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Swiss Bankers Wary Of Withholding Tax Changes

by Ulrika Lomas, Tax-News.com, Brussels

23 November 2011


While acknowledging the need for changes, the Swiss Private Bankers Association (SPBA) has warned that a hasty reform of withholding tax in the Confederation could have serious long-term consequences for the Swiss financial centre.

In a recent release, the SPBA alludes to Federal Council plans to make fundamental changes to the current withholding tax system and to adopt, in the case of interest paid on bonds and money market instruments, the so-called paying agent system.

The association notes that under this system, the tax will no longer be paid directly by the debtor, as is presently the case, noting that responsibility will be transferred to banks or paying agents, whose job it will be to collect the tax according to the legal form and country of residence of the beneficial owner.

The SPBA points out that the new withholding tax will not, however, apply to dividends for which the current procedure will remain in force, which is why it is referred to as a dual system.

While underscoring that the Federal Council’s proposed modification will undoubtedly offer some advantages, notably by revitalizing the Swiss capital market and boosting investment banking activity in Switzerland (essentially the big banks), the association maintains that for the majority of natural persons, the overall situation will remain unchanged since the withholding tax will continue to be a safeguard tax.

The association does, however, warn of the disadvantages of the proposed reform.

Given that the responsibility for the tax collection will lie with Swiss banks, meaning that they will be required to follow very complicated rules to ascertain when and when not to apply the levy, the association argues that banks will be faced with substantial operational risks as a result.

The association stresses that the dual rules will merely serve to reinforce the complexity of the system and notes that for investment vehicles incorporating the two kinds of underlying securities (for example shares and bonds), it would mean setting up an unattractive certification system, which is not currently in place.

Some foreign products could even be banned from the Swiss market quite simply because their issuers would not want to comply with these conditions, the association adds.

The SPBA highlights the fact that from an operational point of view, the planned reform would come into effect at the worst moment for Swiss banks, coinciding possibly with the introduction of tax agreements recently signed with Germany and the UK for example, with the possible reform of the taxation of savings with the other European Union countries and with the FATCA (Foreign Account Tax Compliance Act) due to be introduced in the US.

Concluding its statement, the SPBA underlines that in view of the complexities of the plans, the Federal Council would be “ill-advised to plunge head first into such a fundamental reform” of the tax, which, the association adds, yields between CHF3bn (USD3.3bn) and CHF6bn for the Confederation.

It nevertheless concedes that the current withholding tax raises problems for some areas of the Swiss financial centre, which is why, in principle, a revision of this tax should not be ruled out.

The association urged the Federal Council to swiftly initiate a debate on the taxation of savings in Switzerland, taking into account all the current and future developments at international level.

A comprehensive report in our Intelligence Report series, analysing the situation on the ground in each of the main offshore banking centres, is available in the Lowtax Library at http://www.lowtaxlibrary.com/asp/subs_reports.asp and a description of the report can be seen at http://www.lowtaxlibrary.com/asp/description_report3.asp
TAGS: tax | investment | interest | banking | financial services | international financial centres (IFC) | offshore | agreements | offshore banking | withholding tax | Switzerland | dividends | services

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