A look at what increased tax transparency might mean for the Swiss system.
For Switzerland, the year 2009 as regards taxation issues was clearly overshadowed by the political pressure to adopt Organisation of Economic Cooperation and Development (OECD) exchange of information standards in order to be removed from that organisation’s ‘grey list’. In 2010 it will certainly be the Swiss people who will have the last word.
On 27 November 2009, the Swiss Federal Council adopted five dispatches on the revised double taxation agreements (DTAs). It will request parliament to approve these dispatches. The revised DTAs meet international standards relating to administrative assistance in tax matters.
In a significant move, which might actually delay the implementation of some of these new treaties, the Federal Council stated that it is of the opinion that they should all be made subject to an optional referendum to be voted by the Swiss people.
The dispatches on the revised DTAs concern the United States (US), Denmark, France, Mexico and the United Kingdom (UK) in an initial batch. There is no need for a dispatch on the DTA with Spain which counts as a signed agreement. The current agreement contains a most-favoured nation clause which will be applied as soon as Switzerland agrees a more far-reaching provision on the exchange of information with another European Union (EU) country. This clause was activated when the DTA with Denmark was signed. The dispatch on the revised DTA with Denmark also covers the inclusion of the Faroe Islands. This is why there are only ten dispatches for the twelve DTAs signed up to now with the OECD standard on administrative assistance.
All of the revised DTAs contain an extended administrative assistance clause in accordance with Article 26 of the OECD Model Convention, thereby implementing the Federal Council decision of 13 March 2009 on the new agreements policy. The Federal Council is expected to submit a second batch of five further agreements to Parliament for approval by the end of January 2010.
Initially, the Swiss Government intended to submit only one revised DTA for an optional referendum. However, political pressure from Parliament has persuaded the Federal Council to conclude and recommend that all new DTAs should be subject to an optional referendum. Therefore, any formal ratification by the Swiss Parliament is not expected to take place before spring 2010.
In practice this means that any new DTA will only be applicable as at 1 January 2011. Nonetheless, some DTAs (for example the one with France) will already enter into force on 1 January 2010 even though the actual application would need to wait until 2011, pending ratification by both countries. The point in time of entry into force depends upon the agreement reached.
Switzerland was removed from the OECD ‘grey list’ on 25 September 2009 following the signature of its 12th DTA with Qatar.
The adoption of the OECD standard on administrative assistance in tax matters,
according to Article 26 of the OECD's Model Tax Convention, means that Switzerland shall no longer distinguish between tax fraud and tax evasion.
In this context it is important to note that this new practice will only apply to future DTAs. As no Swiss laws will change, only the provisions of the relevant DTA are authoritative. Therefore, any future administrative assistance by Switzerland for tax evasion may only take place according to the future provisions of new (re-)negotiated tax treaties. International standard practice forbids new DTAs from taking retroactive effect.
In accordance with the provisions of said Article 26, the new treaties will not provide for any automatic exchange of information, which Switzerland and other financial centres (including the US) formally reject. Administrative assistance will only be provided upon formal written request of a contracting state and only if there is justified suspicion that tax evasion or tax fraud has actually occurred. Fishing expeditions will not be allowed and the information-requesting state will need to mention detailed evidence, such as the name of a specific bank and its location.
Furthermore, it should be emphasised that a fundamental principle underlying Article 26 of the OECD Model Convention is that “in formulating their requests, the requested state should demonstrate the foreseeable relevance of the requested information. In addition, the requesting state should also have pursued all domestic means to access the requested information except those that would give rise to disproportionate difficulties.”
Although it is far from certain which treaties the Swiss Parliament or population would subject to a referendum, clearly the new treaties signed with the US and France appear to be prime candidates.
Observers in recent months have especially focused on the attempts by the US and Switzerland to resolve the tax evasion strategies for US clients as devised and implemented by UBS. On 19 August 2009, Switzerland and the US signed an Agreement on the request for information from the Internal Revenue Service of the US regarding UBS.
According to the criteria set out in the annex to the agreement (as published in November 2009), the US treaty request covers the following persons where there is a reasonable suspicion of "tax fraud or the like":
Further investigations are ongoing in both categories to establish whether "tax fraud or the like" has been committed under the terms of the tax treaty.
