Insights

/ Insights / Grayling's Brexit Bulletin - 8 June 2018

Free thinking from Grayling people

Grayling's Brexit Bulletin - 8 June 2018

8th June 2018


Much of the Brexit attention has again been concentrated in London this week despite a round of negotiations in Brussels from 5-8 June.

With developments in Brussels having slowed to a trickle, reporting on concrete developments in the Brussels section of the Brexit Bulletin has become rather challenging.

Happily this week the Commission's Directorate-General for Taxation and the Customs Union (DG TAXUD) published a Brexit-preparedness notice on the preferential origin of goods, so called rules of origin.

Essentially, when the UK becomes a third country, UK input to the production of a product can no longer be considered as EU originating content.

The crux of the matter is that the EU’s Free Trade Agreements and other preferential trade relationships contain rules which stipulate that a percentage of the content of a product verifiably originate in the third country and vice versa.

As such, EU exporters of products that contain UK content may be subject to requests from the third country to verify that the product originates sufficiently in the EU. Similarly the EU may request that importers verify that the imported product is sufficiently originating domestically.

DG TAXUD’s advice to stakeholders is simply to take appropriate steps to ensure verification without accounting for UK content. Or, more to the point, consider how to replace or reduce the UK’s role in their value chain.

The rules of origin implications of Brexit are clearly stark, but they have to a degree flown under the radar.

However, unlike many Brexit-related issues the implications will not be postponed by an agreement on a transition. Indeed, they will be felt as  from withdrawal in March 2019.

The European Commission has previously hinted that it will notify its third country partners of the application of the full body of EU law to the UK during the transition.

Tucked away in a footnote of the notice the Commission states that it will inform its partners that the UK is to be treated as a Member State.

Whilst uncertainty remains over when this notification will occur, how long third countries will have to respond, and whether they will respond positively, the wording suggests that the Commission may be more willing than previously indicated to strong-arm its partners into acceptance.
 



If you have any suggestions about the Brexit Bulletin or want to find out more about a specific aspect of Brexit, please do let us know. Please visit the Grayling Brussels website, follow us on Twitter @TheEULobby, and don't forget to check out our Brexit Papers

If you'd like to subscribe to the Brexit Bulletin or Grayling's other intelligence and information newsletters, please click here

 



This week's content:

The highlights from the UKThe highlights from BrusselsThe highlights from the Czech Republic
The highlights from the UK

Turbulent week culminates in backstop
There has been plenty of activity in the UK over the last week. It started with the Government indicating a delay to the long-promised White Paper on Customs which had been expected before the EU Summit on June 23rd. Then there were leaked reports of civil servant contingency plans for no deal, with modeled scenarios titled mild, severe and “Armageddon”. Amendments have also steadily been tabled in advance of next week’s debates on the EU Withdrawal Bill, with the Labour Party notably tabling one to seek “full access to [the] single market”. Meanwhile, the Government has also conceded ground on a number of minor amendments – although they are retaining their opposition on amendments regarding Britain leaving the EEA and Customs Union. Foreign Secretary, Boris Johnson, has also made a splash by criticising the Treasury as “the heart of remain” and warning that “there may now be a meltdown” in the Brexit negotiations. However, the main row of the week has been over the UK’s backstop proposals for Brexit.
 
When initially agreed in December, these backstop proposals caused some disquiet amongst Brexiteer MPs. Many Brexiteers believed they had made major concessions by agreeing to a transition or implementation period between March 2019 (when the UK leaves the EU) and December 2020, during which the status quo arrangements for goods, people and money will continue. The idea that if no agreement was made on a future trading relationship in that interim period, and that a backstop would come into force under which Northern Ireland would either remain aligned with the EU or that the whole of the UK would match EU trade tariffs, was said to be too much for many Brexiteers to concede. However, Downing Street privately promised that the backstop concession was not worth the paper it was written on, and debate turned to other issues in the Brexit debate. Yet, on Monday news began bubbling away that the UK would formally publish its proposals on the backstop and that the proposals wouldn’t include an end date for a backstop period.
 
Reports quickly broke that Brexit Secretary, David Davis, would resign if no end date was included in the backstop proposals. Brexit Cabinet Sub-Committee meetings have been held, as well as smaller meetings between Davis and Prime Minister, Theresa May. Although it is unclear exactly what happened in these meetings, when the proposals were finally published on Thursday, there is no doubt that the language had changed. Instead of May’s alleged preference for an open-ended backstop, language had been inserted saying any backstop would be “time-limited” and that a future customs arrangement is expected to be agreed “by the end of December 2021”.
 
