US And Switzerland Agree To Share More Tax Information

by Mike Godfrey, Tax-News.com, Washington

28 September 2009

US Treasury Secretary Tim Geithner and Swiss Ambassador to the United States Urs Ziswiler have signed a protocol updating the current income tax treaty between the United States and Switzerland to allow for greater tax information exchange.

The protocol revises the existing US-Switzerland income tax treaty to allow for the exchange of information for income tax purposes to the full extent permitted by Article 26 of the Organization for Economic Cooperation and Development (OECD) Model Income Tax Convention. The protocol also provides for mandatory arbitration of certain cases and addresses issues around the cross-border taxation of individual retirement accounts.

According to the Swiss, under the protocol, any request for administrative assistance must "clearly identify the taxable person concerned" and, in the case of banking information, the bank concerned. The protocol does not allow the authorities to undertake "fishing expeditions." These provisions are not applicable retroactively and in terms of the exchange of banking information, the changes are effective as of September 23 when the protocol was signed.

In addition to the extension of administrative assistance, the arbitration board clause in the existing double taxation agreement (DTA) between the two countries was amended and replaced with wording that corresponds to the OECD model convention. It was also agreed to exempt dividends from taxation paid out by restricted pension organizations in the source country. To date, only dividends paid to occupational pension organizations have been exempted from withholding tax.

In a separate agreement to the amending protocol, Switzerland and the US have agreed to conduct further negotiations within the next two years on the revision of the existing DTA, particularly on the reduction of withholding tax on certain equity dividends to 0%.

However, the Swiss Federal Council indicated that under Swiss practice, tax agreements that provide for significant additional obligations may be subject to an optional referendum if the parliament deems it appropriate.

This is the 11th agreement for the exchange of tax information signed by Switzerland that meets the OECD standard. Of its 11 agreements, 10 are with OECD member countries, including major economic partners such as France, the United Kingdom and now the United States. The OECD has also been informed that Switzerland will shortly sign another agreement marking the 12th agreement conforming to the "internationally agreed" standard. This will mean that Switzerland joins the category of jurisdictions that have "substantially implemented" the standard and are placed on the OECD "white list." The 12th agreement is due to be announced by the Swiss government end September.

To date, Switzerland has negotiated DTAs containing an extended administrative assistance clause in accordance with Article 26 with 15 states and territories. Along with the agreements already signed, there are agreements with Japan, the Netherlands, Poland, Qatar and Singapore which have been initialed, but not yet signed. The Federal Council has also given the go-ahead for the signing of the DTA with Qatar. The remaining initialed DTAs will shortly be submitted to the Federal Council to be approved for signing.

Not surprisingly, the signature of the new protocol was hailed by US Treasury Secretary Tim Geithner and OECD Secretary General Angel Gurría as another significant victory in the war against offshore.

"Tax evasion is not simply an American issue, it is a global issue requiring global coordination," said Geithner. "As we prepare to meet our G20 counterparts in Pittsburgh this week, today's agreement strengthens our longstanding and cooperative relationship with Switzerland and will help serve as an example for others around the world."

"This is a very meaningful development and it shows that OECD countries are prepared to step up to the mark," observed Gurría, who is also preparing to attend the Pittsburgh summit. "Our congratulations to the Swiss authorities."

All 88 jurisdictions surveyed by the OECD Global Forum on Taxation have now committed to the OECD standards. But Gurría warned that signing agreements was only "one step in the process" towards the OECD's goal.

"Although signing 12 agreements that meet the standards is an important step it is not a hard and fast rule," he noted. "This was never a numbers game. The Global Forum will be able to assess more carefully the extent to which agreements are signed with partners that have a significant interest in exchanging information, the extent to which agreements are implemented in practice and a jurisdiction’s willingness to continue to enter into agreements even after it has reached the threshold.”

Earlier in the year, British Prime Minister Gordon Brown and French President Nicolas Sarkozy called for sanctions to be applied against those jurisdictions which had failed to meet the OECD standard by March 2010. This is a position which is no doubt supported by US President Obama, who has proposed a number of draconian tax and information reporting requirements in his 2010 budget blueprint to discourage wealthy individuals and companies from investing offshore and to close the domestic "tax gap" between taxes legally owed and actually paid.

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