Swiss Bankers Propose Universal Withholding Tax

by Ulrika Lomas, Tax-News.com, Brussels

22 September 2009

Urs Roth, Chief Executive Officer of the Swiss Bankers Association, has outlined the Association’s proposal for a universal withholding tax, designed to represent an alternative to a system of automatic information exchange while protecting the privacy of clients of Swiss banks.

Roth referred to the Swiss domestic withholding tax system, under which any interest received from a Swiss savings account has a 35% withholding tax deducted at source, irrespective of the residence of the account-holder. “We believe that it’s an effective deterrent to tax evasion and that it encourages a high degree of taxpayer honesty,” he said.

He said that the proposal he would outline drew not only on Switzerland’s domestic withholding tax system, but also on Switzerland’s experiences with the taxation of savings income agreement with the European Union, which came into force on July 1, 2005.

“The core of the agreement is the imposition of a withholding tax on interest payments to persons in Switzerland liable for tax in an EU member state,” Roth continued. “In 2008 the gross revenue generated by tax withheld on interest payments liable to tax in the EU was CHF738.4m (USD720m), of which CHF553.8m was transferred to EU member states.”

He stated that the Swiss Bankers Association “has now developed a model that would offer all interested states the possibility of a withholding tax system, either as a corollary to the corresponding double taxation agreement with Switzerland or complementary to the agreement with the EU on the taxation of savings income. The model 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 model primarily proposes empowering banks and other paying agents to levy a withholding tax on all earnings generated by wealth,” Roth continued. “The catchment area of such a system would be far wider than the EU’s Taxation of Savings Directive, since in addition to levying a withholding tax on interest income the paying agent would also levy a retention tax on dividends, income from collective investments and capital gains. Furthermore, it would cover not only private individuals but also legal entities.”

“The Swiss paying agent (e.g. a bank) would levy the tax directly at source on behalf of the foreign country with which an agreement had been signed. The revenue would be forwarded to the Swiss Federal Tax Administration for passing on to the client’s country of domicile, but the identity of the client would be known only to the paying agent. Under this system the foreign country would have a guarantee that all investment income – and not just a small portion as at present – received by their taxpayers via a Swiss paying agent would be subject to taxation.”

Finally, Roth said that “the new tax would be of a final nature in legal terms; in other words it would constitute a definitive tax assessment. After the bank in Switzerland has deducted the tax, the bank client would – from the perspective of his home tax authorities – automatically have fulfilled his tax obligations with regard to this income.”

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