Switzerland Under Siege
So much of what Switzerland has traditionally stood for is now anathema to its neighbours in Europe and other members of the club of developed nations: confidentiality underpinned by strong banking secrecy laws; and a liberal tax regime offering a tax sanctuary to the wealthy and multinational companies. To a large extent, the conditions that allow such negative perceptions of Switzerland abroad do still exist. But with the world growing ever more hostile to banking secrecy and “offshore” in general, Switzerland is gradually falling into line with the new transparency agenda (although it isn’t always doing so quietly). Indeed, Switzerland is under pressure to change from almost every angle as our recent news coverage illustrates.
Exchange of Information
One important area where Switzerland has had to concede ground is with regard to administrative cooperation, and in February 2014, the Swiss Federal Department of Finance (FDF) announced that the Federal Council, the seven-member executive council which constitutes the federal government of Switzerland, aims to introduce the Organisation for Economic Cooperation and Development (OECD) exchange of information standard into every double taxation agreement (DTA) that has yet to be adapted through legislation that the FDF has been asked to prepare.
Since 2009, Switzerland has revised or entered into 45 DTAs or tax information exchange agreements in accordance with the international standard. Of these, 36 were in force at the time of the FDF’s proclamation.
The standard is now to be applied to the remaining DTAs by means of a unilateral extension. However, this will be conditional on reciprocity, i.e. the partner states must also agree to exchange tax information with Switzerland upon request. Moreover, data protection and the principle of speciality must be preserved.
Such a procedure was also called for in a motion submitted by National Councillor Ruedi Noser (Radical Free Democratic Group FDP, Zurich) in December 2013. Other states such as Belgium and Singapore have brought their entire DTA network into line with the international standard in the same way.
With this measure, the signing of the multilateral OECD/Council of Europe Convention on Mutual Administrative Assistance in Tax Matters on October 15, 2013, and the ongoing efforts to revise existing double taxation agreements, the Federal Council is demonstrating its desire to swiftly implement the OECD standard regarding administrative assistance in tax matters. This willingness to cooperate on tax transparency issues was demonstrated in May 2014 when the Federal Council adopted draft negotiation mandates for introducing the new global standard for the automatic exchange of information (AEI) in tax matters with partner states.
Switzerland endorsed the OECD Declaration on Automatic Exchange of Information in Tax Matters on May 6, committing to implement a new single global standard on AEI. The Federal Council has insisted, however, that there must be only one global standard, that exchanged information should be used solely for the agreed purpose (principle of speciality), information exchange should be reciprocal, data protection must be ensured, and the beneficial owners of trusts and other financial constructs should also be identified.
Furthermore, the Federal Council stressed that, where appropriate, the issues of regularization of the past and market access are to be incorporated into negotiations on the automatic exchange of information. It also said that, in general terms, the introduction of automatic exchange of information should create a level playing field, and Switzerland’s reputation and that of its financial centre in the area of taxation should be improved.
The Swiss Federal Council also decided to bring the Foreign Account Tax Compliance Act (FATCA) Act, together with the ordinance on disclosure obligations, into force on June 30, 2014, to ease Swiss financial institutions’ implementation of the new disclosure rules.
The Swiss parliament approved the FATCA-implementing Act in September 2013, at the same time as it approved the FATCA intergovernmental agreement between Switzerland and the US, which came into force on June 2, 2014, through an exchange of notes.
The FATCA agreement simplifies matters for Swiss financial institutions in their compliance with the US FATCA, which covers deposits held on behalf of US persons. FATCA implementation in Switzerland will be facilitated by a Model Two Intergovernmental Agreement, which requires Swiss financial institutions to disclose account details directly to the US tax authority with the consent of the US clients concerned. The US will have to request data on any recalcitrant clients through the normal administrative assistance channels.
However, the Federal Council is seeking to switch to Model One, which provides for the automatic exchange of information through a centralized authority. To this end, it approved the draft mandate for negotiations with the US on May 21, 2014.
Worldwide implementation of FATCA commenced on July 1, 2014.
Switzerland’s privacy laws have long been a bugbear of its immediate neighbours as the likes of high-tax France, Germany and Italy have stood by and watched billions in potentially untaxed money flowing into Swiss bank accounts over a number of decades. However, a Protocol to the Double Tax Convention (DTC) between France and Switzerland, signed on June 25, 2014, will enable France to secure additional information from Switzerland on individual taxpayers, including their name or address.
