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Tax Developments in Switzerland


By Tax-News.com Editorial
March 12, 2013


This feature looks at recent tax developments in Switzerland since the turn of the year, including proposals in the areas of value-added tax, stamp duty, gambling taxes and “sin” taxes, as well as issues of wider importance surrounding the country’s special tax regimes and banking secrecy.

Background

Despite growing international criticism, Switzerland is still considered a low-tax jurisdiction and it retains its allure as a base for international holding companies and regional headquarters, as well as being a haven for wealthy individuals seeking an escape from fiscal servitude in the high-tax countries of Western Europe.

The 2013 Index of Economic Freedom, published annually by The Heritage Foundation, says that Switzerland is the world’s fifth freest economy and continues to be the only “free” economy in the whole of Europe according to the Index’s methodology (the other categories being “mostly free”, “moderately free”, “mostly unfree”, and “repressed”). Switzerland also has one of the lowest “tax wedges” (a measure of the tax cost of labour) at 8.4% for one-earner families with two children; the OECD average is 25.4% while in neighbouring France the tax wedge is over 40%.

There is a growing risk however, that the above-mentioned advantages could be eroded as Switzerland faces increasing external pressure to dilute its banking secrecy laws, relinquish some of its more generous fiscal incentives for multinationals and dismantle a system of well-established individual tax breaks benefiting foreign residents.

Before these developments are explored in more depth, we round up recent tax-related news on the domestic front.

Value-Added Tax

Back in January, the Swiss Federal Council approved plans to extend until 2017 the special value-added tax (VAT) rate of 3.8% accorded to the hotel industry for accommodation services. Introduced in 1996, this special VAT rate, currently in force until the end of 2013, has already been extended four times.

On December 21, 2011, the Swiss National Council rejected plans for the introduction of a single VAT rate, as recommended by the Federal Council. The National Council (the lower house of the federal assembly) requested instead that the future VAT model be based on two VAT rates.

Currently, VAT in Switzerland is levied at 8% on the supply of most goods services. There is also a 2.7% reduced rate imposed on the sale of books, newspapers and magazines, food, medicines and water.

Consequently, in accordance with the reform, the hotel sector will in future be subject to a reduced VAT rate and will no longer benefit from a special VAT rate. However, given the need to modify the constitution, necessitating the approval of both the Swiss people and the cantons, the new model is not expected to enter into force before 2016. As an interim measure, it was agreed that the current special VAT rate be extended.

According to the Swiss Federal Department of Finance, this decision will lead to a shortfall of tax revenue of CHF180m (USD193m) a year, representing a total shortfall of EUR720m over four years. Given the size of the sum, the measure will have to be compensated by a reduction of expenditure or by a rise in taxes.

Stamp Duty

On January 23, the Federal Council announced its intention to abolish issuance stamp duty on own capital within the framework of the third reform of corporate taxation. The announcement followed the decision to abolish issuance stamp duty on foreign capital from March 1, 2012.

In Switzerland, a parliamentary initiative has called for the gradual abolition of stamp duty. In order to implement this plan, the Committee for Economic Affairs and Taxation of the Swiss National Council drafted a report into the abolition of issuance stamp duty on own capital, which was subsequently submitted for consultation. The study examined how and when stamp duty could be abolished, as well as evaluating measures to finance the proposals and considering the efficiency of the levies and their effects on the attractiveness of the Swiss financial center.

Fundamentally, the Federal Council approves the abolition of issuance stamp duty on own capital, and plans to integrate the measure into the next reform of corporate taxation in Switzerland. It has therefore proposed that parliament commence work on the project. However, the Federal Council intends to maintain other stamp duties, including the stamp duty on insurance premiums.

Gambling Tax

On February 13, the Federal Administration unveiled details of the Federal Council’s plans for a new gambling law, including plans to introduce a new regime for the taxation of betting gains.

Under current tax law, gains from lotteries and from professional wagers in Switzerland are subject to taxation, while gains realized in a casino are exempt from taxation. To end this "inequality" as regards tax treatment, the Federal Council intends to exempt all winnings from tax. The resulting revenue shortfall would in part be offset by a new tax on the casinos themselves. The proposed overhaul of the gambling regime would also permit online casinos, with in-built safeguards in the new legislation to protect players from gambling addiction. The Government is expected to begin consulting on the proposed measures in the latter half of 2013.

Sin Taxes

On January 24, the Federal Government announced plans to reorganize the taxes on beer, tobacco, and spirits, and to regroup the departments involved in tax collection into one single organizational unit.

