Is Switzerland trying to become an even bigger tax haven? If so, what will the EU do about it?

The TAX3 Special Committee had a hearing on October 1 on the “Relations with Switzerland in Tax Matters and the Fight against Money Launderingfeaturing Mr Dieter Kischel, Head of Sector of Harmful Tax Practices – General-Directorate Taxation and Customs Union – European Commission; Mr Rudolf Elmer, whistleblower former working for Julius Bar; and Mr Andreas Frank, former banker and anti-money laundering expert.

Why did TAX3 have a hearing on Switzerland?

TAX3 Coordinators agreed to have two representatives from the Commission: one from TAXUD and one from European External Action Service (EEAS) in the context of the agreement being negotiated with Switzerland as an institutional framework governing bilateral relations.

However, the only person to appear from the EC was Mr Dieter Kischel from TAXUD, as the EEAS informed that they would not come to the TAX 3 hearing on the grounds of the delicacy of the moment of the bilateral negotiations on the EU Swiss agreement for an institutional framework.

The Swiss corporate tax reform- the TP17

Why is Switzerland having a corporate tax reform? In order to comply with OECD/G20’s BEPS Action Plan, and maybe also to fulfil their commitment with the European Union to eliminate 5 harmful tax regimes dating back to 2014.

Yet, according to a recent publication by Alliance Sud, the “instruments” envisaged under TP17 are such that the countries from which profits are being shifted to Switzerland will continue to lose as much as before, since the new deduction possibilities under TP17 (e.g. such as the patent box, interest-adjusted profit tax or deductions for research and development) allow for tax bases to be kept low.

What was discussed during the meeting?

Dieter Kischel commented that in 2010 the Code of Conduct Group on Business Taxation (CoCG) decided to start a dialogue with Switzerland where-by Switzerland agreed to abolish 5 harmful tax practices. EU MS agreed not to apply any other measures against Switzerland if such changes were made effective.

In 2016, Switzerland attempted a reform of its Corporate Income Tax (CIT) which could have removed the 5 harmful tax regimes. However, a referendum was passed, and the reform was voted against.

Switzerland was included in the revision for the EU blacklist of non-cooperative tax jurisdictions which published its first results on December 2017. However, as Switzerland had committed to such reforms, the Council decided it would not blacklist it, and would only be included  in its grey-list of jurisdictions which have committed to making reforms before the end of 2018.

In 2017, Switzerland initiated a new reform to eliminate the 5 harmful tax regimes. Before discussing the possible de-listing of Switzerland from any EU list, the Commission expects to be formally informed of the removal of these 5 harmful tax regimes.

However, Mr. Kischel also made some very relevant comments regarding the relationships with Switzerland, for example, that the first exchange of information on tax matters between Switzerland and the EU had taken place last September. Switzerland is known for its lack of effective cooperation in tax matters, so should this be read as a good news or just as an evidence of an internationally known problem? Moreover, it is not clear yet that such exchange of information had any substance, i.e. Switzerland could have perfectly replied saying that they did not have any information from what we know.

Among the very relevant comments made by Rudolf Elmer during the meeting, he mentioned that with the new tax reform there are new regimes arising such as patent boxes, reduction of capital and similar taxes, reduction of cantonal taxes, and reduction of corporate income tax rates; e.g. Geneva’s CIT is moving from 24% to 13%. Moreover, Mr. Elmer highlighted that exchange of information only works if a person has opened an account in his/her name. So, if a company has used corporate directors, corporate secretaries, or even a niece, then such identification is not possible through automatic exchange of information; and the big players have had plenty of time throughout all these years to hide the actual beneficial owners.

Moreover, he mentioned that Switzerland is exchanging information with the United States under FATCA, but only because the US has put a lot of pressure saying that the Swiss banks will not be able to make any more transactions via the US.

Andreas Frank noted that Switzerland remains the mother of all tax havens, and that there was no international reaction after the OECD’s report on Switzerland. He also mentioned that competent authorities in Switzerland do not function, as they are not supposed to function.

He also observed that the critics regarding the Swiss harmful secrecy are suppressed by exercises of going against the messengers, i.e. whistleblowers, as Switzerland has reformed its intelligence regulations so it can go after whistleblowers anywhere in the world. And he highlighted the importance of guarding the identity of all whistleblowers, as has been done recently by the Bundestag in Germany.

Mr. Frank suggested moving Switzerland from the grey list to the blacklist of non-cooperative jurisdictions for tax purposes. And he suggested Switzerland be on the high-risk third country list against money laundering and terrorist finance.

He commented that he has seen cases in which money was laundered using three companies which have no connection with the beneficial owner. And he indicated that the best place to put pressure on Switzerland would be FATF as the country is in clear violation. The FATF peer evaluation of Switzerland says no compliant, so it can be put in the blacklist.

Finally, Mr. Kischel ended the meeting by saying that the CoCG will analyse the Swiss legislation only after it has been passed, but in any case, it will only analyse it to evaluate if Switzerland has complied with its commitment of eliminating the 5 harmful tax regimes, i.e. if new harmful tax regimes are created with the new legislation, they will only be analysed in a distant future, as first they would need to be identified as harmful by the CoCG.