While businesses on both sides of the Channel are relieved an EU-UK trade deal has materialised, the agreement is unhelpful to the services sector — significant, considering the services trade with the EU accounts for 42% of all UK exports.
Brussels (Brussels Morning) The services sector covers a broad array of activities: from business and financial, to travel, manufacturing and IT services. EU businesses can sell most services anywhere on the European Single Market; no questions asked.
This flexibility is given because the home country principle allows business to operate anywhere in the EU under the rules of the country they are established. Businesses outside the EU are not afforded the same discretion, having to respect local rules wherever they conduct their activities, known as the host country principle. In some cases, a trade deal can help mitigate host country requirements. So, what does the EU-UK Trade and Cooperation Agreement (TCA) mean for the services sector?
The chapter in the TCA on trade in services starts off well with no requirements for a local presence, no discrimination of UK or EU businesses, and no limitations on the number of services businesses. The next chapter, on business mobility, also looks promising in terms of potentially alleviating host country requirements. However, the annexes to the TCA contain scores of details of exceptions to market access and business mobility, by country, sector, and activity.
To understand the impact of the TCA it is important to look at where and how a service is provided.
People crossing the EU-UK border
If a UK services provider is physically crossing the border to instigate business, they can roam 90 days in the EU. However, when it comes to paid delivery of a project, businesses from third countries selling to the EU have to take the following steps:
- If they exercise a regulated profession, such as those with a qualification to provide certified translations or legal services, they must check whether their professional qualification is recognised in their target market.
- They have to find out whether their activity, e.g., staging a performance, is listed in the TCA as an activity exempt from attaining a work permit.
- They have to determine whether they are a short-term business visitor, an intra-corporate transferee, a contractor or an independent professional — each has its own conditions.
- They have to find out whether the country they want to operate in has an exception or extra requirements regarding the TCA allowed paid activities list. The annexes of the treaty are riddled with exceptions for EU member countries and list numerous additional requirements. Almost half of the EU27 have defined limits to paid activities. For example, Austria requires a work permit and an economic needs test for non-scientific research and design, and marketing research.
- Finally, they have to check whether there are local regulations for their sector or activity, for example, a licence to service machinery.
Investment crossing the border
If it is the aim to set up an operation in the EU, business visitors can stay for 90 days in a period of six months without having to worry about a work permit. However, the TCA is short of provisions that would give confidence to foreign investors wanting to invest directly in the EU.
Digital services crossing the border
Zeroes and ones crossing the border is defined as a service and they enjoy the same benefits, such as absence of discrimination, quota, requirements for a local presence and duties. For example, software developers, digital content producers or cloud computing providers will not have to ask for prior authorisation in the countries they want to direct their marketing to, unlike businesses from other third countries.
Services trade between the UK and Ireland
The circumstances for services trade between these countries in the new arrangements are unique. This is because of the Common Travel Area (CTA) and the special position of Northern Ireland. Unlike services trade with the other 26 EU countries, businesses are helped by the fact that people can move freely between the UK and Ireland.
Additionally, all efforts are made to maintain recognition of qualifications for regulated professions. However, a service itself will be subject to the TCA and entail host country treatment. Also, if a good is combined with a locally provided service between Ireland and Northern Ireland, the Ireland-Northern-Ireland Protocol applies to the goods part of the transaction, the TCA to the services part, and the CTA arrangement to the services provider. At least, this is the theory.
Not in scope
Some sectors have been left out of the TCA, wholly or partly. When it comes to accessing the EU and UK markets, audiovisual media services are not mentioned, other than that they are out of the scope of the TCA. This omission could be problematic because audiovisual media services are a major UK export product. Businesses in this sector will have to rely on international agreements such as the European Convention on Transfrontier Television, leaving video-on-demand producers in particular uncertainty about accessing the EU market.
For the financial services sector, the new EU-UK relationship is still being shaped. We are expecting an EU-UK Memorandum of Understanding for financial regulation. There is hope that the UK’s rules for the financial services sector will be deemed equivalent to the EU’s, which will allow UK firms to operate more easily and, potentially, avoid the need for opening an office in the EU.
The free flow of personal data from the EU to the UK will be subject to a so-called adequacy decision. The European Commission will decide whether the UK GDPR, as applied to EU citizens’ data in UK clouds, on servers and in lever arch files, is protected to the same standard as through the EU GDPR. So far, a decision has not been made, but a grace period of up to six months has been granted.
UK businesses that sell a significant amount of their services (or goods) to EU consumers will be in the clear, provided they comply with UK GDPR. Should an adequacy decision not materialise, or if businesses don’t trust it will last (an adequacy decision can be revoked within 30 days), they are advised to incorporate the EU’s Standard Contractual Clauses in their contract, or even appoint a GDPR representative in the EU.
There are no extra measures beyond complying with the UK GDPR to protect personal data flowing from the UK to the EU. In the future, the UK is expected to devise its own international data policy.
It is not only the UK’s new third country status that is causing changes to how VAT rules apply to services trade. The EU’s VAT framework has been in transition for decades. The next step from an origin-based system towards a VAT system that is based on the destination of the service, is taking place this year.
The UK is now outside the European Single Market for Services and this means that businesses have to be more mindful of local trading conditions and adapt to the rules of where their customer is based.