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Since 2008, due to the financial crisis, the necessity for governments worldwide to increase their tax receipts has placed the fight against cross-border tax evasion at the heart of political debates.
In that context, new global rules have been developed to put in place an exchange of information between states, to obtain increased transparency in tax mattes and to finally develop the automatic exchange of information.
Aware that it was indispensable to play by these new rules in order to maintain a strong and competitive domestic financial industry, the Federal Council (Swiss cabinet), has since 2009 joined the international efforts to fight against tax fraud and evasion.
The Federal Council has established a double consultation procedure for the automatic exchange of information in tax matters. The first part concerns the approval and the implementation of the OECD/Council of Europe Convention on Mutual Administrative Assistance in Tax Matters (hereafter: Convention). The second part concerns the Multilateral Competent Authority Agreement with regards to the automatic exchange of information for financial accounts (MCAA) and the automatic exchange of information in tax matters (hereafter: II. AEOI).
I. The OECD/Council of Europe Convention on Mutual Administrative Assistance in Tax Matters
This convention offers a framework agreement for the cooperation in tax matters between states and is applicable to all kinds of taxes (notably revenue, corporate income, wealth, capital, donations, heritages, VAT) including mandatory social security contributions, namely pension, invalidity and loss of income insurances in Switzerland.
The Convention has been signed by Switzerland on 15 October 2013, but it declared to be willing to apply it only to the following taxes: revenue and wealth, corporate income and capital at federal, cantonal and communal level as well as to the withholding tax.
As of today, the entirety of the G20 member states and nearly all members of the OECD have signed this convention, which provides for three different kinds of exchange of information:
- Information exchange upon request, which corresponds to the OECD rule adopted by Switzerland in 2009. As of now, this kind of information exchange has been implemented in double taxation treaties concluded between Switzerland and 51 countries as well as in 9 exchange of information agreements. Up to now, 41 such double taxation treaties and seven such exchange of information agreements have entered into force.
In Switzerland, the exchange of information is governed by the Federal Act on Administrative Assistance in Tax Matters. For an exchange to take place, the requesting state must file a written request to the Federal Tax Administration, in English or in on of the official languages. It needs to contain the identity of the concerned tax payer, the requested information, the fiscal reasons for which the request has been filed and a justification, listing the reasons which led to assume that the wanted information is held in the state requested. In order to obtain this information, the Federal Tax Administration can put in place compulsory measures, comprising also the execution of search warrants in banks. Concerning legal remedies, the Federal Tax Administration must inform the concerned client on essential parts of the collected information before its transfer. The client can approve the transfer by giving his irrevocable consent. In case of denial, he can file a recourse, which will have a suspensive effect.
- Spontaneous exchange of information. That means that the Swiss authorities will transmit information even though no request has been filed, and that on the other hand it will receive information pertinent to taxation and application of the Swiss tax laws from other parties to the agreement. Though, the Convention only provides for a few cases of in which information will be exchanged spontaneously. There will be such a spontaneous exchange of information in case one state, based on information available to it, assumes that another signatory state might have an interest in obtaining the information at stake. Three examples:
- Circumstances underpinning an assumption that in the other state there might be an abnormal reduction or exemption of taxes
- A person benefits from a reduction or exemption of taxes that would lead to that person being subject to taxation in the other state or that would lead to an increase of the tax liability
- There are circumstances to assume that a tax reduction takes place due to a fictional transfer of income within a group of companies;
- Finally, the Convention could serve as a base for the introduction of the automatic exchange of information (point II).
II. Automatic exchange of information in tax matters at international level (AEOI)
These AEOI rules govern the routinely and intervallic exchange of information concerning persons (individuals and corporations) being subject to taxation in one state and and who have a bank account in the other state. In particular, they govern the modalities of the exchange, for which two models are available:
- The automatic exchange can be done by means of a bilateral agreement between two contracting states (model 1),
- The exchange can be governed by the Multilateral Competent Authority Agreement on the Automatic Exchange of Financial Account Information (MCAA) (model 2).
The requisite information is in both models collected by financial institutions in the signing countries and transferred to its tax authorities, which in a second step communicate them to the tax authorities of the other contracting state. Model 1 corresponds to the standard treaty model by which two countries conclude an agreement on the automatic exchange of information AEOI. Model 2 however is an additional agreement allowing all contracting states to implement the AEOI in a uniform manner in all contracting states. The basic idea of the MCAA is a multilateral application of the AEOI with the possibility of spontaneous exchange, allowing for a quicker and more efficient introduction. Its main benefit for states is to avoid the need to renegotiate the entirety of signed agreements every time the interpretation of a particular norm has changed.
However, the two models are considered to be equivalent for the introduction of the automatic exchange of information, and can therefore be applied in parallel.
The information that will be exchanged comprise the balance of the account, all capital revenue (capital gains, interests and dividends) as well as the identity of its beneficiary owner. Financial institutions will thus collect a vast range of information of their clients, and transfer them to its national tax authority, which will subsequently transmit it to its foreign counterpart.
How it works:
As of now, around 100 states have committed to implement this new form of automatic exchange of information in tax matters.
If the vote in Parliament, and possibly the referendum, will have a positive outcome, Swiss banking institutions could begin to collect data on their clients living abroad, with the first actual exchange of information scheduled for 2018.
By that procedure, banking secrecy will not be applicable anymore for clients who are residents in countries that participate in the exchange of information.