The Grayling View
Much of the initial comment on this row has focused on who won. May can claim that the language is still really a fudge and can privately acknowledge that it is unlikely the EU will agree to a December 2021 cut-off. As EU officials have consistently said – a backstop cannot be time-limited. However, Davis can also claim victory as the text of the proposal was changed and it does clearly include some element of time limitation. However, this row also highlights more about the domestic pressures May is facing in the Brexit negotiations. 
 
First, it serves as a reminder that only one year ago today, the UK voted for a minority Government. The impact of that decision on the Brexit process is now being felt keenly as without a majority, May is unable to govern without significant compromise. With Davis threatening to resign and crunch votes on the Withdrawal Bill in Parliament next week, she had even less room to manoeuvre on the backstop than usual. However, despite the short term pressures she was facing, this incident may give more credence to the suspicion held by some that May can be pushed around. 
 
Second, the row highlights who in the UK Government is really leading the negotiations. That May’s Brexit Secretary had not agreed to the backstop proposals just days before their publication shows that it is May’s team who are really leading the negotiations – most notably her Europe Adviser, Oliver Robbins. There was significant disquiet amongst some Brexiteers when Robbins was moved from the Department for Exiting the European Union to the Cabinet Office in September last year, with claims that Davis was being side-lined from the negotiations. This case could see that row reignite. 
 
Third, this is the first time the Brexiteers have really fought back. Compare the rhetoric of Cabinet Members such as Davis, Johnson and Trade Secretary, Liam Fox, during the referendum to the proposals, White Papers and agreements that they have agreed to, and it is clear that they have made significant concessions during the Brexit negotiations. With May still yet to set out a clear plan for the UK’s future relationship with the EU, remain MPs and Lords utilising Parliament to seek a soft-Brexit, fears that a transition or backstop could be endless, and worries growing amongst Brexiteers that the UK is conceding so much that any potential benefits of Brexit will be lost, the Brexiteers’ gloves could be about to come off. 

 

The highlights from Brussels 

Barnier raises doubts over UK backstop proposal
In today’s press conference in Brussels, responding to the UK’s proposal for a revised “backstop” that would see the UK outside the Customs Union but inside the EU’s tariffs, Michel Barnier said it “raises more questions” than answers, adding that the EU’s preferred option – namely keeping Northern Ireland aligned with EU rules – works better. He explained that “checks carried out on ferries are less disruptive than along a 500 km-long land border. In addition, these checks can build on arrangements and facilities which already exist between the rest of the UK and Northern Ireland." He also highlighted the absence of any provisions in the backstop on regulatory alignment, which is critical to avoid a hard border.

 
The Grayling View
The issue of the Northern Ireland border continues to run and run. The EU’s proposed solution is unacceptable to the DUP, and thus to the Conservatives, whilst the UK’s more recent proposal this week is unacceptable to the EU. However, sooner or later someone will have to budge. The UK solution has been accused of resembling cherry-picking, but is this really fair? Sure, it enables the country to agree trade arrangements with third countries which are not covered by the EU’s tariffs (e.g. services), but in every other way it is bound to the EU system. The EU may be taking a principled stance, but so will Brexiteer Ministers and MPs, whose idea of “global Britain” surely went beyond trading under the EU tariff. Of course, just staying in the Customs Union would calm the nerves of most businesses, but this is still not being considered by the UK Government at the present time. Perhaps there will come a time when it will be.  

 

Divergence to come on intellectual property rights
The European Commission (DG TAXUD) published a notice to stakeholders highlighting the legal repercussions for intellectual property right owners following the withdrawal of the United Kingdom from the EU.

The notice highlights that, subject to a transition agreement, EU rules on intellectual property rights will no longer apply to the UK from 29 March 2019. This concerns specifically customs enforcement of intellectual property rights (Regulation (EU) No 608/2013), whereby a decision to take action on goods suspected of infringing an intellectual property right by a Member State competent customs department is applicable across the EU.

Following Brexit, applications to the UK’s competent customs authority on goods infringing intellectual property rights will no longer be able to be submitted. Similarly, granted applications adopted by the UK will no longer be valid in the EU-27. Nevertheless, applications submitted in the EU-27 remain valid, even if they require the UK customs authority to take action.
 
