Switzerland - Response to BEPS
Switzerland - Response to BEPS
Switzerland is embracing tax reform and working on substantial corporate tax changes independently of the OECD BEPS project. In a referendum vote on 12 February 2017, the public denied proposed laws as decided by the parliament. The Federal Council nevertheless continues the reform work and accepted the cornerstones of a new reform in June 2017, maintaining its direction. The Federal Council intends for components of the bill to enter into force in January 2019 and in January 2020.
The Swiss Parliament has been driven to act in part by the same public outcry heard in other jurisdictions. EU opposition to certain Swiss tax structures is also playing a role in the proposed reforms. In January 2014, the EU and government of Switzerland initialed a mutual understanding on business taxation, ending a nearly decade-long dispute.
The new measures will align with the BEPS project proposals, and the Swiss tax authority has been actively monitoring the OECD discussions to ensure that new legislation conforms to the new standard. The most important elements of the legislation would abolish:
- the special holding company regime
- the mixed and domiciliary regime
- the finance branch regime
- the Swiss principal regime.
Regimes established to replace the previous ones will comply not only with EU law but also with the requirements set out by the OECD. As substitutes for the abolished tax regimes, the following main measures would be introduced:
- patent box regime
- R&D super deduction
- a substantial reduction of cantonal income tax rates that would result in an overall effective income tax rate ranging from 12.4 percent to some 18 percent (depending on the canton)
- Although a notional interest deduction is not a cornerstone of the new reform, there is still some political activity to introduce such deduction limited to the cantonal level.
Perhaps in anticipation of the coming reforms, the Swiss tax authorities have become stricter with audits. When their rulings are challenged or there is room for interpretation, the authorities have been leaning toward the recommendations of the BEPS project. Switzerland enjoys a solid financial position compared to other European countries, so its support of the BEPS project should not be seen as a directive from a cashstrapped government. Rather, its actions reflect the Swiss government’s desire to be perceived as a leader in implementingthe internationally recognized OECD principles.
Tax directors are re-examining their hybrid instruments, wary of any indication of profit shifting. They are performing gap analyses to determine the degree of change needed to comply with the expected new regulations. Current tax rules, introduced some 2 decades ago, do not allow Swiss parent companies to use hybrid structures with their immediate subsidiaries. Further, for over 50 years, Switzerland has had legislation in place that unilaterally inhibits the misuse of treaty benefits, which still complements treaty regulations. In light of the international developments on the avoidance of treaty abuse and increasing international information exchange, this legislation has been partially replaced by treaty law.
Switzerland signed the multilateral agreement on the exchange of CbyC reports, and the Swiss parliament accepted the federal implementation act6 on 16 June 2017 (the referendum period lapses on 5 October 2017). The federal act closely follows the OECD’s proposals on Action 13. It is expected that legislation requiring CbyC reporting will come into force by end of 2017. Thus Swiss companies will be required to file their CbyC Reports for 2018 financial years in 2019 to enable the Swiss Federal Tax Administration to automatically exchange information with the countries concerned in the first 6 months of 2020. Earlier CbyC report filings (and subsequent exchanges by the tax authorities) for 2016 and 2017 financial years can be done by Swiss headquarters on a voluntary basis.
Exchange of rulings
Generally, valid rulings are to be exchanged spontaneously as of January 2018, where they meet the applicable criteria(in particular, where they have cross-border effect). The relevant Swiss ordinance is closely based on Action 5 of the BEPS Action Plan. Rulings on the special holding company, mixed and domiciliary and Swiss principal regimes are subject to the exchange. The Swiss regulation also covers a patent box regime.
On 7 June 2017, Switzerland took part in the signing ceremonyfor the Multilateral Instrument to prevent BEPS under Action 15. At the time of signing, Switzerland announced that it would only include 14 tax treaties as covered tax agreements, namely, the Swiss treaties with Argentina, Chile, India, Iceland, Italy, Liechtenstein, Lithuania, Luxembourg, Austria, Poland, Portugal, South Africa, Czech Republic and Turkey. Together with Switzerland, these partner states have agreed to negotiate precise wording for amending their existing treaties through the instrument. If agreements on the technical implementation of the instrument can be obtained with other treaty partners, the corresponding treaties would be amended at a later stage.
Switzerland focuses primarily on implementing the BEPS minimum standards, which could alternatively be agreed on via bilateral treaty amendments. This implies that Switzerland has reserved the right not to apply the Multilateral Instrument’s provisions on matters that go beyond the minimum standards. These include the standards for transparent and dual resident entities (Articles 3 and 4 respectively), anti-abuse rules for PEs situated in third jurisdictions (Article 10), and the artificial avoidance of PE status through commissionaire arrangements (Article 12). On treaty abuse, Switzerland opted for the principal purpose test and inclusion of the instrument’s mandatory binding arbitration clause.
The Federal Council is expected to publish and submit the Multilateral Instrument for public consultation before the end of 2017. The instrument will then undergo the standard parliamentary approval process before entering into force. Should it pass successfully, the Multilateral Instrument would enter into force by 1 January 2019 at the earliest.
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