Switzerland: enhanced tax transparency according to international standards

Based on a general decision taken by Switzerland’s Federal Council in March 2009, Switzerland provides for administrative assistance in tax matters upon specific request only, and exclusively for those jurisdictions with which a respective double taxation agreement, or an agreement on exchange of information, has been concluded.

However, until today, the governments of 69 countries, including all G20 states and including Switzerland, have signed the Convention on Mutual Administrative Assistance in Tax Matters. In July 2014, the Organisation for Economic Co-operation and Development (OECD) council defined an enhanced global standard for automatic exchange of information. As of October 2014, 51 countries had already signed the Multilateral Competent Authority Agreement (MCAA) in order to support this automatic exchange of information.

Swiss sign up

Since not only the countries of the EU, but also jurisdictions such as the Bermudas, British Virgin Islands, Mauritius and many more are among the signatory countries, and considering the international pressure put on Switzerland to follow the new global standard, the Swiss Federal Council signed the MCAA in November 2014, too. On 14 January 2015, the draft legislation in order to adopt the convention, as well as the MCAA, was published.

Given the rather complex and time consuming legislation process in Switzerland, the respective amendments of the existing administrative assistance rules will most probably not be effective prior to 2018. Nevertheless, it might be worthwhile having a closer look at the expected changes.

Global standard

Basically, the new global standard to which Switzerland has agreed will not only allow for the automatic exchange of information, but also for so-called spontaneous administrative assistance.

What does “spontaneous administrative assistance” mean? This type of administrative assistance is new for Switzerland. According to the draft legislation that has recently been proposed, information can, among other things, be sent to the other contractual state: in cases of suspected tax evasion; if a taxpayer receives a tax benefit or other preferential tax solution which is supposed to increase the tax burden in the other state; or if the tax authorities of one contracting state have received information that may also be useful to the other state in order to complete the relevant fact pattern on a particular taxpayer.

Knowledge sharing

In other words, whenever a tax authority receives information that it holds potentially useful for the other jurisdiction in order to ensure the accurate assessment of a taxpayer, the authority will be entitled to share its knowledge with the other tax administration.

It is hard to predict whether there will be a handful of cases of spontaneous information annually, or whether there will be hundreds, or even thousands, of cases. However, in the future, every taxpayer, in particular international companies, need s to be aware that any information it discloses to a tax administration in a jurisdiction which is a party to the global standard for automatic exchange of information in tax matters might be notified to any other jurisdiction that is a contractual party of the respective convention.

Such an exchange of information would not necessarily be negative for the taxpayer, but must still be kept in mind, in particular in multinational organisations. As an example, a company which has established its headquarters in one jurisdiction, and is claiming certain branches with limited or even extended competences and functions in other jurisdictions, should be aware that the tax authority of the legal domicile might inform the branch jurisdictions accordingly, with the purpose of ensuring adequate taxation in both the headquarters and branch domiciles.

Strengthen HQ

Or to express it a bit more positively – a company claiming not only its legal domicile but also the relevant risks and functions in a (lower tax) jurisdiction should consequently strengthen its headquarters respectively, while at the same time limiting the activities of its branches in higher tax jurisdictions to the extent absolutely necessary.

The potential future exchange of information needs particularly to be considered in light of the Swiss ruling practice. In numerous cases legal entities, but also individuals, have obtained tax rulings from the Swiss tax authorities in order to get pre-clearance with regards to transfer pricing, planned restructurings, financing arrangements, group and branch structures, and others.

Detailed information

Since a tax ruling is only valid if the relevant, complete fact pattern was presented to the tax authority accurately, the Swiss tax authorities receive a lot of detailed information and documents related to a taxpayer and its business. All this information will in the future potentially be shared with any other interested tax authority, upon discretion of the competent Swiss tax administration.

Although the amended legislation providing for the spontaneous exchange of information is, as already mentioned, unlikely to become effective prior to 2018, it is time for any multinational company to review its international structures and align them properly in terms of substance and functions.

OECD’s battle

The new types of extended administration assistance, including the exchange of information, fit in the OECD’s battle against Base Erosion and Profit Shifting with the clear, and at the end of the day unquestionable, purpose of taxing the profits of a company where they economically are effectively generated.

From this perspective, although the described exchange of information may be subject to criticism in light of confidentiality and tax secrecy, it might at the same time be a chance to review and improve the international tax planning strategies of a company.

Christoph Niederer is a partner and the head of Zurich Tax Department, and Fiona Gao Yue is an associate of China Desk at VISCHER.