Bank secrecy however, will only be lifted in international cases. Swiss tax authorities will still not be permitted insight in bank accounts of Swiss residents, be they foreigners or Swiss nationals, provided that Parliament will not introduce legislation amending domestic banking secrecy. On the other hand, a Swiss resident who owns an account abroad in a jurisdiction with which Switzerland has concluded an agreement on the automatic exchange of information, he might come under scrutiny of the Swiss tax authorities.
Questions regarding how a client spends his money or which financial products he invests in are confidential information and will subsequently not be communicated. The entire process is subject to privacy protection and the exchange is authorised for tax purposes only. Thereby confidentiality of financial data that is in conformity with tax legislation is maintained.
Before being actually applied, the AEOI must be concluded between the concerned states, and then be activated by means of a notification to the secretariat of the coordinating body.
Every state can deposit a list with states with which it would like to apply the AEOI, when signing the MCAA or later.
The selection of a contracting partner state will require a thorough analysis for Switzerland. For the time being, the Federal Council has told that that it would like to contract in priority with the United States and the European Union. Concerning other countries, it is the Federal Council’s intention to favour states with which already double taxation treaties or Exchange of Information Agreements are in place. Switzerland will take into consideration the respect of the law and is likelier to engage with countries to which close economic and political ties are already established. These states may put in place procedures for clients wishing to regularise their past situation.
The conformity of national implementations with these new sets of rules will be supervised by the Global Forum on Transparency and Exchange of Information for Tax Purposes, that currently has 120 member states. Likewise, a member state will have the possibility to denounce a bilateral treaty in case the other state acts inconsistently with the agreed rules.
Apart some reservations of minor importance on the rules of the AEOI, Switzerland has further declared two points: first, to inform any person affected by an exchange of information before any data is transferred. Second, not to pursue a foreign authority’s request to undertake a tax control in Switzerland.
But the aforementioned AEOI agreements are of reciprocal nature. Therefore, foreign financial institutions running accounts of Swiss residents are as well obliged to deliver data on their holdings. The Federal Tax Administration is going to receive them, by electronic and encrypted transfer via the tax administration of the corresponding country. To identify each of the clients, the data will be linked to the Swiss Social Security Number. The Federal Tax Administration, however, since it’s not allowed to tax individuals, will only sort out the data and transfer it to the respective cantons. This should also take place by electronic means. In order to safeguard privacy, international task groups will examine the security standards of the participating countries.
The transferred data are gross data, that is only the sum of, to give an example, capital gains or dividends are displayed. No breakdown of the single assets will be available to the recipient. The basic idea is to provide evidence to the tax authorities that the persons subject to taxation have enclosed all relevant documents. The data will therefore not be apt to serve as a base for direct taxation.
The Federal Implementation Act has been approved in early December. The international bilateral agreements and the MCAA need yet to be approved by Parliament. If its outcome will be positive, as well as the potential referendum, the concerned Swiss financial institutions could start to collect data on their clients living abroad in 2017. The first exchange of such data could take place in 2018.
Don’t hesitate to contact us if you would like additional information on the matter of this newsletter or if you have questions on the impact of the entry into force of the new exchange of information in your situation.
As of now, the following jurisdictions have committed to automatically exchange information:
JURISDICTIONS UNDERTAKING FIRST EXCHANGES BY 2017
Anguilla, Argentina, Barbados, Belgium, Bermuda, British Virgin Islands, Bulgaria, Cayman Islands, Colombia, Croatia, Curaçao, Cyprus, Czech Republic, Denmark, Dominica, Estonia, Faroe Islands, Finland, France, Germany, Gibraltar, Greece, Greenland, Guernsey, Hungary, Iceland, India, Ireland, Isle of Man, Italy, Jersey, Korea, Latvia, Liechtenstein, Lithuania, Luxembourg, Malta, Mauritius, Mexico, Montserrat, Netherlands, Niue, Norway, Poland, Portugal, Romania, San Marino, Seychelles, Slovak Republic, Slovenia, South Africa, Spain, Sweden, Trinidad and Tobago, Turks and Caicos Islands, United Kingdom
JURISDICTIONS UNDERTAKING FIRST EXCHANGES BY 2018
Albania, Andorra, Antigua and Barbuda, Aruba, Australia, Austria, The Bahamas, Belize, Brazil, Brunei Darussalam, Canada, Chile, China, Cook Islands, Costa Rica, Ghana, Grenada, Hong Kong (China), Indonesia, Israel, Japan, Marshall Islands, Macao (China), Malaysia, Monaco, New Zealand, Panama, Qatar, Russia, Saint Kitts and Nevis, Samoa, Saint Lucia, Saint Vincent and the Grenadines, Saudi Arabia, Singapore, Sint Maarten, Switzerland, Turkey, United Arab Emirates, Uruguay
JURISDICTIONS THAT HAVE NOT INDICATED A TIMELINE OR THAT HAVE NOT YET COMMITTED
Bahrain, Nauru, Vanuatu
Main used links:
Explanatory report on the Multilateral Competent Authority Agreement on the Automatic Exchange of Financial Account Information and on the Federal Act on the International Automatic Exchange of Information in Tax Matters
OECD: Signatories of the Multilateral Competent Authority Agreement and intended first information exchange date
Federal department of finance: International exchange of information in tax matters
Federal consultation procedure on international exchange of information on tax matters
Q & A concerning automatic exchange of information
Implementation of the global norm on the international automatic exchange of information in tax matters