When analysing transfer pricing, the economies in which the related parties transact in must be considered. As such, it comes to no surprise that a change of an economy will have some sort of transfer pricing knock-on effects. The latest example of such a change is Brexit (British exit – referring to Britain leaving the EU). For those of you who do not follow the Brexit discussion closely here is a quick wrap up of what is likely to happen to the UK economy should the UK exit the EU:
- The Pound may lose value
- Stock markets are likely to lose value with multinationals and banks hit hardest
- Debt interest rates in the UK are likely to rise
As this is likely to put the UK economy under strain this is not too different from what would happen if an economy is downgraded from investment grade to non-investment grade (i.e. junk status). To refresh your memory on that discussion click here.
But additionally, countries that transact with the UK, for example South Africa will also feel the knock-on effects. Firstly, there is likely to be a renegotiation of trading terms between the UK and EU which are less favourable. This could mean that countries, especially South Africa, which trade with the UK (or use the UK as a gateway into the EU) have less favourable trading terms too. South Africa is the UK’s largest African trade partner.
Secondly, where trade is more difficult and likely to result in increased prices, demand from the UK for South African goods (and vice versa) may decrease, even more so where the economy is strained.
…other taxes such as import duties and VAT will be much more concerning for multinationals.
Thirdly where the Pound decreases in value this will result in foreign exchange losses for UK multinationals. This may sound positive for other countries such as South Africa, but keep in mind that other currencies are likely to increase in value as these are more sought after, such as the USD. This means that countries like South Africa may also face a foreign exchange risk (unless transacting only in Pounds).
Ignoring the economics above, other taxes such as import duties and VAT will be much more concerning for multinationals. Should there be a Brexit, I believe that the UK would maintain the arm’s length principle, meaning that transfer pricing in the UK will remain the same. Especially since the UK is part of the G20/G7. This at least would be some good news.