Within the framework of a total revision of the law on alcohol, the Federal Department of Finance (FDF) intends to integrate the Swiss Alcohol Board into the Swiss Customs Administration (SCA), transferring competencies relating to the taxes on beer, tobacco and spirits as well as regulations governing the alcohol market to the SCA. The decision is to be implemented following entry into force of the revised legislation on alcohol.

Based on an analysis of "sin taxation," the FDF decided to entrust to one single organizational unit the task of applying future legislation on the taxation of spirits and the liquor trade as well as the current laws on the taxation of beer and tobacco. An alcohol and tobacco division is to be set up to assume this role within the tax department of the general customs directorate.

According to the FDF, the regrouping of the different consumption taxes within the SCA opens up a number of opportunities, notably as regards the collection of taxes. It will also reduce administrative costs on businesses and on authorities.

Road Tax

In December 2012, it emerged that Swiss Transport Minister Doris Leuthard plans to set up a new national road infrastructure fund (NIF) to finance the construction, maintenance and extension of Switzerland's highway network, to be funded by income derived from the motorway vignette and from the petroleum tax. However, given that the current revenues from these taxes will not suffice, reports indicate that there will be a rise in the petroleum tax surcharge from CHF0.30 (USD0.32) per liter currently to CHF0.50 per liter in 2016 and to as much as CHF0.70 per liter in 2022. The Government is also said to be considering the idea of a introducing a "user pays" mechanism, whereby a new levy is imposed per kilometer traveled on the roads.

The latest reports follow hot on the heels of the Swiss Senate’s adoption of plans to finance a new railway infrastructure fund (BIF) with existing revenues currently funding railway infrastructure projects (petroleum tax and value-added tax (VAT) revenues) and with new sources of revenue, including plans to limit the commuter tax deduction for direct federal tax to CHF3,000 a year.

An End To the Flat Tax?

As alluded to above, Switzerland has long been considered a sanctuary for wealthy business people, entertainers and sportsmen seeking to escape high rates of personal income tax in Western Europe. Until recently, the cantonal authorities had been happy to accommodate these tax exiles. However, in the last couple of years or so, the mood among the Swiss population and come cantonal governments seems to have changed.

Switzerland’s controversial “flat tax” regime for expatriates is based on the cost of living rather than an individual’s wealth or income. But the regime has already been abolished in five out of 29 cantons in Switzerland over the past few years, including Zurich, Schaffhausen, Appenzell, Basel-Stadt and Basel-Landschaft. Although Bern recently voted to save the tax regime, it nevertheless also voted in favor of plans to tighten the system by increasing the minimum taxable income threshold to CHF400,000. It is expected that this decision will increase the tax burden of around 80% of the individuals currently subject to the flat tax in the canton.

On February 20, the FDF announced that measures aimed at tightening the flat tax regime are to apply fully from 2016. The measures are to enter into force through the country’s tax harmonization law (StHG) on January 1, 2014. The Swiss cantons then have two years in which to adapt their cantonal laws to the changes. From January 1, 2016, the new provisions will also apply for direct federal tax.

The Federal Council’s decision to provide for entry into force of the measures in two stages is intended to ensure that the changes take effect at the same time for both direct federal tax and cantonal tax.

In accordance with the new provisions, from 2016 the tax base for calculating direct federal tax and cantonal tax will be seven times the cost of living, compared with five times as is currently the case. In addition, as regards direct federal tax, a minimal taxable income of CHF400,000 (USD429,311) will apply, although the Swiss cantons will be required to determine their own minimum taxable amount. For any individuals subject to the Confederation’s flat tax regime at the time of the legislative changes' entry into force, the current law will continue to apply for a further five years.

The Federal Council approved the changes in order to improve the existing regime for taxing wealthy foreigners in Switzerland and to increase acceptance for this form of taxation. The federal parliament adopted the legislative changes on September 28, 2012. No referendum was called to challenge the proposals.

Despite the Federal Council’s attempts to gain acceptance for the flat tax regime, in November 2012 the Swiss people’s initiative calling for an "end to tax privileges for millionaires" succeeded in gaining the necessary 100,000 signatures to trigger a referendum on plans to abolish the increasingly unpopular regime, nationwide. Launched by Switzerland’s Alternative Left party, the initiative, backed by the Green Party and the Social Democrats, as well as by Swiss trade unions, collected 103,012 signatures. The referendum is likely to be held in two years’ time.

Around 5,000 foreign millionaires currently benefit from the generous tax regime. The levy generated close to CHF700m in tax revenues for the federal, cantonal and municipal governments in 2010.

Corporate Tax

The interaction of federal corporate tax laws with those at cantonal level can serve to make the overall Swiss corporate tax system quite complicated. However, it also provides ample opportunity for multinational businesses established in Switzerland to substantially reduce the overall exposure to income tax on their regional or global operations.

