Will the UK become a Tax Haven Post-Brexit?

British Prime Minister Theresa May said that she would modify the basis of the UK’s economic model should the country get an unfavorable deal from other EU member states in Brexit negotiations, igniting widespread controversy.

Her comments, made at the EU summit in Malta just a few days ago, seemed to insinuate that the UK would slash tax rates if negotiations go sour, thereby situating itself as an offshore rival to the EU for investments. May also said that if shut out of the single-market system, the move would help the country regain competitiveness.

I personally hope we will be able to remain in the mainstream of European economic and social thinking. But if we are forced to be something different, then we will have to become something different,” May insisted. “If Britain were to leave the European Union without an agreement on market access, then we could suffer from economic damage at least in the short-term. The British people are not going to lie down and say, too bad, we’ve been wounded. We will change our model, and we will come back, and we will be competitively engaged.”

Considering that the country’s corporate tax rate is already at a low 17 percent, well below the EU average, critics have charged that should the UK cut the rate any further, the country would officially be a tax haven.

Other EU leaders have been highly critical of May’s threats. At a press conference in Malta, German Chancellor Angela Markel was asked if Germany would follow the UK’s lead in such a situation, and cut taxes. Markel hit back hard against May’s threat, stating that cutting taxes would undermine the EU should it decide to block a Brexit deal. Markel pointed out that taxes are the price paid for a just and equitable society, and that Germany has no plans to join May and US President Trump in a race to the bottom.

We have a tax system in Germany that has weathered challenges well. I see no reason for entering a race for who has the lowest corporation tax,” she said. “We need tax revenues, we need a fair tax system, in order to make necessary investments in our society.”

Will the UK really become a tax haven post-Brexit? It is true that May, Merkel, and other EU leaders have all said that they are optimistic that Brexit negotiations will lead to a new arrangement with reciprocal trade on a favorable basis for all parties. However, striking a deal on free trade without Britain making concessions on freedom of movement could prove challenging.

The British government favors a hard approach to Brexit that brings immigration under control. However, it is too soon to say what the outcome of the negotiations will be, and what that means for the UK’s tax system.

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