The term "tax fraud or the like" is defined in greater detail in the agreement on the UBS affair, extending to fraudulent conduct (e.g. constructing a scheme of lies or submitting incorrect or false documents) that might result in the concealment of assets and the underreporting of income. Where such conduct is proven, the qualifying threshold under the US treaty request is lowered to include holders of accounts containing assets of CHF 250,000 or more.
In addition to cases of conventional "fraudulent conduct", Switzerland may also be asked to obtain information on continued and serious tax offenses. According to the annex, this refers to accounts that generated revenues of more than CHF 100,000 on average per year for a period of at least three years, where such revenues were not reported to the IRS.
It should be noted that the legal framework for the annex supports the existing DTA between Switzerland and the US, thus ensuring that Swiss law is preserved. For instance, all procedural laws and legal remedies continue to apply.
This also means that clients can lodge a complaint with the Swiss Federal Administrative Court against any negative rulings of the Swiss Federal Tax Administration if they are of the opinion that the court did not respect the relevant provisions. Any decision on whether to hand over client data therefore remains under the jurisdiction of a Swiss court.
However, the August Agreement is a special ‘ad hoc’ state treaty relating to the UBS matter and should not be confused with the new Protocol to the existing income tax treaty which Switzerland and the US signed in September 2009. The main issue was of course the extension of the exchange of information clause.
As in all other negotiated DTAs, information will only be exchanged based on specific requests. The requesting State has to supply sufficient information to identify the person under examination, the period of time for which information is requested, the tax purpose, sufficient information on the holder of the information and some other information (see Art. 4 of the new protocol amending Paragraph 10 of the existing Protocol). So-called ‘fishing expeditions’ are excluded. The new exchange of information scheme immediately enters into force as of 23 September 2009.
Switzerland and France signed a new protocol to the existing income and capital tax treaty on 27 August 2009. Considerable discussions and commentary surrounded the publication of this treaty, as it does not make a specific reference to the requirement for including the bank’s name in an information request.
This prompted the Swiss Government to issue a communiqué stating that so-called ‘fishing expeditions’ remain out of the question, even those from France. In a request for administrative assistance, the taxable person concerned must be able to be clearly identified and, in the case of banking information, the respective bank must be able to be clearly identified.
Future requests for administrative assistance from France must therefore include a specific reference to a specific bank even though in this regard a different wording was chosen in the renegotiated DTA with France as compared to other DTAs.
The wording chosen by France comes from the Tax Information Exchange Agreement (TIEA) drawn up by the Organisation for Economic Cooperation and Development (OECD). This wording was already used by France in agreements with other countries. As a result, in a French request for administrative assistance the name of the bank is not absolutely necessary, provided the bank can be identified though other information which clearly indicates which bank is involved. Information of this nature can be found, for example, in an IBAN or SWIFT code (international bank account number) to which a bank is clearly assigned.
The Swiss Finance Ministry further stated that “administrative assistance with France will thus not deviate in practice from administrative assistance which Switzerland has agreed with other countries” and that “the Federal Tax Administration is not able to provide administrative assistance to a foreign tax authority if the bank is not clearly identified in the request for administrative assistance.”
At this point in time it is impossible to forecast a likely outcome of any popular referendum on any of these signed DTAs, although the one with France is certain to generate political passions. In anticipation of further pressure on banking secrecy and client confidentiality, the Swiss Banking Association has proposed a future withholding tax to be levied in Switzerland, not just on savings income as is presently the case.
The Association, at its annual meeting in Zurich (17 September 2009) suggested that the money collected would be transferred to the respective countries’ tax authorities without disclosing the name of the bank customer. The proposal (called ‘Rubik’) would extend withholding tax on EU citizens to include dividend income generated by stocks and mutual funds, as well as capital gains.
In accordance with the EU’s Taxation of Savings Income Directive, Switzerland has already levied a withholding tax on EU citizens since 2005, but it covers only income from certain types of investment, principally from bonds. According to the proponents of Rubik, the proposal “would generate tax revenues while respecting the privacy of bank clients and it would represent an efficient alternative to a system of automatic information exchange.”
The Swiss Government has promised to closely study this proposal. Unofficial reactions from European countries so far have been mixed and any specific advances will certainly be linked to the EU’s own progress in articulating a revised Savings Income Directive.
Walter Streseman, Vistra SA, Switzerland