The amendment also provides for the possibility of requesting banking information without knowing the identity of the financial institution holding the account. This is not currently permitted under the DTC as it stands. It is proposed the change will apply retroactively to requests for information relating to periods from January 1, 2010, onwards.
The revised agreement will also allow Switzerland to respond to group requests from French authorities. This will be possible for taxable events occurring after February 2, 2013, when Switzerland’s federal law on international administrative assistance in tax matters entered into force.
According to the French Finance Ministry, Swiss authorities have also committed to address, by November, the numerous information requests for which France is still awaiting an answer. Both governments agreed to monitor how effectively information is being shared regularly.
Swiss Banks and the United States
Perhaps the most serious blow to Switzerland’s reputation has been dealt by the United States, which has virtually been at war with Swiss banking secrecy since UBS agreed to pay a USD780m fine to settle allegations that its employees helped US clients to evade US taxes. Indeed, this aggressive campaign forced Switzerland’s oldest bank, Wegelin, to shut its doors completely in 2013 after it was charged with conspiring with US taxpayers and others to hide more than USD1.2bn in Swiss bank accounts from the US Internal Revenue Service (IRS).
On August 29, 2013, Switzerland and the US signed a joint statement to resolve the longstanding tax dispute between Swiss banks and the United States, under which the US makes provision for offering a unilateral US program to settle the dispute, while Switzerland enables affected banks to participate in the program voluntarily.
Swiss banks under criminal investigation in the US for alleged tax-related offences that are seeking a Deferred Prosecution Agreement are known as category one banks, while those seeking non-prosecution agreements, who have reason to believe they may have committed a tax offence and may therefore face a penalty, are category two. Meanwhile, banks that have not committed an offence can apply as category three, and banks deemed compliant and with a local client base are category four.
In a follow-up to this agreement, Swiss Federal Councillor Eveline Widmer-Schlumpf met for talks in Washington with US Attorney General Eric Holder in May 2014 to discuss the US tax dispute settlement program as well as the ongoing US criminal investigations into “category one” banks domiciled in Switzerland.
The Swiss FDF was coy on what was discussed in the meeting, confirming in a statement that it did not wish to comment on the ongoing proceedings involving group one banks. However, it noted that the US tax dispute settlement program for category two, three, and four banks is going “according to plan.”
The FDF added: “Switzerland is committed to ensuring with the US authorities a fair and balanced procedure in accordance with the principle of proportionality in order to prevent Swiss banks from being treated worse than other banks.”
In January 2014, Assistant Attorney General Kathryn Keneally announced that the Tax Division of the US Department of Justice (DOJ) had received 106 letters of intent, and it has been confirmed that the Division has been engaged in extensive discussions with those institutions. Based on these discussions, the Tax Division has now disclosed additional comments and certain deadline extensions regarding the Program.
In particular, while the Tax Division may authorize at any time a formal criminal investigation of any Swiss bank that did not submit a timely letter of intent to participate in the Program, the Division has recognized the difficulty that some Swiss banks have encountered in obtaining proof that an account was not an undeclared account or was timely disclosed by the Swiss bank to the IRS.
Therefore, on June 5, 2014, it was announced by the DOJ that the time in which a Swiss bank may demonstrate such proof has been extended from June 30, to July 31, 2014. Swiss banks participating in the Program are also now expected to provide verification of all the information required to execute non-prosecution agreements by that later date.
In addition, the Tax Division has confirmed that it intends to release publicly the fact that it has entered into a non-prosecution agreement with a bank. However, it also confirmed that the personal data provided by a Swiss bank under the Program will not be made public, and may only be used and disclosed for purposes of law enforcement.
“Harmful” Tax Regimes
Switzerland has been engaged in a long stand-off with the European Union over its corporate tax regime, which Brussels insists is “harmful” to the rest of the EU because tax exemptions granted by cantonal governments erode the tax bases of member states and distort the Single Market. Without Switzerland being a full member of the EU, there has been little that the European Commission could do to bring about change. Switzerland is, though, a part of the European free trade area, is a party to certain European treaties and depends on the EU for a large percentage of its trade. So like it or not, Brussels does have some influence over Switzerland.