Although the rate of tax levied at a federal level is consistent, that levied at a cantonal level varies from canton to canton. Because significant differences presently exist in the rates of taxes levied at cantonal level the choice of canton is an important element in all tax planning.

The federal corporate income tax rate is 8.5% flat. Cantonal tax rates can be levied at rates of up to 22% and are progressive. The overall corporate tax rate may be reduced if the canton in which a company is located allows corporate tax to be offset against capital tax. However, a Swiss domiciliary company may be able to reduce corporate income tax to little or nothing at cantonal level if it does not have a physical presence in Switzerland, receives only foreign source income, and is managed from abroad. Swiss holding companies can also substantially reduce corporate income tax liability at federal and cantonal level if minimum shareholding requirements are met.

The Swiss holding company became a target of the OECD’s unfair tax competition initiative, and Switzerland was forced to share information with other countries where there was prima facie evidence of fraud as a result. However, the regime remains largely intact, much to the chagrin of the EU, which has expended much energy exploring various legal avenues to compel the Swiss to abandon it.

In January, EU Tax Commissioner drew sharp criticism from Bern when he warned that Switzerland had six months in which to amend its company tax arrangements currently favoring foreign companies.  In his ultimatum, Semeta warned that the Confederation will be placed on the so-called "black list" of jurisdictions deemed uncooperative in tax matters if it fails to comply.

European Union finance ministers had announced at the beginning of December last year that they intend to see Switzerland make concrete progress in the area of corporate taxation by June 2013.

While maintaining that the EU is not against tax competition, Semeta stressed that this must be “fair.” The EU code of conduct requires domestic and foreign companies to be treated the same, Semeta said, emphasizing that the problem in Switzerland is that some Swiss cantons give preferential tax treatment to foreign firms compared to domestic corporations.

Swiss Finance Minister Eveline Widmer-Schlumpf fiercely criticized the Commissioner’s latest attack, underscoring that this is not the manner in which to deal "with good treaty partners."  Constantly issuing threats and ultimatums is not the way to achieve results, the minister added, pointing out that Switzerland is currently engaged in a constructive dialogue with the EU and has already put forward proposals for discussion.

Although Switzerland is not a member of the EU, the European Commission nevertheless considers certain cantonal company taxation arrangements for holding companies to be forms of state aid, which are not compatible with the 1972 Free Trade Agreement. In its decision of February 13, 2007, it requested a mandate from the Council to take up negotiations with Switzerland. The mandate was adopted by the Council on May 4, 2007.

Although the Swiss Federal Council has consistently rejected the EU's interpretation, considering it to be unfounded, it has recently entered into negotiations to resolve the matter.

However, while the European Commission has the obvious weight advantage over its more nimble neighbor, at present Brussels simply doesn't have the legal reach to deliver the knock-out blow that would oblige the Swiss to capitulate to its demands.

Withholding Tax Agreements

Switzerland believes that the answer to foreign attacks on its banking secrecy laws is the conclusion of special withholding tax deals under which the partner state gets to tax income from previously undisclosed Swiss banks accounts while the account holder gets to retain anonymity.

So far, Switzerland has signed three such agreements, with Germany, Austria and the United Kingdom. The latter two are now in force.

The Taxation Cooperation Agreement between Switzerland and the UK, which was signed in October 2011, took effect from January 1, 2013. Rates of tax to be applied to interest earned in undeclared Swiss bank accounts range from 21% to a maximum 41%, depending on the asset value. The agreement provides for either voluntary disclosure by UK resident account holders or non-disclosure, in which case a one-off payment is due to settle outstanding UK tax on Swiss bank accounts.

A similar agreement was signed with Austria in April, 2012. Interest earned in past years will be taxed at between 15% and 38% depending on the length the account has been held and the value of assets. Future interest will be subject to a 25% tax. The agreement also came into effect on January 1, 2013.

However, perhaps the most important of these three agreements, given the prickly nature of relations between the two countries on the issue of tax avoidance, was the one between Switzerland and Germany, but due to a split in the German parliament, this has yet to come into effect.

Negotiated by German Finance Minister Wolfgang Schäuble, the bilateral tax treaty provides for a 25% withholding tax (plus solidarity surcharge) to be imposed from 2013 on capital gains received by German taxpayers with accounts held in Switzerland. The accord also provides for a 50% tax to be imposed on inheritances in Switzerland, unless German residents opt to declare their inheritance to the German tax authorities. Additionally, the tax deal provides for the taxation of hitherto undeclared and untaxed assets held by German taxpayers in Swiss banks, at withholding tax rates varying from 21% to 41%.

