The end of the first half of 2014 was marked by significant developments in a number of tax topics, including in particular the corporate tax dialogue between Switzerland and the EU, a review of the existing withholding tax (WHT) system and, finally, the distinction between tax evasion (Steuerhinterziehung/soustraction d‘impôt) and tax fraud (Steuerbetrug/fraude fiscale). The suggested reforms may be expected to spark lively debates.
1. Switzerland – EU Corporate Tax Dialogue
1.1. Historic background
For many years, Switzerland and the European Union were engaged in a dispute on corporate taxation. The main discussion point was the unequal tax treatment of domestic and foreign earnings (ringfencing) under certain tax regimes (see below) which had been alleged by the European Commission to distort competition and violate the 1972 Free Trade Agreement, a view rejected by Switzerland. Also, the regimes were seen as being counter to the EU Code of Conduct for business taxation.
In July 2012, the Swiss government approved a mandate for entering into a dialogue with the EU aimed at finding a solution accepted both at home and abroad.
1.2. The Understanding of June 2014
End of June 2014 a Memorandum of Understanding (MoU) was agreed and initialed early July by representatives of the two parties. The MoU contains no state treaty obligations and is limited to listing certain principles and mutual intentions.
In the MoU, Switzerland confirms its proposal to abolish the contentious tax regimes and that any new tax measures replacing the old ones would be in line with internationally accepted standards. In return, the EU member states confirm their intention to lift any countermeasures (most notably Italy’s “black listing” of Swiss companies) as soon as the Swiss regimes in question have been abolished.
Next to acknowledging basic principles shared between the parties, the MoU specifically enumerates the cantonal tax regimes that Switzerland intends to abolish, namely the status of (i) administrative companies, (ii) mixed companies, (iii) holding companies, (iv) principal structures and (v) finance branches. Their common feature is the ringfencing of foreign income resulting in a favourable overall tax rate, all the more if coupled with debt financing.
The MoU also expressly acknowledges that Switzerland will need to follow its established legislative process including consultations with the cantons, political parties and other interested groups.
1.3. Replacement measures and outlook
Any new tax measures replacing the contentious regimes will need to be in line with international standards, among which especially the OECD Action Plan on Base Erosion and Profit Shifting (BEPS).
Currently, the discussion about replacement measures essentially revolves around three main elements, first, the introduction of dedicated “boxes” (most prominently for IP, but in some instances also interest or even trading revenue), second, a notional interest deduction on equity and, third, an overall reduction of tax rates.
Any changes are unlikely to be implemented before 2018.
It is worth noting though that, now already, ordinary tax rates below 12% are available.
2. Overhaul of the existing WHT system
2.1. The current regime
The current system pursuant to which the creditor of the taxable payment is under a duty to withhold WHT at source regardless of the recipient has been in place for around 70 years. The system has significant drawbacks in that it is, among other things, responsible for driving Swiss multinationals to conduct their group financing from abroad so as to get around the tax. This way Switzerland gives up much of its appeal as a place to do financing from.
2.2. Proposed switch to paying agent system
The proposed reforms include a transition to a paying agent system that would allow differentiating as to the identity of the recipient (Swiss/foreign tax resident; individual/corporate) and type of income (dividend or interest; Swiss royalties are not subject to WHT) when levying the tax. Under a paying agent system the creditor of the taxable payment (e.g. the company distributing the dividend) transfers the full payment to the paying agent (often a bank) which then deducts the tax depending on the identity of the recipient of the payment.
In other words, WHT would be due if the income is paid to the beneficial owner by a Swiss paying agent, regardless of the income’s source.
As a consequence, Swiss resident individual tax payers might be tempted to avoid the tax by moving their income generating assets to non-Swiss banks (paying agents). Whereas, presently, there would be nothing to counteract this the expectation is that notifications received from foreign tax authorities in the context of future automatic information exchanges would act as an effective remedy. A reform in the proposed shape would very probably also fuel a debate on domestic exchange of banking information which has so far appeared to prove resistant to any review.
Non-Swiss resident account holders would generally no longer be subject to WHT provided the relevant income is notified to the tax authorities abroad.
Whereas the Swiss Business Federation (economiesuisse) and larger banks generally back the reform proposals given their potential to repatriate financing operations to Switzerland, smaller banks in particular were more cautious in their welcome fearing a substantial increase in their administrative burden.
That said, because WHT generates a substantial amount of revenue every year (nearly ChF 6 bn in 2013), much of which cannot be or is not, reclaimed any changes to the system reducing that amount are likely to be the subject matter of hot debate at political level.
The current reform proposal will be followed up with a more specific project representing the first step in the formal legislative process and will also serve as basis for a wider discussion among interested parties.
Very much an affaire à suivre.
3. Reforms related to fiscal offences
A third area where a need for reform has been identified is that of criminal fiscal law. A manifest weakness of the legislation currently in force is the application of unequal procedural rules depending on the gravity of an alleged offence and also the area of tax concerned. It is in particular in the field of direct (i.a. income) taxes that reform is seen as a necessity.
Currently, it is possible for a particular type of conduct to qualify both as (administrative) tax evasion and (criminal) tax fraud which may result in two different authorities being competent and even double punishment, or at least to punishment under two legislative headings.
The proposal aims at unifying procedural law and providing for a more uniform applicability of criminal procedural law. The objective is to strengthen the position of the investigative authorities on the one hand but also that of the tax (non-?)payer by widening the range of legal remedies at his disposal.
The Swiss administration has been asked by the government to present a legislative project including an explanatory report to parliament by end 2015.