Financial policy with contradictions

Finanzplatz Schweiz
Finance Minister Eveline Widmer-Schlumpf
Article as analysis
Five years ago Swiss Government has been attempting to build advantages for Switzerland into new taxation agreements. To this day it has no clear grasp of the way these agreements impact the development countries concerned.

This spring makes it exactly 5 years since Switzerland began shedding its role of tax haven. On 13 March 2009 the Federal Council promised to ensure a «clean» financial centre going forward. In particular, it promised thereafter to guarantee foreign tax authorities what is called expanded administrative assistance – in other words, information sharing on request. Implementation of this new policy is still not progressing smoothly, however, and ever more contradictions are emerging.

Today Switzerland has double taxation agreements with 44 of the world’s 148 developing countries. Yet only four of them provide for expanded administrative assistance. This means that the vast majority of all developing countries continue to have no possibility of obtaining information from Switzerland regarding possible tax flight capital. Amongst industrialized countries in contrast, only a tiny minority still has no entitlement to such information. Besides, unlike poor countries, they can already count on the introduction of automatic information exchange.

There is progress...

It is now clear even to the Federal Council that the business of untaxed fortunes from developing countries cannot continue unchecked. In February 2014 it therefore decided at last on a slight extension of expanded administrative assistance. The approach now is to unilaterally expand information sharing upon request to all previously existing double taxation agreements. What this means in concrete terms is that the Federal Council wishes to extend to some one-third of all developing countries a modicum of support in combatting tax flight. The countries concerned should receive expanded administrative assistance without having to engage in complex negotiations on the revision of the existing agreement.

What is especially gratifying about this decision is that it means waiving any counterclaims. In recent years the Federal Council has not only used the revision of existing agreements as an occasion to introduce an expanded administrative assistance clause, but also to demand massive concessions from the partners to the agreements. The countries concerned must, amongst other things, declare their readiness to lower withholding taxes on the earnings of Swiss companies abroad. Administrative assistance in the event of tax evasion was therefore only available in exchange for tax privileges for Swiss investors. That is now set to end.

…or is there?

Yet the latest decision by the Federal Council is only a beginning. It is still unclear what will happen with the over 100 developing countries with which Switzerland still has no double taxation agreements. For them, concluding such an agreement from scratch would still mean a considerable negotiating effort. The Federal Council should really therefore loose no time in offering them a simple Tax Information Exchange Agreement (TIEA). Such an Agreement would settle the question of expanded administrative assistance, whilst usefully leaving withholding taxes on the earnings of Swiss foreign investors untouched.

But this is precisely what the Federal Council does not want. As indicated in a report published in April 2012, it wishes to offer simple TIEAs to selected countries only. This refers to countries that are more or less of little interest to Swiss foreign investors. As before, the other developing countries are to receive tax-related administrative assistance only if they conclude a new double taxation agreement with Switzerland. In so doing, they must still expect to limit withholding taxes. It is doubtful, however, whether this is even worth it from the standpoint of the countries concerned. In a recently published additional report, the Federal Council admits that it has no clear answer in this respect.

Unclear consequences

The new additional report is the Federal Council's reaction to a postulate by the National Council’s Economic Commission. In this postulate the Commission requested detailed information regarding how double taxation agreements with developing countries will affect the latter's tax revenues. Besides, it also wanted to know the Federal Council’s view concerning the impact of low withholding tax rates on the level of Swiss direct investments.
The Federal Council’s answers to the postulate are disappointing. In a word, it seems to have hardly any idea whether double taxation agreements with low withholding tax rates are useful or harmful to the developing countries concerned. It does not even seem to know the implications for Swiss direct investments.

Specifically, the report states that the consequences of double taxation agreements depend on numerous factors. Whether lower withholding taxes will lead to higher foreign investment inflows is a matter of controversy. The Federal Council is therefore unable to assess the impact of double taxation agreements with Switzerland on tax revenues and budgetary planning in the partner countries concerned.

Development policy ignorance

What is interesting about this admission of ignorance is that it contradicts everything that the Federal Council has maintained up to now. So far it has repeatedly argued that double taxation agreements with low withholding tax rates would in any case attract more Swiss direct investments to partner countries. That would in turn increase the volume of taxes in those countries and thus also be useful to developing countries. We now know that the Federal Council had no basis whatsoever for that claim.

There is yet another worrying admission. It is about when the Federal Council prefers a double taxation agreement over a simple TIEA. The answer here is that the possible financial repercussions on the developing country are «not crucial» to this decision. From this it can be concluded that the Federal Council’s tax policy towards developing countries is dictated almost exclusively by Switzerland's own interests. It seems hardly concerned about whether a double taxation agreement or a straightforward TIEA would be more meaningful from a developmental point of view.

Mark Herkenrath, Alliance Sud

A study by the renowned World Trade Institute (WTI, University of Berne) shows that Swiss double taxation agreements with developing countries tend to benefit Switzerland first and foremost. It should be noted that the Federal Council makes no mention whatsoever of the WTI study in its own reports. Interesting fact: the study was commissioned by SDC.

Schweizer Doppelbesteuerungsabkommen: Aktuelle Politik und Entwicklungsrelevanz, Elisabeth Bürgi Bonanomi, Centre for Development and Environment und World Trade Institute, Bern, 2013