The agreement was intended to draw a line under the purchase by German states of stolen tax data discs, containing the names of German residents alleged to have undeclared and untaxed assets held in Swiss banks. However, despite the German Government’s backing, the legislation needed to ratify the agreement in Germany has stalled in the Bundesrat, or upper house, where left of center parties hold sway.

Germany’s parliamentary mediation committee, comprising members of both the Bundestag (lower house) and the Bundesrat (upper house), has so far failed to reach a compromise on the bilateral tax deal. Instead, the mediation committee called for the coalition government to initiate a new round of talks with the Confederation to negotiate "a fair agreement," insisting that a tax accord with Switzerland should not reward German tax evaders. For reasons of social justice a higher tax must be imposed on those who have evaded their tax obligations, the committee stressed.

Unless there is a change in the composition of the German parliament, this agreement is unlikely to be ratified by Germany any time soon. And despite Switzerland’s willingness to negotiate similar withholding tax agreements with other countries – negotiations with Greece for example have been mentioned on a regular basis – it remains to be seen whether this will satisfy demands from various governments for Switzerland to water down its banking secrecy laws, if not abolish them altogether.

FATCA

Switzerland is hoping that signing a Foreign Account Tax Compliance Act (FATCA) agreement with the United States Treasury will help to appease perhaps its harshest critic on the international stage – the US Government.

The FATCA agreement was signed by Swiss State Secretary Michael Ambühl and by the US ambassador Donald Beyer. During its meeting on February 13, 2013, the Federal Council had already given the FDF the go-ahead for the accord to be signed.

With the enactment of FATCA, the United States wishes to ensure that all income earned worldwide by US taxpayers on accounts held abroad can be taxed by the United States. FATCA essentially requires foreign financial institutions to conclude a contract with the US Internal Revenue Service (IRS) that imposes reporting requirements on them regarding identified US accounts. In the case of grave errors being committed during implementation, the IRS may submit requests for information to the financial institutions concerned, about which it has to inform the Swiss authorities. On-site inspections by the IRS at the financial institutions concerned are not permitted.

The FATCA agreement negotiated with Switzerland allows Swiss financial institutions to exchange information with the IRS. The Final Regulations published by the US Treasury and the IRS on January 17, 2013, are applicable to Swiss financial institutions to the extent that the agreement and its annexes do not expressly make provision for derogations from the rules.

The agreement ensures that accounts held by US persons with Swiss financial institutions are disclosed to the US tax authorities either with the consent of the account holder or by means of group requests within the scope of administrative assistance. Information will not be transferred automatically in the absence of consent, and instead will be exchanged only on the basis of the administrative assistance clause in the double taxation agreement.

As the United States will phase in FATCA from January 1, 2014, Swiss financial institutions will be forced to implement FATCA from this date, irrespective of an agreement between Switzerland and the United States, if they do not want to be excluded from the US capital market. Without an agreement, however, they could not benefit from simplified implementation and would thus be at a disadvantage relative to competitors in other financial centers.

Owing to the urgency and importance of the matter, the Federal Council has decided to conduct an abbreviated consultation on the FATCA agreement as well as on the corresponding implementing act. Interested parties have just four weeks from the date of the signing to submit their views.

In reality however, the signing of the FATCA accord is unlikely to relieve the pressure on Switzerland from the Obama Administration with regards tax transparency. Since the UBS affair (which was actually instigated under the George W. Bush administration), the US Government and judicial authorities have accused other Swiss banks of aiding and abetting US citizens to evade US taxes. The latest chapter in this ongoing campaign saw Switzerland's oldest bank, Wegelin, pleading guilty to tax evasion in a US federal court and agreeing to pay USD74m in back taxes and fines last January. Wegelin was charged with conspiring with US taxpayers and others to hide more than USD1.2bn in Swiss bank accounts from the IRS. Wegelin agreed to pay approximately USD20m in restitution to the IRS, along with a USD22.05m fine and a civil forfeiture to the tune of USD15.8m. The latter figure represents the gross fees earned by the bank from the undeclared accounts. A forfeiture was agreed by Wegelin in April, 2012, taking the total amount recoverable by the US to USD74m. The venerable institution has now permanently closed its doors in the US.

Conclusion

Fiscally speaking, Switzerland remains an attractive jurisdiction for both international businesses and individuals, but it is exactly these advantages that have put it onto the radar screens of other Governments, and while the debate over tax avoidance in many countries continues to rage, it is likely to remain there for some time to come.


 

Tags: services | interest | tax avoidance | European Commission | trade | tax rates | agreements | Finance | gambling | banking | individuals | business | withholding tax | banking secrecy | legislation | United States | Germany | stamp duty | law | Switzerland | tax

 

 

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