The Grayling view
Where previous stakeholder notices from the Commission had served as a warning in the event of a no deal, this notice highlights the direct implications of the withdrawal agreement, providing a greater degree of needed clarity on a very specific issue.

Whilst the enforcement of intellectual property rights after Brexit appears clear in this notice, there is still much to be agreed in other areas of IPR. After Brexit, the UK would set up its own intellectual property rights system. In a best case scenario, the UK would recognise all granted EU intellectual property right applications. However, under the current version of the Withdrawal Agreement, pending applications for an EU-28 IPR agreement are still to be agreed. Similarly, an agreement on supplementary protection schemes is still to be reached. Moreover, for future applications, post-Brexit there could be significant divergences under the different jurisdictions. Therefore, it is vital that businesses engage on these issues to ensure that pending applications and supplementary protection certificates apply across the EU and the UK. 

 

The highlights from the Czech Republic

Czech Gambling Law exposes complications of EEA exit
In 2016, the Czech Parliament approved Act No. 186/2016 Coll. on games of chance (the “Gambling Act”). It became effective on 1 January 2017 and, for the first time, allowed foreign online operators to apply for a licence in the Czech Republic.
 
But Brexit has thrown a spanner in the works. Paragraph 1 of the Act says that it only applies to companies who are “established in the Czech Republic, in another Member State of the European Union, or in a state party to the Agreement on the European Economic Area”. What does this mean for British companies that are now operating in the Czech Republic? Assuming Britain does indeed leave the EEA – which is, of course, the policy of both the British government and the Labour Party – what will the Czech government do? If the licence has been granted to a UK legal entity, might it be prepared to extend the Act to cover British firms as well? This seems highly unlikely. Or would it be open to transferring the licence to a new legal entity if British companies move to the EU?
 
Right now, while the Brexit negotiations are ongoing – and with a vote in the Commons coming up on Tuesday on a House of Lords amendment which would keep the UK in the EEA after Brexit – the Czech government is not taking a view. This is leaving the affected British companies in a difficult spot.
 
The Grayling View
The draft withdrawal agreement, while indicating that the UK will stay in the Single Market during the transition period, does not explicitly state that the UK will retain EEA membership during transition. This is crucial for the Czech Gambling Act, as it suggests that British companies will not have the buffer zone of the transition period to resolve this problem.
 
This is, of course, not just a problem in the gambling sector, nor is it restricted to one Member State. As KPMG put it in a note on the draft Withdrawal Agreement in April, “a lot of European tax and regulatory legislation (and domestic legislation implementing same) refers to membership / establishment in an EEA State. The small print hasn’t even started to be drafted yet.”


To find out more about our Czech PA team see www.grayling.cz 
 

Dates for your diary

28-29 June 2018 - EU Summit, and informal deadline for agreement on Irish border
1 July 2018 - Austrian Presidency of the Council
18-19 October 2018 - EU Summit and deadline for negotiations on Withdrawal Agreement 
1 January 2019 - Romanian Presidency of the Council
29 March 2019 - UK expected to leave EU
31 December 2020 - Expected end of transition

 


 

Grayling Brexit Unit

Our Grayling Brexit Unit brings together the very best consultants from across the Grayling network and includes those who have direct experience of working alongside the leading political figures charged with negotiating Brexit in London and Brussels.

The Grayling Brexit Unit is here to support, guide and inform the success of your business and identify how the political dynamics will change as a result of Brexit in both London and Brussels. We are your Brexit experts.

Please contact Robert Francis Tel +32 2739 47 34 (robert.francis@grayling.com) in our Brussels team or Jonathan Curtis (Jonathan.Curtis@grayling.com) in London for more information, and check out our brochure.


Grayling Team

Latest Insights

31st August 2018


Grayling's Brexit Bulletin - 31 August 2018

The BREXIT Bulletin: Second referendum - the case for Our intro last week...

Read More

17th August 2018


Grayling's Brexit Bulletin - 17 August 2018

The BREXIT Bulletin: Combating the BAD side of BrexitThis week POLITICO EU ran a story on the work of two UK based academics alluding to so-called Brexit Anxiety Disorder (BAD). The premise is that...

Read More

10th August 2018


Grayling's Brexit Bulletin - 10 August 2018

The BREXIT Bulletin: Why not all Brexit issues are that difficult to solve...Since the publication of the UK's White Paper we have repeatedly stated that whilst the EU would reject the UK’s...

Read More