This was demonstrated on June 20, 2014, when EU Commissioner for Taxation Algirdas Šemeta announced that, following two years of discussions on business taxation with Switzerland, he was satisfied that changes will be made to the Swiss regime that will eliminate “harmful” tax arrangements. Confirming the agreement, the Swiss Government said that, during its meeting of June 20, the Federal Council gave the go-ahead for the initialling of a mutual understanding between Switzerland and the EU on business taxation. On the EU side, the Economic and Financial Affairs Council has also approved this understanding. “The business taxation dialogue between Switzerland and the EU is thus nearing completion,” it was confirmed.
The agreement follows the adoption in 2011 of a report entitled “Tax Policy Coordination” by EU finance ministers from states participating in the Euro Plus Pact. One of its key recommendations, in its section on avoiding harmful practices, was to engage with third countries to apply the Code of Conduct Group (Business Taxation) principles. It said at the time that specific attention should be given to potentially harmful tax schemes in Switzerland.
According to Swiss reports, a total of five “harmful” measures may be disassembled. These include in particular cantonal tax regimes, which the European Commission said in 2007 were seen to be distorting competition in Europe due to the differing treatment of domestic and foreign income. According to the Code of Conduct’s 2011 Work Plan, other concerns raised are thought to be about ring-fenced tax regimes, and the treatment of multinationals headquartered in Switzerland and branches of multinationals located in Switzerland.
In a June 20 statement issued by the Commission, Šemeta said: “Switzerland has agreed to remove a number of harmful tax regimes that were of concern to member states. Our efforts to secure fair tax competition are bearing fruit, even beyond EU borders. I must commend everyone involved in these discussions for the great outcome, and the member states themselves for the support they lent this process.”
“Switzerland and the EU have now managed to reach a mutual understanding within the scope of the dialogue conducted since 2012. This understanding contains no state treaty obligations and is limited to the listing of principles and mutual intentions,” it said. “Switzerland will remain actively involved in efforts to develop international standards for company taxation within the Organisation for Economic Cooperation and Development.”
So far, there has been no attempt from the EU or elsewhere to prevent Swiss cantons from offering “flat tax” regimes to wealthy foreigners, although they are doubtless frowned upon in Berlin, Brussels, Paris and London. Indeed, opposition to such tax regimes seems to be building up with Switzerland itself rather than externally.
In May 2014, the Swiss National Council (the lower house of parliament) rejected a proposal from the Alternative Left party for an “end to tax privileges for millionaires.” Lawmakers argued that the system, which is based on the cost of living rather than an individual’s wealth or income, makes Switzerland an attractive location for wealthy foreigners, and generates considerable tax revenue for the regions. Nevertheless, the incentive has already been repealed in five cantons.
Switzerland’s main trade association, SGV usam, welcomed the outcome of the vote, insisting that the tax scheme is important for the nation’s economy. The group said that the regime boosts Switzerland’s international competitiveness, increases job creation and preservation, particularly in the outlying regions, and supports small businesses.
About 5,600 wealthy foreigners were taxed according to their living costs in 2012, yielding revenue worth about CHF695m (USD794m). A study conducted on behalf of the Swiss Federal Council showed that these residents spend over CHF1bn each year in Switzerland, generating annual value-added tax (VAT) revenues of between CHF70m and CHF80m.
To guarantee continued support for the regime, the Federal Council has agreed to tighten the regime. From 2016, the tax base for calculating direct federal and cantonal tax will be seven times the cost of living, compared with five times currently. Meanwhile, a minimal taxable income of CHF400,000 will apply for direct federal tax. Swiss cantons will determine their own minimum threshold.
Savings Tax
The EU also aims to re-negotiate the bloc’s savings tax deal with Switzerland, broadening its scope in line with the EU’s own revised Directive, which was finally agreed by member states in March 2014.
Luxembourg and Austria have warned that they are expecting to see “real progress in the negotiations,” when the European Commission presents its report to the European Council in March. Both countries have underlined the need to ensure a level playing field before providing their backing for the extended EU Savings Tax Directive.
Earlier in the year however, it appeared that the negotiations might be disrupted by the EU’s decision to suspend talks with the Swiss over a number of other issues in protest against plans to introduce quotas for migrants in the Confederation. The EU was keen to stress however, that it would continue holding talks with Switzerland regarding the revised savings directive.
The EU maintains that the talks are justified, emphasizing that tax matters are not related to the Internal Market, connected to personal freedom, or linked to institutional matters.
In reality, the EU has very little choice but to press ahead, in view of the immense pressure that it is under to produce swift results in the savings tax discussions.
