ProfitTax
IndirectTax
CorporateTax
Brexit
Topics
Organization
Global Group
Structure
Employee
Mobility
Location
Strategy
Legal
Supply Chain &
Extended Enterprise
Ability to
supply
Logistic and
tariff processes
Indirect
risks
Restructuring
Suppier
Risks
2018 Deloitte 15
Brexit Strategic Response Team
Economic Research
Dr Alexander Börsch
Director Research
Tel: +49 89 29036 8689
Julius Elting
Research Analyst
Tel: +49 89 29036 6486
Dr Mathias Hanten
Partner Banking & Finance Law
Tel: +49 69 71918 8424
Dr Julia Sierig
Partner Employment Law
Tel: +49 71 16696267
Tax
Dr Alexander Linn
Partner International Business Tax
Tel: +49 89 29036 8558
Diana Imhof
Director FSI Cross Border Tax
Tel: +49 69 75695116021
Claudia Sendlbeck-Schickor
Director Mergers & Acquisitions (Tax)
Tel: +49 89 2903 68301
Markus Kircher
Partner Transfer Pricing (Tax)
Tel: +49 69 7569 57011
Legal
Christofer Rudolf Mellert
Partner Deloitte Legal
Tel: +49 211 8772 2947
Dr Florian Klein
Head of Center for the Long View
Tel: +49 69 9713 7386
Strategy & Scenario Planning
EU Customs Law
Michael Schäfer
Partner Global Trade Advisory
Tel: +49 621 1590 1869
Email: [email protected]
Bettina Mertgen
Director Global Trade Advisory
Tel: +49 621 1590 1869
Email: [email protected]
Risk Advisory
Volker Linde
Partner Risk Advisory
Tel: +49 221 87722399
Anton David Schweizer
Senior Manager Risk Advisory
Tel: +49 711 16554117251
Olaf Babinet
Director Strategy & Operations
Tel: +49 211 8772 4592
Real Estate Consulting / Location Strategy
Financial Services & Banking Operations
Tilmann Bolze
Director Financial Services Consulting
Tel: +49 30 25468 325
Thomas Peek
Director Financial Services Assurance
Tel: +49 69 75695 6562
Clive Laurence King
Director Financial Services Assurance
Tel: +49 89 29036 8912
Carl-Friedrich Mueller
Senior Manager Finance & Risk Operations
Tel: +49 69 9713 7441
Alexander Weber
Director Finance & Risk Operations
Tel: +49 69 9713 7441
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